All Questions

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Pricing an american style option on a bond future

what is the good way to pricing american option on bond future? From bonk fixed income securities 3rd by Tuckman, I understand how to pricing European option on bond future, but I still have no clue ...
131 views

Why use implied volatility

First I'll describe the way I understood things so far from the literature, feel free to correct me here, and then I formulate some questions. I'd search through QSE, but haven't found so far similar ...
508 views

Back office processing for FX trades

Can someone provide (or point me to) a summary of back office processing nuances specific to FX trading? For example, I know that there are several FX-specific risks that must be managed. They include ...
28 views

What are some different methods for calculating hedge ratios for multiple leg spreads?

I am looking for many different ways of doing this, and I want to compare the results I get among the different choices. I am going to be using close-to-close change data. Thanks.
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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 ...
44 views

Baye's rule for conditional expectations (Proof review)

The Baye's rule for conditional expectations states $$E^Q[X|\mathcal{F}]E^P[f|\mathcal{F}]=E^P[Xf|\mathcal{F}]$$ With $f=dQ/dP$ - thus being the Radon-Nikodyn derivative and $X$ being ...
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what is the vol in the BS formula?

I need to compute the delta of an option for which I know a) the time to maturity, b) the price of the option, c) the price of the underlying asset. what is the formula to get this delta It seems ...
59 views

How can I use PCA to determine spread ratios for multiple legs?

I would like to generalize Paul Teetor's A Better Hedge Ratio, which uses prcomp() to determine a ratio between two legs. I am hoping to extend this to multiple legs, but am having trouble finding ...
68 views

Overview of robust/regularized portfolio selection

I am looking for either a review paper or individual papers on portfolio selection using robust statistics or regularization (e.g. LASSO, Ridge, etc.) I.e. a review on methods along the lines of: M ...
46 views

FTAP a-la Harrison, Kreps and Pliska

I was reading the papers co-authored by Harrison, Kreps and Pliska, that initiated the formal research on the connection between pricing, martingale measures, arbitrage and completeness. I have some ...
116 views

Value at Risk from Delta of a single asset portfolio

I am trying to figure out the following, for me unfamiliar type of question: Given is a single asset portfolio: the Delta of the portfolio is 15, the value of the asset is 10 and the daily volatility ...
120 views

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Options with a stochastic strike

Do options where the strike itself is a stochastic process exist? If they do - what are the motivations for such a product and where is it used ? Example: Call-Option with stochastic strike: ...
56 views

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backward Kolmogorov equations - Markov properties

I'm a physicist who's research has lead him into the theory of stochastic differential equations. If this question is not appropriate for this forum, please feel free to delete it. So I've been ...
46 views

Log returns vs. prices

I am currently working on a stat arb that is giving me a little bit of trouble. I'm under the impression that most stat arbs are going to use prices such that we can choose a ratio N such that: Price ...
232 views

Obtaining a consistent covariance matrix for stochastic volatility processes

What is the condition for underlying stochastic volatility processes to give a consistent covariance matrix? I read in Hull that in order to have a consistent covariance matrix, volatility parameters ...
239 views

Practical Usage of Wavelets with Real Time Data

There are a lot of papers out there which make attempts to forecast or discuss the benefits of wavelets for frequency decomposition. Oddly, very few discuss the huge boundary effects that are present ...
475 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 ...
121 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 ...
80 views

Given future price probability distribution, what is a strategy that maximizes return?

Say I know the price probability distribution, e.g., lognormal(p,s), of a stock X at a future time ...
66 views

Where does this copula come from?

In a paper I encountered the following notation $$P(Z\leq z,u\leq Y\leq v)=C(F_{Z}(z),F_{Y}(v)-F_{Y}(u))$$ However I don't see why this holds in relation to uniform random variables. Usually ...
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Are PX_BID and PX_ASK on Bloomberg closing bid/ask? or are they daily averaged?

Bloomberg provides PX_BID and PX_ASK on a daily basis, but it's not clear exactly where these numbers come from. Are they closing bid and ask prices, or are they averaged over the entire day? For ...
63 views

Why is that a risk averse consumer buys the optimum insurance when there is actuarially fair insurance?

I think I understand the fact that when marginal utilities of the same function are equal (a consequence of the actuarially fair insurance), the independent variables in it must be equal -- right? But ...
81 views

What impact does arbitrage have on realised volatility estimates?

Doing some research modeling/estimating volatility in the bitcoin market. There is quite a bit of scope for arbitrage within crypto-currency markets. Wonder if this has any impact on my volatility ...
2k views

Random matrix theory (RMT) in finance

The new kid on the block in finance seems to be random matrix theory. Although RMT as a theory is not so new (about 50 years) and was first used in quantum mechanics it being used in finance is a ...
709 views

Correct way to calculate bond's Yield-to-Horizon

I'm creating some .Net libraries for bond pricing and verifying its correctness with a bond pricing excel spreadsheet (Bond Pricing and Yield from Chrisholm Roth) but I believe it calculates the Yield ...
4k views

What types of neural networks are most appropriate for trading?

What types of neural networks are most appropriate for forecasting returns? Can neural networks be the basis for a high-frequency trading strategy? Types of neural networks include: Support Vector ...
5k views

What is the best way to “fix” a covariance matrix that is not positive semi-definite?

I have a sample covariance matrix of S&P 500 security returns where the smallest k-th eigenvalues are negative and quite small (reflecting noise and some high correlations in the matrix). I am ...
911 views

Cleansing covariance matrices via Random matrix theory

I am exploring de-noising and cleansing of covariance matrices via Random Matrix Theory. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually ...
100 views

Cross validation of a garch model

Suppose I divide a time series into 10 sequential time windows, where each window contains 1000 data points. I want to do test 5 different garch models using cross validation. So for each model, I ...
90 views

List of financial derivatives Ito's Lemma does not apply

According to Ito's Lemma there is no restriction on the continuity of the stochastic process. The restrictions are on the continuity of the pay-off so that second derivatives with respect to ...
344 views

Is there a name for, or any research on, a system where you try to predict future price by finding a similar price history in the past?

Allow me to explain. You look back from some period to the present. Say a week ago to now, using a per-minute view. You then crawl through your database of past price data, and you try to find a ...
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Consider a credit rating system consisting of three credit states, A, B and D (default) with the following annual credit transition probability: T = [0.7 0.2 0.1;0.2 0.5 0.3; 0 0 1]. For a company ...
60 views

How often do banks update forward points?

My understanding is that forward rates are calculated by comparing interbank interest rates of the 2 currencies for a currency pair, with the points being the difference between spot and the forward ...
214 views

How to choose a risk-neutral measure when the market is incomplete?

I am more of a probabilist than a financial mathematician. I am currently working on the features of American put options under a particular stochastic volatility model. Like most stochastic ...
87 views

Does risk-neutral measure have anything to deal with risk-neutrality in utility theory?

Or simply: why do we call equivalent martingale measures as risk-neutral measures? In the utility or game theory, when we consider a person's preferences to certain outcomes, we often deal with the ...