1
vote
1answer
130 views
Testing Significance of Correlation
Lets say I have the returns of two stocks(stock1 and stock2). Now without running a regression, I lag one of the variables, calculate the correlation between the two stocks and repeat this process as ...
3
votes
2answers
210 views
Software for backtesting outside strategies (CSV transaction upload)
I've developed some software which generates sets of trades, and I'd like to backtest those trades. My software currently outputs a CSV file with details of each trade:
...
0
votes
2answers
114 views
Regression with Lagged variables
I am new to regression analysis. Let's say initially I have a linear regression
x = alag(x1) + blag(x2) + clag(x3) -- eq 1
I want to predict the price x based on the the price of x from previous ...
3
votes
1answer
163 views
Stochastic modeling of stock price process
Apart from the model of Geometric Brownian motion is there any other "widely accepted" stochastic model to characterize the dynamics of a stock price process?
3
votes
3answers
955 views
Why does the adjusted closing price take into account dividends?
I'm trying to get an intuition as to why the adjusted closing price includes a dividend adjustment:
\begin{equation}
1 - \frac{dividend}{close}
\end{equation}
I understand why the adjusted closing ...
5
votes
2answers
161 views
How does the number of free dimensions of a model affect its required size of sample?
Adding more variables to a model usually increases its accuracy. However, without adequate analysis it could also lead to curve fitting.
Another question (How much data is needed to validate a ...
2
votes
1answer
100 views
OTC Equity Options' Dynamics
This only applies to options that do not have marketable equivalents since margin can be marked to them.
I've never been able to find this on my goog.
How is margin typically calculated for OTC ...
0
votes
2answers
93 views
monthly contract volume required for penny increments?
Have the exchanges disclosed their criteria?
Does anyone have a best guess based upon observations of volume (however you wish to define it)?
Please no qualitative answers.
0
votes
2answers
87 views
changes in open interest vs changes in underlying volume
Has a relationship been noted?
Mostly, I'd like to know if the open interest increases on an underlying, does the underlying usually see increased trading?
My guess would be "yes" since MMs can ...
0
votes
1answer
91 views
Regression extensions
I'm trying to find extensions for my regression and obviously would like to use PE, BV and CFO. But I've got monthly data, while all company's fundamentals are semi-annually... Can I deal with it ...
0
votes
2answers
332 views
What information do stock exchange colocated servers have access to?
In high frequency and low latency trading, decisions are done on the spot by servers colocated in stock exchanges. This implies that those servers have immediate access to the information they need to ...
-1
votes
1answer
143 views
High-Frequency Traders and Front Running: What order types are they using? [closed]
I often hear in the news that High-Frequency Traders can front-run incoming trades because they are faster at acquiring information and to execute trades. I also read that speed is only a necessary ...
3
votes
2answers
189 views
Using variance ratios to test for mean reversion
Can you use the variance ratio test to determine whether or not a time series is mean reverting? I'm using the Lo.Mac function in the ...
0
votes
0answers
38 views
Need historical option data for my final graduation project [duplicate]
I am a student doing my final graduation project on uncertainty quantification applied to option pricing.To validate my work I need historical european option data.So I wonder if there is someone here ...
9
votes
2answers
219 views
Stochastic modelling of derivatives on dividends
I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures.
What are common stochastic ...
25
votes
6answers
4k views
What broker/feed/APIsetup allows for recording the most accurate data (cheaply)?
I'm currently using IB's Java API and getting feeds through them. However the real-time feed is updated only every 250ms and the historical feed only every second.
I'm primarily looking for ES data ...
27
votes
6answers
2k views
Paradoxes in quantitative finance
Everyone seems to agree that the option prices predicted by the Black-Merton-Scholes model are inconsistent with what is observed in reality. Still, many people rely on the model by using "the wrong ...
1
vote
1answer
105 views
Testing Black Scholes Analytical Options Pricer
I've written some code to calculate European option prices using the Black-Scholes analytical method. Can somebody recommend a good way to test that code? I have looked at option pricers online like ...
