1
vote
0answers
27 views

Replicating portfolio: initial portfolio?

I have a bit of trouble understanding how to determine the replicating portfolio of a call using just a stock and the riskfree asset. I have times $t = 0,1,2$, and at time $2$, we have $3$ payoffs ($...
0
votes
2answers
38 views

Valuation growth rate for perpetuity

What would be reasonable rates of return for the computation of perpetuity in firm valuation? I tend to google FMI's expected World GDP growth rate, but I can't always find results. Would someone ...
4
votes
1answer
85 views

What if: Negative interest on an overdrawn bank account?

Theoretical question: Consider if a bank account had a -12% yearly interest rate, and an account was currently overdrawn to a balance of -$100. What would the bank do to the -$100 balance after one ...
2
votes
0answers
13 views

US Rule versus Actuarial Method for calculating interest

I'm trying to understand the difference between the actuarial method and the U.S. Rule for calculating interest. I think the difference is that the actuarial rule adds unpaid interest to the principal ...
1
vote
2answers
41 views

cumulative return calculation, disagreement

A friend of mine and myself are having an argument on how to correctly determine cumulative return. The dataset has monthly return data and we are trying to determine the 6-month cumulative return. ...
2
votes
0answers
61 views

Risk neutral probability and forecasting

When our goal is pricing of derivative products we, due to no arbitrage conditions, have to use the risk neutral probability. In other side if we have risk management purpose we have to use the “...
1
vote
1answer
54 views

Why does the correlation between r and V in Longstaff and Schwartz 1992 model is positive?

I am reading the Longstaff and Schwartz's 1992 and 1993. From $r = \alpha x + \beta y$ and $V = \alpha^2 x + \beta^2 y$. It was mentioned in the paper that the $r$ is positive correlated with $V$. ...
4
votes
2answers
130 views

Are two stochastic processes independent if the Wiener processes inside are uncorrelated

Assume there are two stochastic processes: $dx_t = \alpha_1(x_t,t)dt + \beta_1(x_t,t)dW^1_t$ and $dy_t = \alpha_2(y_t,t)dt + \beta_2(y_t,t)dW^2_t$. Does $dW^1_t\times{dW^2_t} = 0$ imply that $\...
2
votes
1answer
35 views

Help understanding factor modeling, solving for residuals

I am trying to understand and implement a factor model, and I think I might be having some issues. I am trying to solve for the residuals in the equation: $$ R_{i} = \sum_{A=1}^{K}\beta_{iA} f_{A} + ...
0
votes
1answer
73 views

What models / methods are used in practice in derivative pricing?

I wrote my bachelor thesis about European Option Pricing under Stochastic Volatility and Jump Diffusion and am now near the end of my MSc in Quant Finance. As i want to write a "potential job"-...
1
vote
0answers
23 views

How to calculate monthly Return from a Momentum Strategy with overlapping Holdingperiods?

I replicate a Momentum Strategy from Rey and Schmid (2007) "Feasible momentum strategies" based on the idea from Jegadeesh and Titman (1993). I only buy the single stock with the highest past return ...
0
votes
2answers
42 views

How to setup a back test step by step?

I would like to setup a back test for Indian equities, Kindly help out with step by step procedure, No need to go into details, outlining of procedure are enough in bullet point, I will research ...
6
votes
2answers
62 views

SABR Model Closed Form Solution

I've been researching the SABR model and one of the main benefits it seems is that you can obtain a closed for solution of the implied BS volatility in certain cases. In all the papers I've read, I ...
1
vote
2answers
59 views

Put Volatility Smiles and Implied Volatility

I have been observing the option chains of put options with differing maturities. I have noticed that those puts with a close expiry date have the steepest volatility smiles. Can someone please ...
0
votes
1answer
56 views

Delta Hedge, does large stock move produce a loss?

I dont understand how MM protect themselves from large moves in underlying while being delta hedged. Example: MM sels 1 ATM put and sells 100stock (delta = 1) as a hedge. Now what will happen if next ...
3
votes
1answer
55 views

Realized Vol for 15 min interval using second Data

I would like to calculate realized volatility for a 15 min period. Most of the literature I looked up shows how to construct daily realized volatility using intraday data. These literatures does use ...
1
vote
0answers
24 views

student-t asset path

I am trying to simulate an asset path based on a t-distribution. I found a lot of ressources and the fact that it will be difficult to do a path. But now I changed my Geometric Brownian Motion ...
0
votes
0answers
12 views

Beta model for measuring risk

My task is to measure Commodity risk ( Oil) for a company . For that I use the APT model , I run a time series linear regression over 10 years where the independant variables are economical and ...
1
vote
1answer
24 views

Is Asian option in binomial asset pricing model a martingale?

