All Questions

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Deriving credit spreads or migration matrices from prob of default

How do I derive credit migration/transition matrices or spreads from default probability? May you please provide references, or do you know what type of articles or authors to find?
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PEGY Ratio: Does it make sense?

PEGY ratio is calculated as PE ratio/(Earnings Growth Rate + Dividend Yield). Putting aside the discussion of whether forward or trailing P/E ratio should be used, isn't adding dividend yield over ...
73 views

Proving that Absence of Arbitrage does not imply law of one price

I am trying to prove that the Absence of arbitrage statement (AOA) does not necessarily imply the law of one price (LOP). For the definitions of these concepts I am using Cochrane's book "Asset ...
82 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?
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Which interest rates to use for options pricing?

I am looking at the historical treasury interest rates and am uncertain which rates would be best to use for options pricing. Should I use 1 month, 6 month, 2 year? See: ...
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Suppose you bought a July ITM call and sold an August ATM put, am I net long or short?

Here is the full question, even though ive broken it down to the mini question above. Suppose you have bought a July ITM call and sold an August ATM put. What would be your delta in this position? ...
64 views

Replication of a call option by cash-or-nothing digital option

I am so stuck on this question: Consider a two-asset model where asset 0 is cash, so that the price of asset 0 is $B_t=1$ for all $t \geq0$. Asset 1 has prices given by $dS_t = a(S_t) dW_t$, where the ...
22 views

Solvency Problem for Financial Institutions

According to my finance lecture, the motivation for risk measures is grounded in the solvency problem: Risk measures are used to determine the amount of capital to avoid insolvency of the financial ...
39 views

Create 10-K Filing Database

I am finance grad student, and working to create a financial statement database. My objective is to download an income statement, balance sheet, and statement of cash flows for every publicly traded ...
45 views

Opposite of hard to borrow?

If market participants are certain a stock will suffer a huge decline, the shares will become hard to borrow and an interest fee will be applied to borrow the stock. This interest fee eliminates the ...
82 views

risk-neutral valuation implies no arbitrage?

It is known that in an arbitrage-free continuous time market, the price of every asset is evaluated as the corresponding price in the replicating strategy using risk-neutral valuation. I want to ...
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In which divisions of banking are the Greeks and Black Scholes equation applied? [closed]

I know that Black Scholes and the Greeks are important in market risk. In what other areas are they used?
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Is an arbitrary prior for Black-Litterman valid? Or do we need a market implied one?

I went through The Black-Litterman Approach: Original Model and Extensions - see also. The BL approeach starts with a prior on the expected returns vector derived from the hypothesis that the market ...
32 views

Law of one price in continuous time

The law of one price (i.e. for assets $S^{(i)}$ and $S^{(j)}$, $S^{(i)}_T = S^{(j)}_T$ almost surely implies that $S^{(i)}_t = S^{(j)}_t$ almost surely for all $0 \leq t \leq T$) is known to hold ...
21 views

How to generate jump times in in Multilevel path simulation for jump-diffusion SDEs?

I am trying to generate jump times in in Multilevel path simulation for jump-diffusion SDEs using the following MATLAB code: I used following Algorithm in Yuan Xia paper: But I have not reached ...
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How to simulate jump times in Multilevel path simulation for jump-diffusion SDEs?

How to simulate jump times in Multilevel path simulation for jump-diffusion SDEs in this pag ? Yuan Xia I used this code: ...
18 views

What to do when I do not get enough fill in cash leg during cash - future arbitrage

Futures have fixed lot sizes in my exchange, but cash do not. When I am spread trading the cash - future pair, what should I do if I am unable to get enough fill on the cash side.
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Data Selection for Empirical Pricing Kernel Estimation (Stochastic Discount Factor)

I want to estimate an empirical pricing kernel for an index. Hence, I need to estimate a physical and risk neutral density. For estimating the physical density, only the index data in an observed time ...
61 views

Bloomberg-alternatives for intraday stock price data?

Given the limitation Bloomberg imposes in terms of the number of days you can go into the past when retrieving historical intraday data, what are similarly reliable alternative solutions? I require ...
38 views

Why asset management firms shouldn't be custodian of its own funds?

I am reading the Madoff case. One of the issue is BMIS Firm (Bernie Madoff Investment Securities) were acting as a Asset Management Firm, broker as well as Custodian. Why is it an issue? What sort of ...
150 views

Wiener process integral

Suppose that $W_{t}$ is a Wiener process. Assume $W_{0}=0.$ Is it true that $\int_{t=0}^{T}dW_{t}=W_{T}$? If so, why? Is one preferred to the other?
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How to prepare data for superior predictive ability (SPA) test?

Can anyone please let me know how to prepare data to compute superior predictive ability (SPA) test in R? I am working on forecasting volatility in stock markets, the context is, I used ...
102 views

Is volatility really a coherent risk measure?

