4
votes
0answers
517 views

Testing Valuation, Size and Momentum (proprietary factors) from 1988-2013: No evidence of driving cross-sectional returns

I am currently testing whether three proprietary factors - Valuation, Size and Momentum - explain cross-sectional returns. A sample of 3000 securities was tested using Fama-MacBeth two-pass ...
4
votes
0answers
88 views

Risk neutral measure in exponential levy model

Is there a method of finding a risk-neutral measure for assets driven by the levy process? I understand there is the esscher transform but I think it tends to transform the processes into ...
4
votes
0answers
152 views

How to price an option with two volatilities?

Imagine you have two volatilities, the second which is "activated" when the stock crosses a barrier called $p_b$. The present price is $p_1$. ($p_b>p_1$). This can be used to price options after a ...
4
votes
0answers
349 views

Shrinkage Estimator for Newey-West Covariance Matrix

I like to apply the Newey-West covariance estimator for portfolio optmization which is given by $$ \Sigma = \Sigma(0) + \frac12 \left (\Sigma(1) + \Sigma(1)^T \right), $$ where $\Sigma(i)$ is the lag ...
4
votes
0answers
93 views

Simple way to get the crossing probabilities of a moving barrier

Hello Quant Finance StackExchange, Is there a simple way to find the crossing probabilities of a moving barrier, namely a barrier written in the form $U(t)=\alpha_1t^2 + \beta_1t + \gamma_1$ and ...
4
votes
0answers
157 views

ERP and FF 3-factor model

In a more conservative estimate than a simple historical average, Fama & French estimate (US) equity risk premium at 3-4% (e.g., Equity Risk Premium, JF, 2002). This suggests that in an APT-like ...
4
votes
0answers
144 views

Is it random walk?

I would like to ask a question about random walk. Campbell, Lo & Mackinlay defined the random walk, in the following way (RW3): $$ cov[f(r_{t}),g(r_{t+k})]=0,\qquad k\neq0 $$ for all $f(\cdot)$ ...
4
votes
0answers
310 views

Rate Distortion Minimization in a Python Clustering Algorithm

I'm attempting to solve for $\hat{k}$ clusters, such that the rate distortion is minimized, as described here, however, the answers that I am getting from my algorithm are not following the "Jump" ...
4
votes
0answers
258 views

Quant/Stat Factor Performance Website/Distribution?

Does anyone know of a decent quant/stat factor website, distribution(public or private) or publication that tracks performance of "many" of traditional quant/stat factors? By that I mean would show ...
4
votes
0answers
481 views

How to determine ratios for mean-reverting basket

Suppose I have a basket of 3 securities A, B, and C. I believe that the basket is cointegrated and I want to create a mean-reverting trade. I fit the model: ...
4
votes
0answers
343 views

compute time from FX forward, how use DEPO rates?

assume I have following delta-term vol data from broker: ...
4
votes
0answers
192 views

is there a mapping from Altman Z-score for private companies to bond ratings or probability of default?

On wikipedia, there is a formula to calculate the Altman Z-score for private companies: Z-score estimated for private firms: T1 = (Current Assets − Current Liabilities) / Total Assets T2 = Retained ...
4
votes
0answers
164 views

Estimation of ranks of log-returns via copula

I have successfully chosen and estimate a copula for the ranks of the log-returns of my actions. My question is, since I have worked with the ranks instead of directly the log-returns (in order to be ...
4
votes
0answers
262 views

Analyzing the angle between vector of weights and vector of returns in mean-variance optimization

I am using the paper "A Sharper Angle on Optimization" by Golts and Jones (2009) as a basis for my (minor) masters thesis in mathematical finance. The paper focuses on the mean-variance analysis of ...
4
votes
0answers
497 views

Asymmetric Volatility Modeling (Interpretation)

I am currently writing a paper on asymmetric volatility modeling of brent, gold, silver, wheat, soybean and corn from 1986-2012 and divided them into 4 sub-sample periods (i.e. 1986-1991, 1991-1997, ...
4
votes
0answers
475 views

What makes IRC a market risk?

