# All Questions

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### 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 $f(\cdot)$ ...
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### 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 ...
223 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 ...
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### 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: ...
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### RQuantLib: any difference between FixedRateBond() and FixedRateBondPriceByYield() with flat term structure?

Please, consider the following functions from RQuantLib package: FixedRateBond() ...
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### 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 ...
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I want to fit the following model to a time series: $$y_{t}=\alpha_{0}+\alpha_{1}y_{t-1}+\alpha_{2}y_{t-1}^{2}+\lambda h_{t}+\varepsilon_{t}$$ $$... 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" ... 0answers 204 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 ... 0answers 141 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 ... 0answers 87 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 ... 0answers 259 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 ... 0answers 94 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 ... 0answers 257 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 ... 0answers 165 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} - ... 0answers 77 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 ... 0answers 309 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 ... 0answers 132 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 ... 0answers 306 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? 0answers 290 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 ... 0answers 165 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, ... 0answers 114 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 ... 0answers 123 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 ... 0answers 305 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 ... 0answers 96 views ### Analysis of Unbalanced Covered Calls Hello I am doing an analysis on covered calls with and extra amount of naked calls. Ignore the symbol and current macroeconomic events. I couldn't find any reference to this strategy (unbalanced is ... 0answers 159 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? ... 0answers 183 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. 0answers 33 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 ... 0answers 79 views ### Johansen-Ledoit-Sornette Model im trying to predict crash time by using lppl model(JLS). My codes can run, but the error is to high....I try with some other initial values, but still can't reduce the error.....How i can reduce ... 0answers 41 views ### Simple Forward Interest Rate Proof Just trying to check my logic here: Let Z(t,T) be a Zero-Coupon Bond with maturity T bought at time t, S_m be the spot interest rate for time m and S_n for time n respectively, where n ... 0answers 20 views ### How do derivatives affect capital structures? Yesterday, I was at a lecture where the speaker said that the impact of derivatives was often to make senior debt, in effect, subordinated debt (in terms of priority, recovery rates, etc.)? How do ... 0answers 43 views ### Tick Data Poisson Process I am trying to generate a custom tick index using two indices (Let's say australian index ASX 200 and Japenese Index NKY). Japan index ticks every 10 seconds...and australia ticks every 30/35 seconds. ... 0answers 40 views ### Which are the popular free/open-source charting controls? Recently i've tried SciChart and VisiBlox - beautiful charting tools. Is there any free or open-source tools for visualizing charts on C#? Thank you for answers. 0answers 100 views ### What's the practical difference between the Johansen vs Engle-Granger tests for cointegration? For the two-variable case, what are the practical differences between using the Engle-Granger procedure versus the Johansen test for cointegration? Is one universally more powerful than the other? ... 0answers 92 views ### What equation will convert implied yield volatility to implied price volatility? I am trying to figure out how to turn implied yield volatility of a short-term interest rate into implied price volatility. Is there an equation to do this? I have come across the equation for a ... 0answers 48 views ### What is the main reasons to use Miltersen & Schartz (1998) model for commodity futures options versus a standard Generalised Black and Scholes model (if there are any?) I have read the paper but I am not to sure about its practical implications as would people with more experience using this ... 0answers 108 views ### What happened to Mountain View Analytics? I stumbled over Thomas Cover's work on algorithmic portfolio selection; apparently, an outfit called "Mountain View Analytics" attempted to implement the suggestions from Cover's research. ... 0answers 61 views ### Effective simulation of multi factor Heston model Im looking for a quick way (as in runs quick, not necessarily is quick to implement) of simulating multiple square root processes for a stochastic volatility model, flexible enough to allow for ... 0answers 34 views ### Risk neutral measure for jump processes How can I construct risk neutral measure for option price if active price form is:$$S(t)=S(0)\left[\exp{σW(t)+(α-βλ-1/2σ^2)t+Q(t)}\right] ? Here $W(t)$ is a Brownian motion and $Q(t)$ is a ...
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In a trading manual I got during a course, the value of the ATM Call-Spread is approximated by $CS_{ATM}=\frac{1}{2}StrD+(F-m)\times\Delta CS$ The lecturer skipped the part where he derived this ...
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### Why is the LIBOR-market model free of arbitrage?

Recently I have been reading a lot on the market models. One thing that keeps escaping me - why is the Libor-market model (LMM) assumed to e free of aritrage in continuous time ? To me this means ...
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### Bond (yield curve) dynamics in the Forward-LIBOR-market-model

The standard Libor-Forward-Market-Models provides a way of modelling the evolution of forward rates in time. However the model does not seem to be well suited for the modelling of zero-bonds. But ...
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### Weighted average implied optionlet/swaptions volatility

Let an implied volatility curve/surface is made up by optionlets or swaptions Black's implied volatility. If you wanted to price, say, a FRN with cap and/or floor, a CMS et cetera you would input the ...
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### How can dividend protection be considered in the binomial model in pricing the convertible bond?

If the convertible bond has dividend-protection, how can we cater it in the binomial model? If there is dividend protection at or above 1%, can we impose input of dividend yield of 1% in the ...
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### Practical implementation of Least Squares Monte Carlo (tweaks and pittfalls)

The Longstaff-Schwartz LSM approach is nowadays ubiquitous(at least in the academic literature) in pricing path dependant derivatives. Up to now I have mostly worked with lattice methods. My ...
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### Forecasting amount of slippage in executing option spreads

Is there a good quantitative model to estimate how much slippage is required to execute a particular option spread trade? For example, let's say you want to execute an Iron Condor. Given X, Y, Z ...
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### The concept of an incomplete market

While skeeming the relevant literature and web-sites I noticed that mostly the concept of the incomplete market is reduced to the following statement "A market is incomplete if there are more ...
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### Does Bakshi, Kapadia and Madan (2003) VIX building approach underestimate volatility?

From a paper that shortly addresses an alternative approach to VIX-like index building: To test this approach, I've built a fake book of B&S options with constant volatility equal to ...