3
votes
0answers
566 views

FIGARCH estimation in R

I am trying to estimate a FIGARCH(1,1) model in R for Value-at-Risk purposes. As I understand it, the rugarch package does not support FIGARCH or FIEGARCH. To that end, I used the garchOxFit function ...
3
votes
0answers
138 views

How to price an option with two volatilities?

Imagine you have two volatilities, the second which is "activated" when the stock crosses a barrier called $p_b$. The present price is $p_1$. ($p_b>p_1$). This can be used to price options after a ...
3
votes
0answers
283 views

Definition of risk factors for market risk scenario testing

I am doing a research for stress testing in market risk. The usual process I found out for scenario testing is: Define risk factors upon the portfolio Define the desired scenarios Vary the risk ...
3
votes
0answers
599 views

Calculating most profitable arbitrage orders on multiple market with fixed and variable fees

If I have multiple markets (let's say 5, but the solution should be generic) trading the same stock/commodity/whatever, and the markets differ in both variable fees (which are in % of the trade order) ...
3
votes
0answers
151 views

Black-Scholes PDE to heat equation, nonconstant coefficients

Can someone provide me with details or a reference on how to transform the Black-Scholes PDE with nonconstant coefficients (i.e. $r=r\left(S,t\right)$, $\sigma=\sigma\left(S,t\right)$) to the heat ...
3
votes
0answers
74 views

Standard Assumption Terminology

Regulators are starting to analyse (or at least they are talking about it) model assumptions. We all know that too often our assumptions are just in the model documentation. Furthermore, we have no ...
3
votes
0answers
61 views

Discount of Asian vs European vols

I understand the discount for Asian vs. European vol depends on time to expiry and length of averaging period. This makes sense intuitively; a short averaging period far away blurs into a single ...
3
votes
0answers
93 views

Optimal mortgage rate strategy

When buying a mortgage, you can choose to "lock in" a rate at any point within 60 days of your closing date. Once locked in, you can't revert. This makes it a secretary problem - in the traditional ...
3
votes
0answers
138 views

Is it random walk?

I would like to ask a question about random walk. Campbell, Lo & Mackinlay defined the random walk, in the following way (RW3): $$ cov[f(r_{t}),g(r_{t+k})]=0,\qquad k\neq0 $$ for all $f(\cdot)$ ...
3
votes
0answers
90 views

Overnight Index Swaps

Just a very quick general question regarding the OIS market. Is it common place on termsheets to state a PV Notional and additionally a FV notional, if so what is the purpose of this and does market ...
3
votes
0answers
237 views

Quant/Stat Factor Performance Website/Distribution?

Does anyone know of a decent quant/stat factor website, distribution(public or private) or publication that tracks performance of "many" of traditional quant/stat factors? By that I mean would show ...
3
votes
0answers
425 views

How to determine ratios for mean-reverting basket

Suppose I have a basket of 3 securities A, B, and C. I believe that the basket is cointegrated and I want to create a mean-reverting trade. I fit the model: ...
3
votes
0answers
149 views

RQuantLib: any difference between FixedRateBond() and FixedRateBondPriceByYield() with flat term structure?

Please, consider the following functions from RQuantLib package: FixedRateBond() ...
3
votes
0answers
209 views

How replicate data using PCA

I have a set of date covering petrol prices. My example has two columns where each row represents a sequential date. ...
3
votes
0answers
209 views

PCA Variances and Principal Portfolio Variances

In Meucci's paper called "Managing Diversification" he mentions that: "Indeed, the eigenvalues A correspond to the variances of these uncorrelated portfolios" I tried to replicate it but found they ...
3
votes
0answers
187 views

Fitting a non linear AR + GARCH(1,1)-M model

I want to fit the following model to a time series: $$ y_{t}=\alpha_{0}+\alpha_{1}y_{t-1}+\alpha_{2}y_{t-1}^{2}+\lambda h_{t}+\varepsilon_{t} $$ $$ ...
3
votes
0answers
54 views

Credit spreads vs default events dependence

Reading this note it strikes me that credit spreads and defaults seem not to be commonly modeled jointly (e.g. more or less directly in structural models), but at best with some kind of "ex post" ...
3
votes
0answers
209 views

how to represent financial data as a spatial process

Does any one have a good tutorial , introduction or overview on the web for different ways of representing financial data as a spatial process? Such as those spatial processes often used in ...
3
votes
0answers
164 views

is there a mapping from Altman Z-score for private companies to bond ratings or probability of default?

