# All Questions

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### proper choice of risk aversion parameter in the risk-sensitive cost-criterion

Suppose I want to minimize certain risk sensitive cost. Is it a valid question to ask what is the proper (also in which sense) choice of risk aversion parameter in the risk-sensitive cost-criterion ? ...
69 views

### What is the distribution of stock splits?

I want to know how rare are splits more extreme than, say, 7:1 (and reverse splits similarly). An answer here points to announcements on Yahoo Finance, but apparently only monthly views. What is a ...
166 views

### Heat/Diffusion Equation

I am working on a problem where I have successfully reduced a version of Black Scholes to the Heat Equation and then shown the solution to be: ...
303 views

### Why are we obsessed over normalizing financial data?

I have recently began work on some high frequency financial tick data. I have been told to 'normalize' the data as much as possible and run linear regressions through them. In fact, the data doesn't ...
345 views

I am trying to plot the asset swap spreads of government inflation-linked bonds (ILBs) versus the asset swap spread of government nominal (plain-vanilla) reference bonds. I used the article in the ...
65 views

### Negative Risky vs Negative Butterfly

I understand that in regard to FX options, a volatility smile with negative Risk Reversals is effectively indicating that the spot market for a given currency pair is in decline (puts over). In ...
68 views

### Underlying changes impact on implied volatility

What are some valid techniques that can be used to simulate how changes in the underlying are most likely to impact implied volatility along with the skew of all strikes for options with the same ...
137 views

### Probability of Hyperinflation as a function of Probability of Soverign Default

I'm looking for some academic research on modeling risk of hyperinflation. Specifically, I'm interested in modeling the probability of hyperinflation over some time interval (e.g., probability of ...
38 views

### Chaikin Money Flow Persistence Formula

I am trying to create an approximation of the Accumulation/Distribution Rating using the Chaikin Money Flow Persistance indicator. I have the Chaikin Money Flow Formula as below, could anyone assist ...
78 views

### CVA number used by Finance Team

What are different reasons, Finance Team will need CVA number for? Is there any specific regulatory reporting to be done?
139 views

### Non-Negativity of up-factor and down-factor in Binomial No-Arbitrage Pricing Model

Consider a stock which is trading at $S_0$ at time $t=0$ and is expected to be trading at price $uS_0$ or $dS_0$ at time t=1 where $u$ and $d$ are up-factor and down-factor. The theory says that to ...
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### How to find optimal look back in quant trading models

I'm in the process of building a quantitative trading model, I want to improve on the way in which I decide upon a look back length for the indicators. I understand the different pros/cons for very ...
207 views

### Should I analyze the tick data day by day?

Let assume that we have one month of tick data which were traded at NYSE. We want to model the price changes as a function of the last p lags of price changes and the last q lags of the time duration ...
554 views

### What happens when bond price is less than the recovery rate

I am simulating various price path of bonds, and one issue that came up is the recovery rate. When a bond defaults, the amount you get back recovery rate * principle. This creates a problem if the ...
242 views

### where to find historical option prices?

I have a dataset of options (traded in European exchanges such as NYSE Euronext) and I would like to find their price history. Where to find it? I see that ...
227 views

### Some clarifications on eigenvectors and eigenvalues from PCA

Could somebody tell me whether suggestions in bold true or not? Q # 1: http://www.math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb071108.pdf ...
115 views

### reference question about portfolio optimization

I know the "classical" modern portfolio theory. However I have quite a lot of different sources. It seems that there is not a book which cover this topic in a rigorous way: theory application ...
363 views

### How to deal with extreme cases in normal random numbers generation?

In order to generate normal random numbers, one usually generates random numbers following a uniform distribution $Z \sim \mathcal{U}(0,1)$ and then applies the reverse CDF function on them ...
66 views

### Opposite of Tail-Risk Hedge (Established Vocabulary)

I'm working on a client memo explaining several approaches to equity hedging, and I'm looking for a not-too-technical term for a hedging strategy where I try to keep options near the money, as to have ...
440 views