Since it does not have a closed form solution for the price, it's unlikely to be a martingale. However, on the other hand, if we represent the price as a function of the current stock price and the ...
3
votes
1answer
62 views

Importance Sampling for Least Square Monte Carlo

I am currently trying to implement and model an Importance Sampling estimator for Longstaff and Schwartz algorithm for pricing American put options. It is used such that more paths are in-the-money ...
2
votes
1answer
83 views

Valuing derivatives under stochastic interest rates

I would like to price a European option with maturity equals to 5 years. To do this, I'm using the Black-Scholes model with stochastic interest rates. Suppose I choose the CIR model for the risk-...
6
votes
1answer
120 views

Why is the GARCH intercept supposed to be strictly positive?

Maybe it's a simple question but I don't really understand why it is theoretically required. Let's take the standard GARCH(1,1) $$\sigma^2_{t+1}=\omega+\alpha\epsilon^2_{t}+\beta\sigma^2_{t}$$ In most ...
1
vote
1answer
44 views

What does each bar in the empirical average eigenvalues spectrum of the correlation matrix of log-returns of stocks represent?

An example diagram, taken from this paper, looks like follows: What is its physical interpretation? The highest eigenvalue, the paper says, represents market mode. So, what does the difference in ...
0
votes
1answer
31 views

Calculate historical duration based on current duration & historical prices

Suppose I have today current duration of a bond and it's historical daily prices. How from that I can calculate the historical duration? e.g. the value of duration I would saw if yesterday, week ago, ...
1
vote
0answers
40 views

Optimal portfolio construction questions [closed]

I am working on a paper that tries to build an optimal portfolio to hedge various risks (mainly interest rate risk). I have never done this before. Which software program should I use to create an ...
3
votes
1answer
52 views

Dollar-Neutral in addition to Market-Neutral?

What is the point/benefit of using a dollar-neutral strategy in addition to a Beta-neutral strategy? What exactly does a dollar-neutral strategy buy the investor? What's useful about balancing long ...
3
votes
1answer
121 views

Mathematical Derivation of Residual Risk

I understand the difference between Excess, Residual and Active Returns. I also understand what Active Risk; defined as: $\sigma_{r_P-r_B}$ (i.e. standard deviation of the difference in returns ...
1
vote
0answers
13 views

How to calculate optimal monthly withdrawals from an investment with compound interest

I have 1.25M dollars. I want to put it in an investment with 60% annual return paid monthly and re-invest the interest to achieve compound interest. After 15 years, my principal would have grown to ...
0
votes
1answer
50 views

Volatility for time periods with little data

When I want the monthly volatility of stock and I only have data for about one month and I do calculation like this: ...
-1
votes
2answers
50 views

NPV of two annuities

For exam preparation we are given some past papers, however there are no solutions and I would like to know if my logic is correct for the following question: Assume you are 25 years old. An ...
1
vote
0answers
26 views

Problem with determining weights in tangency portfolio (2 risky assets)

I use the following well known formula in order to determine the weight of asset i in the tangency portfolio (in the case of two risky assets): $w_{i,T}=\frac{\sigma[r_2]^2E[R_1]-\sigma[r_1,r_2]E[R_2]...
3
votes
3answers
111 views

What is the rationale behind using SV models with 2 distinct volatility processes?

In the Double Heston model, there are 2 distinct volatility processes. The SDEs read \begin{align} & d{{S}_{t}}=r{{S}_{t}}dt+\sqrt{{{v}_{1}}(t)}{{S}_{t}}d{{W}_{1}}(t)+\sqrt{{{v}_{2}}(t)}{{S}_{t}}...
1
vote
0answers
21 views

How do I build a cross currency basis swap pricer using implied levels generated from fx forwards? [closed]

I'm building a strategy where I would take positions depending on whether the basis swap looks rich or cheap relative to the forwards, inside 1yr maturity. Depending on liquidity the market in ...
2
votes
0answers
30 views

How to apply Kelly criterion to a portfolio made by a stock plus a option?