Why people say that volatility is a coherent risk measure? I don't see it clearly because what happen if the two assets are correlated positively? subadditivity would not be preserved. That ...
12 views

dynamic programming with serially independent returns

Book suggests that "asset returns are assumed to be serially independent, so wealth is a single state connecting one period to the next". I understand path dependency is lost in case of serial ...
95 views

arbitrage in Heston model

Really struggling in this question: Consider a market with two assets $(B,S)$ whose price dynamics satisfy $$dB_t = B_t r dt$$ \quad \quad \quad \quad \, ...
40 views

Par and Zero Coupon Yield Curves

The government par yield curve shows a marginally lower yield than the Government zero coupon curve. What is the reason for this in general.
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What is the most elegant way to write a trading (or asset selection) algorithm in MATLAB, based on a simple criterion?

Assume a $T \times N$ matrix $X$ of values for an asset characteristic at time $t \in \{1,2,\dots,T \}$, where $T$ is the observation period in months and $N$ is the number of assets and a ...
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I was asked this question in an interview and despite thinking about it for a while, I haven't been able to come up with a good answer. Suppose you have a strategy you are running where at certain ...
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How much money should i ask for a this software? [migrated]

We are having a meeting tommorow and I have to come up with price for the it system. What thay want is: Database with around 20 tables Web managment system and Web API iOS app Android app Windowos ...
36 views

In theory historical performance of a portfolio

I am looking at the quantitative model our team is using for analyzing the performance of a portfolio of stocks. However I don't understand what the model is trying to achieve. The model is supposed ...
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Are these nonstationary variables?

If I have understood correctly, computing the correlation of two nonstationary variables can lead to spurious results. For example, computing the correlation of two stock price time series would lead ...
17 views

How to calculate the standard deviation of a 'deviation from a moving average'?

Say I have a vector of daily price changes for an asset and calculate the standard deviation of returns in the usual way. Let's call this result A. Now assume that for the same asset I also have a ...
29 views

Total demand under logit model

The setting is simple, i.e. formula for demand of service/product is linear $$d = \alpha - \beta p$$ where $\alpha$ is maximum demand, $\beta$ is some coefficient, and $p$ is price. There ...
50 views

How to calculate a forward-starting swap with forward equations?

I have been trying to resolve this problem for some time but I cannot get the correct answer. The problem is the following one. Compute the initial value of a forward-starting swap that begins at ...
261 views

How can I export intraday frequency data from Bloomberg and (how) is this procedure different than for lower frequencies?

For a research project, I would like to work with some intraday asset prices. I have already successfully exported the corresponding data at daily frequency, using the Excel API, but somehow this ...
26 views

How to estimate CVA by valuing a CDS of the counterparty?

I'm trying to estimate CVA of one of my derivatives by valuing a credit default swap (CDS) of my counterparty. However, I don't know how to set up the CDS deal (notional amount, maturity, etc.). ...
25 views

Hot do I calculate an effective forward rate? [closed]

I have to find nominal and effective forward interest rate for 3M-9M term, knowing that current interest rates are: 3M - 2.05% 6M - 2.04% 9M - 2.03% 12M - 2.02% For a nominal interest rate I just ...
125 views

Does it make sense to use upward and downward volatility in option pricing?

Historically stocks have a higher likelihood to increase in price than to fall in price. As such would it make sense to split a stocks volatility measurement into upward and downward components? For ...
29 views

Longer term average probabilities of fills at fx ECNs?

I am wondering whether anyone can share experiences and longer term average probabilities of fills when quoting inside the spread at various fx ECNs. I need to make an assumption of the probability of ...
37 views

Any Simple Way to Prove Black Scholes Type Identies?

A certain complicated option pricing formula results in products of Black Scholes $N$ components like this: $-p_1N(d_1)N(d_6)+p_sN(d_2)N(d_5)>?0$ where $p_s>p_1$ Trying to find a simple way ...
14 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 ...
20 views

What is the future value of a growing annuity with different periods for payment growth and monthly payments?

How can I modify the formula in this answer so that the frequency of payment growth is also a variable? For example, instead of payments growing by 2% each year I would like them to grow 2% every two ...
22 views

Cost of carry for posting bonds as collateral

Cost of carry for posting bonds as collateral How do you calculate cost of carry for posting bonds as collateral?
133 views

Bachelier model: number of stocks in replicating strategy

Given: Consider a two-asset, continuous time model (B,S) where $$dB_t = B_t r dt, \quad dS_t = \mu dt + \sigma dW_t.$$ The question is: Show that there exists a ...
62 views

Black Scholes model: condition of payout function

Given: Consider a two-asset, continuous time model (B,S) where $$dB_t = B_t r dt, \quad dS_t = S_t ( \mu dt + \sigma dW_t)$$ Clearly, the martingale deflator is: Y_t = e^{(-r - ...
75 views

Dupire model and Local Volatility model

In the context of Option pricing model. Is there a difference between the Dupire Model and the Local volatility model ? Thanks Achal
33 views

Interpretation of Cointegration results, pValues and t-Stat

This is a follow up to: Cointegration results interpretation validation? I ran another Engel Granger Test on a pair, The results I get: ...
47 views

What's state price vector?

What is state price vector?. Please explain me in detail is difficult to understand for me.