All Questions

4
votes
1answer
225 views

Mean-variance portfolio & quadratic programming

I am somewhat confused when it comes to modern portfolio theory, mean-variance portfolio optimization and its quadratic programming formulation. Issue 1: Formulation of mean-variance portfolio ...
1
vote
0answers
50 views

Incorporating a stochastic correlation structure into a multi-factor model

I am considering extending a multi-factor fixed income stochastic model (e.g. LIBOR-Market) to use stochastic correlation matrices instead of determinstic ones. For pricing instruments with short ...
3
votes
3answers
718 views

Simulating the short rate in the Hull-White model

What is the best way to simulate the short rate $r(t)$ in a simple one factor Hull White process? Suppose I have $$ dr(t) = (\theta(t)-\alpha r(t))dt+\sigma dW_t $$ where $\theta(t)$ is calibrated ...
2
votes
2answers
154 views

Options with a stochastic strike

Do options where the strike itself is a stochastic process exist? If they do - what are the motivations for such a product and where is it used ? Example: Call-Option with stochastic strike: ...
3
votes
1answer
102 views

Numéraire — couldn't understand the wiki explanation

I'm trying to understand Numéraire concept so am reading the wiki page: I couldn't understand the last formula's 2nd equation: $$ ...
3
votes
1answer
87 views

Understanding the derivation of a ML-estimator

I'm trying to understand the derivation of a ML-estimator and more specifically the rewriting of the covariance matrix Sigma. In this rewriting a lemma is used to show that $$ (1) \hspace{1.4 ...
4
votes
1answer
70 views

backward Kolmogorov equations - Markov properties

I'm a physicist who's research has lead him into the theory of stochastic differential equations. If this question is not appropriate for this forum, please feel free to delete it. So I've been ...
0
votes
0answers
58 views

Log returns vs. prices

I am currently working on a stat arb that is giving me a little bit of trouble. I'm under the impression that most stat arbs are going to use prices such that we can choose a ratio N such that: Price ...
4
votes
2answers
255 views

Obtaining a consistent covariance matrix for stochastic volatility processes

What is the condition for underlying stochastic volatility processes to give a consistent covariance matrix? I read in Hull that in order to have a consistent covariance matrix, volatility parameters ...
6
votes
1answer
318 views

Practical Usage of Wavelets with Real Time Data

There are a lot of papers out there which make attempts to forecast or discuss the benefits of wavelets for frequency decomposition. Oddly, very few discuss the huge boundary effects that are present ...
5
votes
0answers
243 views

On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
2
votes
1answer
118 views

Where does this copula come from?

In a paper I encountered the following notation $$P(Z\leq z,u\leq Y\leq v)=C(F_{Z}(z),F_{Y}(v)-F_{Y}(u))$$ However I don't see why this holds in relation to uniform random variables. Usually ...
0
votes
2answers
334 views

Are PX_BID and PX_ASK on Bloomberg closing bid/ask? or are they daily averaged?

Bloomberg provides PX_BID and PX_ASK on a daily basis, but it's not clear exactly where these numbers come from. Are they closing bid and ask prices, or are they averaged over the entire day? For ...
2
votes
2answers
104 views

What impact does arbitrage have on realised volatility estimates?

Doing some research modeling/estimating volatility in the bitcoin market. There is quite a bit of scope for arbitrage within crypto-currency markets. Wonder if this has any impact on my volatility ...
22
votes
5answers
3k views

Random matrix theory (RMT) in finance

The new kid on the block in finance seems to be random matrix theory. Although RMT as a theory is not so new (about 50 years) and was first used in quantum mechanics it being used in finance is a ...
5
votes
1answer
980 views

Correct way to calculate bond's Yield-to-Horizon

I'm creating some .Net libraries for bond pricing and verifying its correctness with a bond pricing excel spreadsheet (Bond Pricing and Yield from Chrisholm Roth) but I believe it calculates the Yield ...
18
votes
3answers
5k views

What types of neural networks are most appropriate for trading?

