# All Questions

737 views

### Applicability of PCA to get historical volatilities to calibrate interest rates trees

My question in short is as follows: can I take main principal component of historical covariance matrix and use it as historical volatilities when fitting a binomial tree? Here's more detailed ...
29 views

### Portfolio Selection formulation

I was just wondering why in http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1601412 on page 22, the constraint (48) is a strict equality for the minimum variance formulation. Whereas in a different ...
127 views

### Intuitive Reasoning for Using Risk-Neutral Measure

Although we thoroughly covered risk-neutral pricing in university I never fully understood it in the context of continuous-time processes. But first of all, lets consider a discrete time example: ...
52 views

### remove seasonality in future contracts

very new to commodities. I have raw agriculture future data, and I need to remove the seasonality (de-seasonalize) from the data, what is the general approach ? Thanks for the help!
23 views

### When would dedicated portfolios do better than 'immunized' portfolios?

We just learned about cash-matching through dedicated portfolios (using risk free bonds) in my class that concerned mathematical programming. However, in an aside one of the notes said: It should be ...
91 views

### stochastic calculus - Itô formula?

I encounter a problem in the proof below: I don't know how to proove the first line in yellow (cf below): it makes me think about the Itô formula a lot I don't undertand the deduction (ok ...
108 views

### Direct use of implied volatility

I am not sure to understand exactly the direct use of implied volatility. Let's take an example: if an instrument has a daily volatility of $\sigma$, there is a 68% probability that its value will be ...
183 views

### Market data for options

Looking for recommendations on places to get market data for options. I'm looking at NYSE and NASDAQ only. My current solution is my broker, Tradeking. I can request realtime data for 700 option ...
120 views

### Why is the volatility smile important

One thing I can't understand clearly is why there is so much focus on the volatility smile. Given my knowledge of the Black and Scholes model, this is what I get: People use the volatility smile as a ...
131 views

### References on Statistical Arbitrages

Is there any basic materials (books, papers) to read on Statistical Arbitrage? I certainly understand much of the useful information is in the industry. I just want to get some understanding on the ...
96 views

### Where can I get historical fundamental data for multiple companies in a single CSV file?

Summary I seek an explicit reference to a source that gives me a fixed URL, e.g. http://example.com/?isin=US1912161007 or ...
75 views

### stochastic calculus - brownian motion

I don't know how to prove this : let be $X_t = \int_{0}^{t}\sigma_{u}dW_{u}$ where $\sigma_{t}$ is a predictable process. If $|\sigma_{t}| = c$ a.s. how can I prove that $X_{t}=c*\beta_{t}$ ...
37 views

### Calculating units in a cross currency short trade

If I have a forex account with a broker and a balance of 100 USD, and I'd like to short EUR/JPY, how many units can I short? How is this calculated? Which currency pair do I use to translate between ...
542 views

### On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
63 views

### Black Scholes Model Replicating Strategy Delta Hedged Exam Question

A share is currently priced at 640p. A writer of 100,000 units of a one year European put option with an exercise price of 630p has delta-hedged the option with a portfolio which holds cash and is ...
110 views

### How to estimate parameters of geometric brownian motion with time-varying mean?

Does anyone know how to estimate $A$, $\sigma_1$,$\sigma_2$ from the following system? $$dx = \mu_t x dt + \sigma_1 x dB_x$$ $$d\mu = A(\bar\mu - \mu) dt + \sigma_2 dB_\mu$$ Variation in $x$ could ...
243 views

### Which is the better risk sensitive measure?

Consider the two following optimization problem 1) $$\min_{\theta} \ln E_{\theta}[ e^{X}]$$ 2) $$\min_{\theta} E_{\theta}[ X]$$ with the constraint $$Var_{\theta}[X] <c$$ Is it true that ...
51 views

### How to calculate cash flow for XC swap

Given 3MLibor vs 12MLibor USD basis swap the 3M Libor is exchanged at 12MLibor+1%. How to calculate the cash flow
390 views