On wikipedia, there is a formula to calculate the Altman Z-score for private companies: Z-score estimated for private firms: T1 = (Current Assets − Current Liabilities) / Total Assets T2 = Retained ...
3
votes
0answers
96 views

Resources to read more about/learn how implied pricing works

I was looking at this video today: http://www.cmegroup.com/education/interactive/webinars-archived/implied-price-functionality.html on implied pricing. And am aware that implied orders/pricing ...
3
votes
0answers
275 views

Monty Hall Model

Given a fixed time period,say 3 days, the stock/market can go up,down or stay sideways. A hedge fund can long, short or use rangebound(options strategy) to bet for that 3 days closing level. Hedge ...
3
votes
0answers
95 views

Estimating two normal random numbers with one equation

Subtitle: Estimating the correlation of the shocks driving two commodities in two multi-factor models I am fitting two 2-factor models to electricity and gas futures, respectively. In order to ...
3
votes
0answers
280 views

How does one estimate theta in the Ho-Lee model from a yield curve?

I have a yield curve constructed using linear interpolation with data points every 3-months for US treasuries. I would like to use that calibrate a Ho-Lee model, but I can't wrap my head around how ...
3
votes
0answers
182 views

Measuring unbiased estimator for variance with RMSE?

The root mean squared error (RMSE) is considered by some to be the best measure of how good a variance estimate is. You often see it quoted as: $RMSE=\sqrt{\frac{1}{n}\sum_{i=1}^n(\hat{\sigma_i} - ...
3
votes
0answers
187 views

Optimal Position Size with Transaction Costs given Forecast Mean and StDev

I have rather a challenging question. I'm hoping that someone can share their experience. I will build up the problem in steps. Let's start our thinking with the idea of a buy and hold strategy of ...
3
votes
0answers
79 views

Individual/casual investors and the bias towards blue-chip stocks?

There's quite a bit of research (example, [1]) teasing out the fact that home/casual/individual investors prefer stocks with large positive skewness. It surprised me, as I was reading a bunch of these ...
3
votes
0answers
379 views

What makes IRC a market risk?

Since modeling leaves complete freedom we can assume both market and credit risks can enter the picture. However the minimum requirement is (migrations and) defaults simulation, how does this ...
3
votes
0answers
133 views

Arbitrage free price of a derivative when the price is collected over the lifetime of the derivative

Let $X_t$ be an american style financial derivative with random exercise time $T$ where $t$ and $T$ belongs to some finite set $A$. Buying this derivative requires the buyer to pay $p_t$ up to time ...
3
votes
0answers
318 views

Real time stock volatility

Is there any need for real time weighted volatility on a tick by tick basis for equities? If you had that access to that, what could you do with it?
3
votes
0answers
317 views

Is there a standard method of scaling alpha forecasts to t-cost estimates?

Given a set of monthly alpha forecasts (i.e. standardized z-scores from a multi-factor return model) and a non-linear market impact model (or more specifically, its piecewise-linear approximation), is ...
3
votes
0answers
170 views

How companies choose earnings release dates, & effect on Implied Volatility

A company's earnings release date significantly affects weekly or monthly option prices/implied volatility. For companies that typically release earnings on the cusp of monthly options expiration, ...
3
votes
0answers
118 views

Are there canonical test cases for testing of pricing engines

Short intro: We are developing pricing engines for the calculation of market risk in a Solvency II solution, including bonds, callable bonds, cds, options, futures and so on. Are there any canonical ...
3
votes
0answers
124 views

What is the relation between return volatility and return rank volatility, and how can I control the latter?

