8
votes
3answers
1k views

Gamma vs. Volatility Risk

Original Question: What is the link between Gamma and the Volatility Risk? It leads me to ask: - What is the Volatility Risk definition and what are the good practices to measure it? Thinking about ...
0
votes
1answer
107 views

Constructing Volatility Smile from Implied Volatility & Delta

I have implied volatility data for call and put options (expiring in 1 month from any given date) for a particular stock. In addition, I have the delta for the options. However, I have no information ...
3
votes
2answers
71 views

Risk Neutral Pricing Necessary Condition

Suppose that I have an option on a single stock expiring at time $T$ and I replicate the payoff of this derivative by investing in the stock market and the money market. So this condition reads $$X(T) ...
0
votes
1answer
64 views

Yahoo OHLC data reflects nonexistant stock split

Can anyone explain why the OHLC data I'm getting from yahoo appears to reflect stock splits during times when no significant corporate actions have occurred? For example, I'm looking at ABT and yahoo ...
0
votes
0answers
63 views

Fixed volatility portfolio with max returns creates skewed results

I am trying to create a portfolio of only four components using the mean-variance optimization (MVO). I am setting up my problem such that I want to maximize the expected returns with a fixed vol ...
1
vote
1answer
107 views

Analysing FX Data

When analysing currencies, the data always comes in pairs so it is hard to normalise a multivariate time series of data e.g. if I have GBPvsUSD, EURvsUSD and CADvsUSD then changes in the US economy ...
1
vote
3answers
174 views

Estimate of fx trading volume

I understand that there are no official figures of fx trading volume per currency, but are there any good estimates? Is there any fx exchange that is particularly forthcoming with its volume data, ...
2
votes
1answer
76 views

Correlation Multiple Currencies

If i have a portfolio of stocks from different currencies and i want to generate a correlation matrix from the stocks, how is the correct procedure ? Imagine a portfolio which the base currency is ...
2
votes
2answers
253 views

How to classify stocks by their volatility?

I would like to hear other possible ways of classifying Stocks by the Volatility of their returns. Assuming that I want to characterize each stock as Low, Medium or High Volatility Stock and assuming ...
3
votes
3answers
97 views

Modelling currency exchange rates timeseries data across re-denomation dates

I am working with data for an exotic currency, that has been re-denominated a couple of times during the twenty years of data that I have. What is the best way of 'normalising' the data, so that I ...
2
votes
0answers
92 views

State Space models with Short Time Series

My problem is that I have a state space model that I estimate using the Berndt–Hall–Hall–Hausman (BHHH) algorithm. The state space model is relatively simple in that the hidden part follows a pure ...
4
votes
1answer
103 views

Nested volatility

The introduction VIX options makes the concept of "volatility of volatility" a real life concept. The idea of "nested volatility" seems interesting, and I am wondering if there are any academic ...
0
votes
1answer
56 views

Contribute to Finance related projects [closed]

I am currently a student and in the future would like to work as a software developer for a financial institution such as Bloomberg, Factset etc. I was looking to contribute to some open source or ...
2
votes
4answers
342 views

Implementing A 50/50 Prediction Model Strategy

Reworded the question for clarity (see edits for original post): How can one knowingly foresee where a 50/50 prediction model will be profitable? For previous posts: I understand that if I have a ...
1
vote
2answers
82 views

CVA/CDVA - Worsened Credit Quality implies profit?

In the book Counterparty Credit Risk, Collateral and Funding by Brigo et al I found the following: credit quality of investor WORSENS $\Rightarrow$ books POSITIVE MARK TO MKT credit quality of ...
1
vote
2answers
84 views

Art market specificities

I am looking for some reference on the art market in light of quantitative finance. I am interested in some things: The market in general, how is it compared to financial market ? What about common ...
-3
votes
1answer
1k views

Is there a piratebay for data(bases)? (here, talking about historical financial data) [closed]

I would like to, for example, access (and later, upload), for example, historical financial data for the S&P500. If a piratebay for databases existed, maybe we could freely share information that ...
3
votes
2answers
626 views

Delta hedging frequency for plain vanilla European options under trading costs

I am looking for methods to select points in time when delta hedging plain vanilla European options under trading costs. It is easy to come up with ad hoc ideas such as Time-based: for example at ...
4
votes
2answers
92 views

How does this follow from the separating hyperplane theorem?

This is from Pliskas book in mathematical finance. I do not know what was best to write the question so I included the pages from the book. He has not written what form of the separating hyperplane ...
1
vote
1answer
137 views

How to develop your own interest rate model?

How can you develop your own interest rate model? What must be take cautiously before making one? Also what is the regulation that one mustfollow? Also what is some common properties that models ...
4
votes
3answers
1k views

Pairs trading: Question on non-negative profits, size of the positions and trading signals

I'm trying to backtest Pairs Trading but have become a bit confused on the different methods of selecting pairs, how to look for trading signals and what size of the positions to take in the assets. ...
3
votes
1answer
198 views

Portfolio Optimization - n risky assets

I'm currently implementing a CAPM model in Excel: A portfolio of n risky assets when n=6 (in this case) A riskless borrowing rate of 8% and riskless lending rate of 3% I'm given the expected return ...
1
vote
2answers
190 views

M&A hedging an equity portfolio against an index

Quick Note This question was already posted under the userID user8170. Reason being I could not access my account. Now I am able to login to my account I am reposting the question here and will ...
4
votes
3answers
264 views

selecting test data for neural networks

I have been working on a neural network based on certain technical indicators. As people familiar with neural networks would know after developing a hypothesis, the developer is also supposed to ...
1
vote
1answer
73 views