### Alternative ways to understand time-varying comovement between two time-series?

I have been looking into ways to better understand how the dependencies/correlations/etc between two time series can vary over time. I first thought about using a Kalman/particle filter over a ...
54 views

### Pricing digital options in discrete time

I am stuck in this exercise from my textbook: Consider a one-period market model with $N+1$ assets: a bond, a stock and $N-1$ call options. The prices of the bond are $B_0=1$ and $B_1 = 1+r$, ...
106 views

### Forex P&l Attribution on Physical Forward position

Please validate my unrealized Fx P&L calculation on the commodity forward contract e.g. consider i have bought 1 MT of wheat at 300 EURO my financial currency for company is USD. I am using below ...
33 views

160 views

### Cointegration Test: Residual is stationary but not random?

I am testing cointegration relationship on various pairs of stocks by this following these steps. Test for I(1) on a pair of stocks, says X and Y, using dickey-fuller test. If both time series are ...
120 views

### Set up sharpe ratio with 2 risky portfolio

You are considering an investment in the stock. In the stock market, there are two risky stocks (A and B) and a risk free claim, C (you can think of it as the t-bill). The covariances and returns of ...
151 views

### Moving window forecasting in Python

I am looking to create some code that will out-of-sample forecast the HAR-RV model. The model itself is formulated as the following, and the betas are estimated through HAC-OLS or Newey-West. ...
387 views

### How to express the Black Derman & Toy Model in a $dr=A\,dt+B\, dW$ form?

The Black Derman & Toy (BDT) model is given by $$d(\ln\,r)=\left(\theta(t)-\frac {d(\ln\sigma(t))}{dt}\ln r\right)\,dt+\sigma(t) \, dW.$$ How can one rewrite the BDT model as $dr=A\,dt+B\, dW$, ...
213 views

### Regression in liquidity risk model of Jarrow/Protter

In the paper "Liquidity Risk and Risk Measure Computation" authors describe a linear supply curve model for liquidity risks in presence of market impact, i.e. impact-affected asset price $S(t,x)$ is ...
276 views

### Is it statistically valid to ignore “irrelevant” stock prices during backtesting?

As an amateur trader, I have reasonable success with my current end-of-day trading systems. All my systems are based on at least ONE year of "in-sample" data for backtesting, followed by 6-months of ...
26 views

### How to deal with missing returns when creating value (equal) weighted returns

recently I am doing cross sectional regressions, and getting confused about missing returns. Suppose we have 100 stocks, then we want to construct a value weighted return (or equal weighted return). ...
39 views

### How do I calculate the PPP adjusted exchange rate between two countries?

I have been trying to calculate the PPP-adjusted EURUSD exchange rate. I am not sure if it is the same as relative PPP, for which I have used this formula: Spot rate at time t = Current spot rate * ...
54 views

### Limits on Short selling

When back testing an algorithm that relies upon short selling certain stocks, how to limit the short selling so that the back-test results still remain reliable? What kind of controls are generally ...
318 views

### Consistency of economic scenarios in nested stochastics simulation

I am interested in references on research regarding the consistency of economic scenarios in nested stochastics for risk measurement. Background: Pricing by Monte-Carlo: For pricing complex ...
63 views

### What are the main market anomalies/inefficiencies detected in quantitative finance?

I wondered about the existence of a complete list of the anomalies detected in quantitative finance. Generally, a market anomaly or inefficiency is a asset price and/or rate of return distortion on a ...
31 views

### How to price lookback american option when its payment is distributed during its life

I would like to price a floating strike american lookback with a particular feature: I don't want to charge upfront the client, rather I would like to insert a "running fee", some sort of a dividend. ...
30 views

### convention in borrowing money in a multiperiod model

I have a question concerning the idea of consumption in multi period. The following is given $$C_1=W_0-xS_1+B$$ $$C_2=xS_2-BR$$ where $W_0$ is initial wealth $x$ is the weight on an asset with ...