I have no experience in finance, but I've been playing around with a virtual portfolio. I'm trying to control the "rank volatility" distribution - that is, the volatility of a stock's daily rank in ...
3
votes
0answers
320 views

How to balance two Forex crosses correctly to do a linear regression?

I have two cross and an account in EUR: EUR/USD GBP/USD I would like to do a balanced linear regression using R. With "balanced" I mean that I would like to normalize it by calculating the ...
3
votes
0answers
161 views

Benefits of Diversification and Rebalancing with negatively skewed leptokurtic return distribution?

I am missing tools to investigate this issue. I am trying to solve this question here. What kind of issues should you acknowledge over the naive diversification/rebalancing with normal distribution? ...
3
votes
0answers
186 views

What is the longest number of consecutive days that options implied volatility has stayed “extremely high” for any particular underlying?

Curious as to whether or not there is any sort of all time record. Any index, future, or stock will do. Volatility must be well above the average 1 year volatility for all periods.
2
votes
0answers
35 views

how to apply a simple copula model

I'm playing around with copulas and wanted to generate some sample based on copula techniques in R. For this purpose I applied the following algorithm: Generate three sample vectors coming from ...
2
votes
0answers
62 views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic intereset rates, a stock paying no dividends, no repo rates etc. Let C(T,K) be the price of a call with expiry ...
2
votes
0answers
43 views

Inflation/Rates Correlation

I've been looking into a short piece of maths a colleague has written on pricing inflation with payment delays, and was hoping someone could confirm whether my understanding is correct, or if my ...
2
votes
0answers
47 views

seasonality and generalized additive model

I am reading a report which talks about seasonality. There is a chart showing the average returns for each month of the year. In the chart it appears the last 3 months of the year tend to be negative. ...
2
votes
0answers
88 views

Law of a geometric brownian motion first hitting time (formula dont match Monte Carlo Simulation)

I posted this question before on MSE I need to use it in a small step in the middle of a simulation and I think I'm not getting correct results to this probabilities and so for my all ...
2
votes
0answers
78 views

negative transition probabilities in the heston model

I've been trying to implement a bivariate tree for pricing american options with the heston model in R using the paper of Beliaeva and Nawalkha ...
2
votes
0answers
54 views

Testing Statistical Significance of Various Portfolio Simulations

I'm trying to determine which of my portfolio simulations/backtests if any are good enough to put some money into. I outline an approach below and I'm interested in knowing: What problems are there ...
2
votes
0answers
102 views

Scale of Market Quakes Computation

I would like to reproduce the results in the paper "The scale of market quakes", from T. Bisig, But I am getting stuck at the computation of the Fourier Coefficients in equation (4). They are defined ...
2
votes
0answers
63 views

Beta distribution - Holding period

Let's say I have a risk factor that is defined between [0,1], such as recovery rates. Assuming I have daily data, I can estimate the "daily VaR", i.e. the tails over 1 day period, since the data is ...
2
votes
0answers
30 views

How can I break down the change in value for an inflation-linked bond

I am trying to decompose the change in value of an inflation-linked bond into two constituent parts: 1) That due to changing nominal rates on the issuer's non-linked bonds 2) That due to changing ...
2
votes
0answers
78 views

Pricing Callable Floating Rate Note

I have a question concerning pricing of a callable floating rate note (FRN). I have not found a lot of literature concerning callable FRNs (although a lot for callable bonds). With my understanding, ...
2
votes
0answers
70 views

Practitioner's criterion for MC pricing convergence

Let's say I have some Interest Rates (IR) pricing model which relies on Monte Carlo pricing and I'd like to benchmark its quality and find out optimal settings (time steps & iterations) per asset ...
2
votes
0answers
82 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 ...
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, ...

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