### How to price a Swing Option?

I'm working in the commodity market and I've to price Swing Options with MATLAB, preferably with finite element. Has anyone already priced these kind of derivatives? I'm thinking about using the ...
374 views

### How to get Geometric Brownian Motion's closed-form solution in Black-Scholes model?

The Black Scholes model assumes the following dynamics for the underlying, well known as the Geometric Brownian Motion: $$dS_t=S_t(\mu dt+\sigma dW_t)$$ Then the solution is given: ...
132 views

### Comparison of multicurve calibration methods

It seems that there are mayor softwares around offering a multicurve framework based on bootstrap. I find this puzzling nowadays, given the distinct advantages of best-fit optimization methods and ...
3k views

### Worked examples of applying Ito's lemma

In most textbooks Ito's lemma is derived (on different levels of technicality depending on the intended audience) and then only the classic examples of Geometric Brownian motion and the Black-Scholes ...
45 views

### Questions related to the banking crisis during the European sovereign debt crisis

I am studying the European Sovereign Debt crisis and I have the following questions which I am struggling to find examples for: 1) I have heard that during the sovereign debt crisis, European ...
367 views

### Does Modern Portfolio Theory align with EMH?

I came to the conclusion that in literature Markowitz' Portfolio Theory is believed to be compliant with the Efficient Market Hypothesis. The weakest form states that the current price fully ...
165 views

### Historic Value at Risk - Ratios vs. Differences

Quick Summary on Historic VaR Let $S_0,...,S_n$ be the daily values of some stock (where $S_0$ is the current value). Then for $i=1,\ldots,n$ we let \hat r_i:=S_{i-1}/S_i \quad \text{and}\quad \hat ...
368 views

### Calculate bond yield in python

I want to run the newton method on a large dataset to calculate bond yield. Below is the code I created using a loop. I need to run it on ~50 million lines and the loop is quite unwieldy. Is there a ...
118 views

### How is the price of a bond actually determined?

How the price of a bond is actually determined? Is it the supply-demand that determines the price first and then the YTM is calculated on the back of this for that bond. Or is it that the changes to ...
2k views

### How is PnL calculated

In Fixed Income, I know that bonds PnL are evaluated depending on where the price lies on price/yield curve at the end of the day, compared to where it started from at beginning of the day. The ...
398 views

### Handling Missing values in stocks returns when estimating the co variance matrix

What is the best way to handle missing values when stocks did not exist for the entire historical period?.
228 views

### Arbitrage free implies complete market?

In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this proposition It seems that to show that the model is complete, we must show that the claims are reachable. That is, we ...
116 views

### Pricing Principle 1

In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this Pricing Principle. Is the one in red supposed to be the proof of the Pricing Principle 1? Or merely an intuitive ...
62 views

### forecasting crash time of KLSE index (1991-1994)

Price deviation = financial bubbles. i try to fit the following stock price index to predict recession. I couldn't fit the model with the data(Data are not available in yahoo finance for the ...
194 views

### ETFs have lower tracking error than Futures?

I used the daily returns of SPX Index, SPY US Equity, and SPA Index. I then calculate their standard deviation as hedging instruments with respect to SPX Index, i.e., (spx_ret - spy_ret) or (spx_ret - ...
224 views

### Logic behind Gordon Growth Model in a DCF analysis?

Sorry, I wanted to ask this on the finance/money forum, but they don't support LaTeX there. Let's say we are valuing a company using the DCF methodology with a 5-year projection period. We project ...
322 views

### SVCJ (SVJJ) Duffie et. al Model implementation in Matlab

I'm attempting to implement aforementioned SVCJ model by Duffie et al in MATLAB. so far without success. It's supposed to price vanilla (european) calls . parameters provided, the expected price is: ...
83 views

### How to construct a deterministic trading model based on a loess (local regression) model?

Given data that has been fit to a loess model, can you make reliable decisions on future trades given a good past fit? Has anyone here done so and can give an example of their use case? I am yet to ...