3
votes
2answers
227 views
Data Synchronization
I'm working on market trends. I have daily prices for 33 assets from different markets. I was wondering if there is a way to cancel the effects of different opening/closing times.
I have been told ...
2
votes
2answers
106 views
Why do long-term equity return forecast models use dependent observations?
I've been reading up on different models used to forecast the equity risk premium, and I've seen a couple of papers that had questionable methods. For example, this paper by Javier Estrada goes into ...
1
vote
0answers
46 views
Risk factors for derivatives on dividends
I consider pricing and risk analysis of derivatives on dividends of the members of equity indices (such as Dow Jones EuroStoxx). There are options but I focus on futures.
What are the main risk ...
6
votes
2answers
2k views
How GARCH/ARCH models are useful to check the volatility?
Below a R code wrote by the moderator @richardh (whom I want to thank again) about ARCH/GARCH models.
...
2
votes
0answers
144 views
Does the geometric Ornstein-Uhlenbeck process have stationary variance?
I know that the long run variance of the standard OU process is
$\lim_{s\rightarrow \infty}\mbox{Var}(P_{t+s}|P_t) = \frac{\sigma^2}{2\theta}$
I'm using the geometric version of the process. I ...
14
votes
2answers
796 views
From a high frequency point of view, with a price prediction and assuming infinite leverage, how do you determine optimal trade size?
I have read about something like Kelly criterion for long term expectation maximization assuming a fixed starting bankroll. But if one can assume unlimited leverage, and one has a signal for a price ...
0
votes
1answer
87 views
Assessing Forcasting with Correlated Residuals
Trying to use a linear regression model to forcast the CPI. I noticed that when I took a moving average of the residuals, though homsokedatisc and nonautocorrelated(ie they squiggle up&down with ...
3
votes
3answers
140 views
YTM and current yield
Which of the following statements is correct?
a. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must also exceed its coupon rate.
b. If a bond’s yield to maturity ...
2
votes
2answers
99 views
Portfolio risk-return when assets have limited and inconsistent historical data / time series?
Lets say we have "today's" snapshot of asset allocation and need to determine the 6mo, 1 yr and 5 yr risk and returns of this portfolio. If the time series for every asset is very long, longer than ...
1
vote
2answers
277 views
What is the instantaneous P&L of a Variance Swap?
What is the instantaneous P&L of a variance swap.
Is it $(\sigma^{2}_{t}-\sigma^{2}_{implied})dt$?
5
votes
3answers
737 views
What really drives option implied volatility?
A common and oft repeated belief regarding options volatility is that implied volatility increases due to people bidding up a contract, usually related to anticipation of the outcome of an expected ...
4
votes
2answers
213 views
How to reactivate a risk mangement rule in an automated process
If some conditions are met (stop loss, trailing stop, take profit...) we will close ours positions (sell/buy) to avoid having more loss or to ensure profit. In an automatic trading system, it is easy ...
0
votes
1answer
62 views
What is the meaning of the discounted process defined from the interest rate process?
Assume a money market has interest rate process $R(t)$. In Shreve's Stochastic Calculus for Finance II, formula (5.2.17) on page 215 defines the discounted process as
$$
D(t) = e^{-\int_0^t R(s) ds}.
...
5
votes
1answer
112 views
Risk neutral valuation independent of $Q$?
This question is bothering me now for a while. Suppose given is a random payoff $f\in L^0(\mathcal{F}_T)$ at time $T$, where $L^0(\mathcal{F}_T)$ denotes the space of all $\mathcal{F}_T$-measurable ...
3
votes
1answer
141 views
Where can I get historical ticker change database?
There's 30 days worth of data at http://www.otcmarkets.com/marketActivity/symbol-changes - but I'm really looking for the past 10 years, or 5 years if only that is possible. Any dice?
The closest ...
3
votes
3answers
205 views
Does implied vol vary for calls vs puts?