First of all, assuming a Gaussian, Markowitz, well behaved world. Extensions for non-well behaved world will be welcomed. I know that by a portfolio made by only by one stock (and a risk free bond) I ...
1
vote
2answers
60 views

Simulate drifted geometric brownian motion under new measure

I have a very fundamental question regarding simulation of DRIFTED geometric brownian motion. We have the standard Blackos Scholes model: $dS(t)=r S(t)dt+\sigma S(t) dW^{\mathbb{P}}(t)$, where $W^{\...
0
votes
0answers
25 views

Yahoo Finance data scraper [duplicate]

I am building a small financial web application and I need a data source for price (Adj. Close) and volume data. I have written a scraper to scrape equity data for yahoo finance and can pass this to ...
4
votes
0answers
23 views

Polynomial interpolation of corrected lognormal distribution

Can anyone provide a formula for a polynomial interpolation of the corrected lognormal distribution used to model returns traditionally resulting from the wrong Brownian motion generated model? ...
1
vote
1answer
77 views

Calculating the global minimum variance portfolio in R?

I am attempting to use the globalMin.portfolio command to calculate the global minimum variance portfolio in RStudio. My code is as follows (note that several libraries have been included which may ...
2
votes
1answer
35 views

How to compute the yield on the Ultra-Bond Treasury Futures

I am trying to compute the yield on the Ultra-Bond Treasury Futures which is roughly 172.2187. Heres the description of the contract: U.S. Treasury bonds with remaining term to maturity of not ...
1
vote
0answers
34 views

Minimum Variance Portfolio problem [closed]

Minimum Variance Portfolio Suppose there are N stocks in the investmentable universe and we have a fully invested portfolio investing 100% of the capital. The Covariance matrix is denoted as ∑. We ...
3
votes
1answer
85 views

Copulas and default probability

Assume a basket of 3 credits, each with some unconditional default probability ${q_i}(t) = \Pr [{\tau _i} \le t]$. Consider the joint CDF $H$ of the default times is given by $H(t,t,t) = \Pr [{\tau ...
1
vote
0answers
30 views

Estimating time-varying tail dependence for Archimedean copulas

Patton (2006) defines the upper tail dependence coefficient for a time-varying bivariate SJC copula as $$\tau^u_t=\Lambda \left(\omega_u + \beta_u \tau^u_{t-1}+\alpha_u \frac{1}{10}\sum^{10}_{i=1}|u_{...
0
votes
1answer
64 views

Portfolio with a certain pay-off curve

I would like to find a relevant optimization option's portfolio models which can describe a certain pay-off curve (objective function) under same assumptions. For example, assumptions on how to limit ...
0
votes
1answer
32 views

Beta = 1 and 0. Type of portfolios

I read in E. Quian's "Quantitative Equitity Portoflio Management" the following: A traditional long-only portfolio [with unit beta] would have most of its risk in the market risk. However, a zero ...
2
votes
1answer
62 views

Selection of optimal backtesting parameters

Suppose I backtest some strategy on in-sample data while varying two parameters, say $X$ and $Y$. $X$ can take the values $\{3,6,9,12,15,18\}$ while $Y$ can take $\{10,15,20,25,30\}$. I want to select ...
3
votes
1answer
144 views

Could someone teach me how to construct the portfolios by compute (like using R, Excel or Eviews)

Recently, I am doing my dissertation that covers asset pricing theory. The empirical test of Fama 3 factors model is an important part of this dissertation. Please let me review the fama model. Fama ...
4
votes
2answers
112 views

Using R with princomp to create hedge baskets

I am experimenting to try to find better ways to hedge some of our equity portfolios. It's easy enough to use R to get a PCA breakdown of exposure for a portfolio but I can't figure out how to then ...
7
votes
1answer
60 views

Who pays for sovereign ratings?

Does the "issuer-pay" model hold also for sovereign credit ratings? Do States pay for having their bond being rated?
2
votes
1answer
41 views

Time series of European sovereign credit ratings by the Big Three?

I would need time series, from 2000 to 2015 (if possible) of sovereign credit ratings by Moody's, S&P and Fitch. Could you suggest me a source or provide me such a dataset? Thank you very much!
4
votes
1answer
45 views

What approaches are there for keeping local and remote order books in sync?

Scenario: developing a custom application which defines a structured workflow for manual order submission to Bloomberg EMSX; it should minimize own persisted state and rely on the remote order book as ...

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