Since modeling leaves complete freedom we can assume both market and credit risks can enter the picture. However the minimum requirement is (migrations and) defaults simulation, how does this ...
4
votes
0answers
160 views

Discrete-time Jump-Diffusion Model

I am wondering if anybody could point me to any literature that talks about a discrete time version of the jump-diffusion model, I am aware that there is a paper by Amin (1993) that shows a discrete ...
4
votes
0answers
150 views

Rolling window Kendall's tau against APARCH(1,1) correlation

Assume you want to forecast the correlation matrix of a stocks' basket (say 15 ~ 20 stocks from different sectors); assume you need to forecast at $T$ days because you will use the forecast ouput with ...
4
votes
0answers
186 views

How to estimate CAViaR (Engle and Manganelli 2004) using non linear quantile regression?

I am trying to replicate results from Engle and Manganelli (2004). The following is one of their specifications, $q_t(\theta)=\gamma_0+\gamma_1q_{t-1}(\theta)+\alpha|r_{t-1}|$, $q$ is the quantile of ...
4
votes
0answers
156 views

Is it more accurate to analyze returns on a calendar day basis than a trading day basis?

I'm rather new to the actual practice of this kind of analysis, but it just seems wrong to me to throw Mondays' returns in with the rest without accounting for the passage of time on the weekend when ...
4
votes
0answers
145 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time ...
4
votes
0answers
175 views

How companies choose earnings release dates, & effect on Implied Volatility

A company's earnings release date significantly affects weekly or monthly option prices/implied volatility. For companies that typically release earnings on the cusp of monthly options expiration, ...
4
votes
0answers
470 views

ATM volatility versus OTM volatility and directional standard deviation

The forward instrument vol curve is skewed to the downside (50 delta risk reversal, 25 put, 25 call) were trading several ticks to the put). Is there a smaller standard deviation (in price terms) to ...
4
votes
0answers
708 views

Help With Quant Modelling Software

Im a software developer (freelance) working in investment banking, and I'm looking to improve my CV by gaining a better understanding of the financial quant role and the software used by quants to ...
4
votes
0answers
199 views

Taking into account the correlation in Barrier options on a Basket

In a Barrier option (where the contract cancels when the underlying hits the barrier) I succesfully found the way to compute the probability of a single underlying touching the barrier (with constant ...
4
votes
0answers
485 views

Algorithms for predicting a couple points in the future

I'm familiar with supervised learning algorithms like regression and neural networks which look at a bunch of input points and learn a function which outputs a value (the value varying depending on ...
4
votes
0answers
620 views

Hasbrouck's information share

Given a cointegrated set of price series, I am trying to compute the Hasbrouck's information share, as described in page 12-13 of this article. page 7-8 of this article I have the vector error ...
4
votes
0answers
165 views

Use of Local Times in Option Pricing

I know two applications of local time in option pricing theory. First, it allows a derivation of Dupire's formula on local volatility in a neat way (i.e. without resorting to differential operator ...
3
votes
0answers
40 views

How to check that an interest rate curve is arbitrage free

I have 2 interest rate curves (LIBOR 3M and OIS). I want to create stress scenarios for those two curves. Is it possible that some scenarios will make my term structure arbitrageable? How can I test ...
3
votes
0answers
33 views

How to calculate the JdK RS-Ratio

Anyone have a clue how to calculate the JdK RS-Ratio? Let's say I want to compare the Relative strength for these: EWA iShares MSCI Australia Index Fund EWC iShares MSCI Canada Index Fund EWD ...
3
votes
0answers
50 views

Computing Value at Risk for portfolio in R

I know how to compute VaR with long positions using PerformanceAnalytics. What about a portfolio consisting in two equities A and B, 100 USD long positions in each, and 2 stock options for the same ...
3
votes
0answers
32 views

How to price lookback american option when its payment is distributed during its life

I would like to price a floating strike american lookback with a particular feature: I don't want to charge upfront the client, rather I would like to insert a "running fee", some sort of a dividend. ...
3
votes
0answers
77 views

What are the main market efficiency measures?