What types of neural networks are most appropriate for forecasting returns? Can neural networks be the basis for a high-frequency trading strategy? Types of neural networks include: Support Vector ...
19
votes
4answers
6k views

What is the best way to “fix” a covariance matrix that is not positive semi-definite?

I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix). I am ...
12
votes
2answers
1k views

Cleansing covariance matrices via Random matrix theory

I am exploring de-noising and cleansing of covariance matrices via Random Matrix Theory. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually ...
3
votes
1answer
123 views

Cross validation of a garch model

Suppose I divide a time series into 10 sequential time windows, where each window contains 1000 data points. I want to do test 5 different garch models using cross validation. So for each model, I ...
3
votes
5answers
370 views

Is there a name for, or any research on, a system where you try to predict future price by finding a similar price history in the past?

Allow me to explain. You look back from some period to the present. Say a week ago to now, using a per-minute view. You then crawl through your database of past price data, and you try to find a ...
1
vote
0answers
107 views

Credit Spread, Transition Matrix

Consider a credit rating system consisting of three credit states, A, B and D (default) with the following annual credit transition probability: T = [0.7 0.2 0.1;0.2 0.5 0.3; 0 0 1]. For a company ...
1
vote
3answers
105 views

How often do banks update forward points?

My understanding is that forward rates are calculated by comparing interbank interest rates of the 2 currencies for a currency pair, with the points being the difference between spot and the forward ...
6
votes
3answers
265 views

How to choose a risk-neutral measure when the market is incomplete?

I am more of a probabilist than a financial mathematician. I am currently working on the features of American put options under a particular stochastic volatility model. Like most stochastic ...
3
votes
1answer
128 views

Does risk-neutral measure have anything to deal with risk-neutrality in utility theory?

Or simply: why do we call equivalent martingale measures as risk-neutral measures? In the utility or game theory, when we consider a person's preferences to certain outcomes, we often deal with the ...
1
vote
2answers
92 views

Controlling portfolio concentration

I'm working with a heterogenous basket of instruments (in volatility terms). Risk parity allocation seems to be useful for the portfolio( * 1/Volatility). However, there are times when the ...
2
votes
1answer
112 views

Is the volatility of a trader's wealth equal to the volatility of the underlying assets traded?

Assume that a trader trades in several stocks with different volatilities. The return of the trader's portfolio would be the weighted average of returns and the risk would be a function of the the ...
1
vote
1answer
317 views

Value Weighted Return

I recently have started to look at some data from CRSP, and they have a metric called Value Weighted Return (two versions with and without distributions). When I looked it up, it seemed that this ...
1
vote
1answer
121 views

Effects of random-generator-choice on derivative's price

There is a plethora of pseudo-random-generators out there. Some of them are definetly better and some of them severily underperform. My standard tool is Mersenne Twister - when I need to generate ...
1
vote
2answers
200 views

Reading XBRL Data from the SEC FTP SITE

After I ftp into the SEC Edgar site (ftp.sec.gov) I am able to pull the appropriate financial statements (i.e., 10-k, 10-q, 8-k, etc.) onto my local computer. However, when I go to open these files, I ...
2
votes
2answers
417 views

Definition of Return of A Long/short Portfolio

This can either be a silly question or a question with no sure rigorous answer but defined with some convention. Any way, here it is. What is the (industrial recognized) definition of the return of a ...
0
votes
0answers
68 views

How to determine the equiy interest of target company if there is circular ownership?