Volatility skew tells us that options with the same maturity at different strikes can have different implied vol. However, can a corresponding call and put for the same strike and maturity have ...
2
votes
1answer
153 views
Calculating the probability of a price change using an options pricing formula
I don't know if I'm doing this right and I'd greatly appreciate help.
I'm trying to use an option pricing formula to backout the likelihood of the Euro dropping below $1.27, even for a minute, at any ...
11
votes
1answer
219 views
Are BSDE's used in practice?
In the academic applied probability/math finance community, Backwards Stochastic Differential Equations (BSDE's) are extremely popular, and they provide a single framework for several different ...
4
votes
1answer
146 views
Hedging with actual volatility: problem understanding the math behind the result
From this paper. page 3
We get that the total profit at expiration is the difference in value between the price of the option with actual volatility and the one with implied volatility.
I have tried ...
0
votes
0answers
122 views
Mean Reverting Spread
I have constructed a mean reverting spread using two indexes. I know they have to be mean reverting, but when plotted side by side they are mean reverting for a little bit and then deviate and head ...
6
votes
1answer
109 views
Different definition of NFLVR
I attend a course in mathematical finance. In the first chapter we discus the absence of arbitrage in full generality. For this purpose we define the following sets:
...
1
vote
0answers
142 views
Call options portfolio: what would the underlyings' moments to be maximized?
Let you have only three underlyings, like SPY, TLT and GLD, and you want to buy $n_{1}$ Call options on SPY, $n_{2}$ Call options on TLT and $n_{3}$ Call options on GLD... with a limited budget, that ...
5
votes
2answers
127 views
Market weights for Black-Litterman
I'm trying to implement Black-Litterman for an arbitrary selection of assets.
One of the input for BL is the "Equilibrium market capitalization weights for each asset".
In most examples I've seen, ...
0
votes
2answers
208 views
Why the implied volatilities calculated are so different
I Calculated facebook option(expired in 12/4/13) Implied Volatility with the Bisection Method. The program will be attached at the end. The results for different strike prices are so different:
...
3
votes
2answers
198 views
Black-Scholes and Fundamentals
So basically
$dS_t=\mu S_tdt+\sigma S_tdWt$
and
$\mu=r-\frac12\sigma^2$
I have just been thinking about this later equation. This is very interesting because it ties together risk-free ...
19
votes
8answers
5k views
Digital Signal Processing in Trading
There is a concept of trading or observing the market with signal processing originally created by John Ehler. He wrote three books about it.
Cybernetic Analysis for Stocks and Futures
Rocket Science ...
3
votes
3answers
317 views
Central Limit Theorem and Lévy processes
Lévy processes are self-decomposable and independent on any non-overlapping interval, so how come the distribution of the process at time T,$\phi(T)$, which is the sum of N i.i.d with law $\phi(T/N)$ ...
7
votes
3answers
141 views
How to justify a model that could not predict external factors?
I'm building some models, for example, Bad Loan (NPL) rate.
It's based on historical simulation method -- basically it's saying the future behavior could be predicted by history data.
However, this ...
0
votes
0answers
34 views
Where can I buy historical intraday bars? [duplicate]
I'm looking to buy historical intraday 1 or 5 minute bars of the US stocks going back as far as possible (up to 10 years). Preferably: OHLC bid+ask+trade prices and with volume (But trade prices at 5 ...
0
votes
2answers
109 views
Credit risk data
I am trying to get historical data for credit risk and do some analysis on it as a school project. I thought CDX index might be a good proxy for typical credit risk data, but I am not sure. Typically ...
0
votes
1answer
80 views
Matlab - Differences between rng and rand
I was trying to run some Monte-Carlo simulations and if I used:
rng(seed, 'Twister');
For some reason I would get "Option Values Can not be Negative" errors in the blsimpv function, but if I just ...
1
vote
0answers
50 views
Problems with exact Heston simulations
I am just wondering if there is any problem with the so-called "exact" Heston simulations? So far what I have seen are the good things about it, what are the disadvantages? Because if it is so ...