Methods for “prompt month equivalent” exposure in commodities forwards/futures markets

It is common in commodities markets to hold many positions, both long and short, across a range of contract months beginning in the prompt month (today, September) to five or more years out. In ...
0
votes
0answers
59 views

multi factor equity model exposures not as expected

I'm researching an equity multi factor model. It contains three factors, say A, B & C. The factors are weighted as such, ...
10
votes
5answers
5k views

Using linear regression on (lagged) returns of one stock to predict returns of another

Suppose I want to build a linear regression to see if returns of one stock can predict returns of another. For example, let's say I want to see if the VIX return on day X is predictive of the S&P ...
2
votes
1answer
94 views

hedging with a 3 month fx forward every month

I think this is a bit odd question. Let us say I want to hedge my fx exposure every month but using 3 month forwards . How can I do that ? Is it not easy just to use 1 month forwards ? I recalculate ...
1
vote
0answers
33 views

Doubt on risk cost criterion

I want to minimize some kind of risk sensitive cost. But, I am confused what cost criterion should I use. I am aware of only expected exponential utility. I want to know what are the other such ...
0
votes
2answers
62 views

Infinite autocorrelation - Unit root?

I have a time series of gold prices, on which I want to build an ARIMA model. The series is autocorrelated and if I can difference as often as I want, it always is. First: data: d1gold Dickey-Fuller ...
1
vote
1answer
169 views

Cholesky Decomposition on Correlation Matrix for Correlated Asset Paths

I found a matlab example for modelling correlated asset paths: http://www.goddardconsulting.ca/matlab-monte-carlo-assetpaths-corr.html In this model the author uses the matlab code chol() in order to ...
0
votes
2answers
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 ...
2
votes
1answer
153 views

Volatility of Futures

Apparently: Under a constant interest rate, the futures price is given by a deterministic time function times the asset price (I think I understand this). This means that the volatility of the ...
0
votes
3answers
165 views

What is the effect of dividend yield being greater than the risk-free rate to American options pricing?

Even though dividends are discrete, literature often makes the assumption of continuous dividends (mostly in the case of indices but the individual stocks as well). The dividend yield denoted by q is ...
20
votes
8answers
2k views

How to design a custom equity backtester?

I was thinking about writing my own backtester and I realize I have to make some assumptions. So I was hoping I could post what I am planning on doing and hopefully some of you can give me some ideas ...
1
vote
1answer
79 views

How can theta be so large on this option?

The AAPL Sep 95 put currently has a theta of -.21. The put midpoint is .84. 84/21 = 4 days. However, the put has nearly a month before expiration, at which time it will be zero. Not 4 days from ...
-2
votes
0answers
37 views

Stock Price Evolution Equation Clarifications [closed]

What is the dimension of Δt? Is it second [s]? What are the expected return and the expected volatility? How can I calculate them for any given stock? Should I use the return and volatility values for ...
1
vote
1answer
331 views

Probability of stock closing over a certain price

A stock has beta of 2.0 and stock specific daily volatility of 0.02. Suppose that yesterday's closing price was 100 and today the market goes up by 1%. What's the probability of today's closing price ...
1
vote
1answer
77 views

ADR vs Foriegn Stock Price Arbitraguers

So I am sure you all know about the whole Argentina default that has been in the papers lately, no need to delve into it. This so called "technical" default has lead some interesting investment ...
1
vote
1answer
117 views

what is General IB2 Restriction in Basel II credit risk model

I was reading Basel II wiki page, it says: The first pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: ...
1
vote
0answers
146 views

one-step-ahead Stochastic Volatility for 5-minute VWAP prices

I'm trying to run an SV model against prices of Euro/USD. For those not familiar with SV, its a volatility model in which each point gets its own volatility parameter $h_t$ with 3 main parameters that ...
1
vote
2answers
110 views

Impact of NZD mid-day EST Roll forward

Was taking a look at an NZD spot deal that was traded on a Friday for value the following Tuesday (t+2). Somehow this trade became classified as a forward by our back office systems (dealer says they ...
2
votes
0answers
33 views

what kind of test for volatility and where find the data

I am working on a model for stochastic volatility. In short, the model try to capture that the volatility goes up suddenly after a shock (war, policy, financial events, etc) and then goes down slowly, ...
1
vote
0answers
68 views

CVA formula proof

I'm struggling to prove the CVA formula in this paper. Equation (3) is the result of computing the expectation of formula (1). Could you please show me how to prove that?
4
votes
1answer
172 views

Why does regression capture differences in volatility?

I read the following statement in the book python for data analysis, chapter 11, and I was wondering if someone could give me intuition about why regression has this effect? The purpose of the ...
2
votes
0answers
42 views

Testing for the presence of a positive or negative gamma effect

I am currently analyzing a statistic that I believe will have the effect of hedgers having a positive or negative gamma position in certain stocks. In the case where I believe hedgers have positive ...
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 ...
4
votes
1answer
71 views

Discounted risky asset stochastic process problem

$S_t$ is the random variable representing the risky asset price at time $t$. M_t is the riskless asset. They are governed by the equations $\frac{dS_t}{dt}=\mu dt + \sigma dZ_t$ and $dM_t = rM_t ...
3
votes
0answers
88 views

Particular Conditional Expectation of Geometric Brownian Motion

If we have the density function $$f_{Y}(y,t)=\frac{1}{y \sqrt {2\pi\sigma^2t}}exp(-\frac{(ln \ y - \mu t)^2}{2\sigma^2t})$$ Then the mean of $Y(t)=e^{X(t)}$ conditional on $Y(0)=y_0$ is found to be ...
3
votes
0answers
159 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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