I would like to ask is there any way to determine the equity interest of target company if there is circular ownership. For example, suppose company A owns 50% of company B, company B owns 100% of ...
1
vote
1answer
148 views

Price of Bond given credit state matrix

"Consider a credit rating system consisting of four states, A,B,and D(default) with the following annual credit transition probability: A= [ 0.7, 0.2, 0.1; 0.2, 0.5,0.3; 0,0,1] For a company rated ...
0
votes
2answers
56 views

SEC XBRL Context Dates

In SEC XBRL financial filings, why do the date ranges for duration contexts not match the context's quarter? e.g. The markup for the context "D2012Q3" may look like: ...
-1
votes
3answers
66 views

Standard way to represent trend in an a-dimensional way [closed]

Let us suppose that a factory needs to know when certain products are increasing the profit. This factory produces an huge number of products each with different targets. So the factory need to ...
5
votes
3answers
265 views

Geometric Brownian motion - Volatility Interpretation (in the drift term)

A Geometric Brownian motion satisfying the SDE $dS_t = rS_t dt+\sigma S_t dW_t$ has the analytic solution $$S_t = S_0\exp\left\{\left(r-\frac{\sigma^2}{2}\right)t\right\}\exp\{\sigma W_t\}$$ Recently ...
0
votes
0answers
318 views

Backtesting with fundamentals

Recently I've read some books about quantative approach to fundamental investing: - What works on Wall Street - James O'Shaughnessy - Quantitative Value - Wesley Gray, Tobias Carlisle - Quantitative ...
4
votes
0answers
41 views

What type of interpolation should be used in key rate perturbation models?

When perturbing a key rate in order to assess sensitivity of portfolio value, what sort of interpolation is standard? A book I am looking at says linear, but this seems pretty unrealistic to me--and ...
1
vote
1answer
104 views

Direct exchange data via a Vendor

I am considering the option between using direct exchange connections vs using a vendor like Bloomberg for market data. I am interested in daily data and potentially tick by tickdata. Initially I am ...
4
votes
1answer
195 views

Definition of orthogonality and independence for a stochastic processes

Somehow I can't find the explicit definition of when two processes are supposed to be orthogonal or independent anywhere. I think orthogonality and independence should mean the same thing in this ...
0
votes
0answers
30 views

Forward Yield curve for an arbitrary company

Let say I am analyzing a company XYZ. Credit rating for this company is BB. Now I need to have the 6-month forward Yield curve for this company. Can somebody help me how to find this information from ...
2
votes
1answer
377 views

Does one use the covariance or correlation matrix in cholesky decomposition to generate correlated samples

Can we interchangeably use Cholesky decomposition of covariance and correlation matrix to generate simulations? If not, in which situations do we use one or the other and why? Thanks in advance.
0
votes
1answer
128 views

Difference between VaR and credit VaR?

Quick question: is there a difference between credit VaR and VaR or are they the same thing?
3
votes
1answer
342 views

How is the MA (moving average model) useful?

How is the MA model useful in modeling financial data, for example the stock indices? For example, from what i understand in the AR (auto-regressive) model portion, we can use the ADF test to check ...
3
votes
1answer
1k views

Valuing Total Return Swaps

In my quest for simulated data, I am trying to generate prices for Total Return Swaps by calculating the NPVs of the fixed and floating leg. My problem: Given the fixed leg, how do I set the spread on ...
5
votes
2answers
170 views

Risk neutral Esscher transform of exponential Levy processes

Let $X_t$ be a Levy Process and $e^{X_t}$ the corresponding exponential Levy process. Using the Esscher transform for a change of measure for which the Radon-Nykodym derivative is ...
1
vote
0answers
159 views

Mock/practice trading for options (delta/gamma hedging etc.)

I know there are some sites for practicing equity investing. But could you provide me with suggestions concerning options trading etc. I read Natenbergs book on Options and want to test things like ...
0
votes
1answer
40 views

CAPM as pricing formula

P - price that the asset was purchased. Q - price that it was sold P = Q/(1+r+B(R_m - r)) What is the financial meaning of denominator. Thanks for help.
0
votes
0answers
81 views

Detrending before cointegration

When checking for co-integration , is it necessary to detrend the time series? What is the best way to go about it?
3
votes
1answer
193 views

Scaling of a transition matrix

I am working on a ratings transition matrix and I wondered how people scale it down to shorter time periods (although one should more or less stick to the estimation period i know). It is clear that ...

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