# All Questions

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 ...
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 ...
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 ...
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: ...
1answer
102 views

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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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: ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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 ...
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.
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?
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 ...
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 ...
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 ...
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 ...
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.
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?
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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