I'm going to test for the effect of the change in market efficiency on the stock market portfolio, and, I want to know what are the main measures known in the academic literature in order to compare ...
3
votes
0answers
164 views

Discrete Trading to reduce speculation

I recently read a paper by Terje Lensberg (2014) "Costs and benefits of financial regulation: Short-selling bans and transaction taxes" where he analyzed the effects of financial regulation (short ...
3
votes
0answers
40 views

Clarification of Saturation-Reset Regimes

I have worked my way through this article, waiting to get into school I have been self-learning a bit. I have a good grasp on most of the article, but the component strategy of Saturation and Reset ...
3
votes
0answers
39 views

Dynamic Hedging for a Bond

Sorry if this question is duplicate. Analyzing the scenario to hedge bond credit risk with CDS. but if Bond price changes CDS notional will not change. is there any way i can hedge this ?
3
votes
0answers
87 views

The danger of using Principal Component Analysis (PCA) in Robust Optimization problems

I have received a reviewer's comment on a paper which applies PCA to reduce the size of a problem and the application is in the robust optimization field. The reviewer implies that "In robust ...
3
votes
0answers
57 views

Stochastic control (HJB) for wealth process involving stopping times

Given a wealth process that evolves as $$d w_t = r w_t dt + \theta_t ( \sigma dW_t + (\mu-r) dt) - c_t dt.$$ where $\theta_t$ is the worth of holding at time $t$ and $c_t$ is the consumption stream. ...
3
votes
0answers
100 views

Constructing Volatility Smile from American Options

My question is about best practices for reconstructing volatility smiles for a fixed tenor from American option data. For simplicity/liquidity, I am currently considering options on SPY. I am ...
3
votes
0answers
44 views

Dixit & Pindyck (1993) Chapter 4, equation 13

Starting with the Bellman equation for the optimal stopping problem: $$F(x,t)=max\{\Omega(x,t), \pi(x,t)+(1+\rho dt)^{-1} E[F(x+dx, t+dt)|x]\}$$ In the continuation region where the second term is the ...
3
votes
0answers
30 views

Basket Default Swap (BDS)

I would like to understand better the $n^{th}$ to default pair spreads of a basket default swap containing $m>n$ entities. For example, consider 2 single name CDS's with same spread and same ...
3
votes
0answers
221 views

Portfolio Optimization with Monte Carlo Simulation - How to do it with Excel?

If I have three asset classes and their historical weekly returns for five years, how can I construct a minimum variance portfolio and an efficient frontier plot with Excel? To do that do I have to ...
3
votes
0answers
93 views

How do I calculate the probability of a stock being above or below a value using the Heston model?

How can I use the Heston Model to calculate the probability of a stock being above or below a certain value on a given date in the future?
3
votes
0answers
57 views

Estimating Number of “Day Trades” from Total Volume of Commodity Futures Contract

Looking at futures data I am trying to calculate/estimate the number of "day trades", i.e. positions that were initiated and closed during the same day, as distinct from those positions that were ...
3
votes
0answers
81 views

Filtering out AR(1) effects before using stochastic volatility model

I wonder if I first filter out AR(1) (autoregressive model with lag 1) effects from univariate time series and then fit stochastic volatility model does above procedure introduce any bias at first or ...
3
votes
0answers
59 views

I want to Derive $P(t)=P(t,T_{n})+\sum_{i=1}^{n}[P(t,T_{i-1})-P(t,T_{i})]$

Derive the pricing formula $$P(t)=P(t,T_{n})+\sum_{i=1}^{n}[P(t,T_{i-1})-P(t,T_{i})]$$directly, by constructing a self-financing portfolio which replicates the cash flow of the floating rate bond. ...
3
votes
0answers
107 views

ISLAMIC FINANCE WACC

I need to calculate WACC for copany operating in the coutry with islamic finance system. I used build-up method to calculate cost of equity. But still searching for cost of debt in the economy. Has ...
3
votes
0answers
140 views

GMM time-series regression factor model with factors that are not returns

Factor models with factors that are not returns are usually estimated and tested by cross-sectional regressions. However, there is a way to use time-series regression to estimate and test the model. ...
3
votes
0answers
33 views

For an affine process, how do we know the second order term is positive definite?

A regular affine process is defined to have the generator $Af(x) = \sum_{k,l=1}^d(a_{kl}+\langle a_{I,kl},y\rangle)\frac{\partial^2f(x)}{\partial x_k\partial x_l}+\langle b+\beta x,\nabla f(x)\rangle ...
3
votes
0answers
168 views

Mid-Point calculation with execution probability

Referring Cao, Hansch, and Wang (2004) "The Informational Content of an Open Limit Order Book" $$ \mbox{WP}^{n_1 - n_2} = \frac{\sum_{j=n_1}^{n_2} (Q_j^d P_j^d + Q_j^s P_j^s)}{(Q_j^d + Q_j^s)} $$ ...

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