11
votes
2answers
526 views

How credible is Knight pointing the finger at Rule 107C?

After the Knight Capital incident, I decided to read into the new Rule 107C that NYSE pushed-out August 1st for a one-year pilot. From what I've read, Knight claims that new code rolled out for this ...
11
votes
5answers
2k views

How to interpolate gaps in a time series using closely related time series?

I am trying to construct a daily time series of prices and returns for some large universe of securities. However, all I have available are a monthly time series of the prices/returns (as well as ...
11
votes
2answers
913 views

What is the precision of standard deviation estimates with small samples?

I was asked today to "quantify" the precision of an estimated the standard deviation from a small sample, I was not sure how to answer. The case is quite simple, I have a sample of $n=25$ measures ...
11
votes
3answers
670 views

What is the most effective way of determining & measuring the level of HFT activity in a stock in (close to) real time?

On a security by security basis, I want to be able to quantify the level of HFT activity (and later institutional & retail activity). Is it higher than it normally is? How much so? What would you ...
11
votes
4answers
3k views

Volatility pumping in practice

The fascinating thing about volatility pumping (or optimal growth portfolio, see e.g. here) is that here volatility is not the same as risk, rather it represents opportunity. Additionally it is a ...
11
votes
3answers
469 views

What is a commonly accepted econometric model for volume?

What is the gold standard econometric model for volume? For example, a common model for price is the autoregressive (AR) model with GARCH(1,1) innovations. Do you know of any good survey articles ...
11
votes
3answers
4k views

Is there an all Java options-pricing library (preferably open source) besides jquantlib?

I am looking for an all-java implementation of black scholes, preferably open source. I found jquantlib and quantlib (C++). Any other recommendations? The jquantlib site seems to be down. I'd prefer ...
11
votes
4answers
813 views

Quantitative Math required for Market-making?

I understand there is an awful lot of Quantitative Math required for statistical arbitrage/algorithmic trading. However, would someone "in the know" be able to tell me whether there is less ...
11
votes
1answer
851 views

So many volatility models. Any comparisons of them?

Are there any papers that make an explicit contrast/comparison of the following (or other) vol models in terms of the suitability for addressing some empirical problem? Wavelet multiresolution ...
11
votes
3answers
1k views

Role of skewness in portfolio optimization?

What is the role of skewness in portfolio optimization?
11
votes
3answers
1k views

Rate interpolation in Libor Market Model

Libor Market Model (LMM) models the interest rate market by simulating a set of simply compounded, non-overlapping Libor rates which reset and mature on predefined dates. How do I obtain from them a ...
11
votes
2answers
735 views

Operating parameters of market makers?

I'd like to get a feel for the operating parameters of official market makers. I'm looking more for discerning characteristics, rather than exact numbers or an exhaustive list of each MM. Examples: ...
11
votes
3answers
2k views

When does delta hedging result in more risk?

There's a question in an interview book saying "when can hedging an options position make you take on more risk?" The answer provided is that "Hedging can increase your risk if you are forced to both ...
11
votes
2answers
721 views

Can you replicate an option on an arbitrary basket of stocks?

Since a market index is nothing more than a basket of stocks, you can create your own index by putting together stocks of your choice. The only difference is that you can trade options on major ...
11
votes
2answers
4k views

How to derive the implied probability distribution from B-S volatilities?

The general problem I have is visualization of the implied distribution of returns of a currency pair. I usually use QQplots for historical returns, so for example versus the normal distribution: ...
11
votes
3answers
442 views

How are prices calculated for commercial/residential mortgage-backed securities?

What is the theoretical/mathematical basis for the valuation of [C]MBS and other structured finance products? Is the methodology mostly consistent across different products?
11
votes
2answers
852 views

Copula models and the distribution of the sum of random variables without Monte Carlo

There is a vast literature on copula modelling. Using copulas I can describe the joint law of two (and more) random variables $X$ and $Y$, i.e. $F_{X,Y}(x,y)$. Very often in risk management (credit ...
11
votes
3answers
616 views

What benchmark/index to use for backtesting a portfolio of stock options?

What benchmark should I use for backtesting a model for when I should buy an option of a particular stock? For equities, one could say their portfolio outperformed the S&P 500. I would like to ...
11
votes
1answer
2k views

How do I compare implied and historic volatility?

what would you suggest are the starting points for comparing, in an easy, visual way, implied and delivered volatility surfaces? I'd like to see what the differences are between the historic surfaces, ...
11
votes
2answers
3k views

How does left tail risk differ from right tail risk?

How does left tail risk differ from right tail risk? In what context would an analyst use these metrics?
11
votes
4answers
812 views

Solving Path Integral Problem in Quantitative Finance using Computer

I've asked this question here at Physics SE, but I figured that some parts would be more appropriate to ask here. So I'm rephrasing the question again. We know that for option value calculation, path ...
11
votes
2answers
827 views

How to forecast expected volatility from high-frequency equity panel data?

I'm wading through the vast sea of literature on realized volatility estimation and expected volatility forecasting (see, e.g. Realized Volatility by Andersen and Benzoni, which cites 120 other ...
11
votes
2answers
1k views

How to build a regime-switching model which knows its own limits?

In recent months I've come to the conclusion that there are not only certain regimes in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The ...
11
votes
2answers
916 views

Topological methods in finance

Recently a promising start-up (Ayasdi) has made headlines. They are a spin-off of the Applied and Computational Algebraic Topology group of Stanford University (ComTop). What they basically do is ...
11
votes
2answers
6k views

Cross Currency Swap Pricing in nowadays environment

Multicurve setting has now become the new paradigm for vanilla swap valuation. For the record I give here (without getting into too much details) the methodoloy for pricing Euribor3M swaps in this ...
11
votes
1answer
315 views

Enhancing Monte-Carlo convergence (crude method)

I am currently doing a project involving Monte-Carlo method. I wonder if there is papers dealing with a "learning" refinement method to enhance the MC-convergence, example : Objective : estimate of ...
11
votes
1answer
591 views

What techniques are used for testing order book implementations?

I am finishing the implementation of a limit order book for modeling NASDAQ. The order book works off of the ITCH feed. My question is what techniques are typically used for testing order books. I am ...
11
votes
1answer
3k views

Which approach to estimating fundamental factor models is better, cross-sectional (unobservable) factors or time-series (observable) factors?

There are many approaches to estimating fundamental factor equity models. I would like to focus on two traditional methods: The time-series regression approach of Fama and French. Factors are ...
11
votes
1answer
1k views

What is a good topic on financial time series analysis for master thesis?

Can someone suggest a topic or some reasonably narrow area in financial time series analysis (e.g. statistical, machine learning, etc.) which can make a good topic for a master thesis? By 'good' I ...
11
votes
2answers
1k views

Modelling with negative interest rates

For a project, I am interested to model the impact of recently negative interest bonds on the portfolio. The literature on modelling negative interest rates is limited, and the only theory I could ...
11
votes
3answers
1k views

Value-at-Risk of the sum of two dependent lognormal random variables

Hy I posted this question first at mathflow.net they suggested me this page, which I was not aware of. Question: Let $(X_1,X_2)$ be a multivariate normal random vector ($X_1$ and $X_2$ need not be ...
11
votes
2answers
454 views

Relationship between Large Cap and Small Cap Volatility

Relative value of large cap volatility. We all track the VIX as a measure of volatility, but we often forget that the VIX is volatility indicator for the large cap index within the SP500. We can ...
11
votes
1answer
318 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 ...
11
votes
4answers
346 views

How to prove that markets are incomplete under the Stochastic Volatility model?

Has anyone ever formally proved that Markets are incomplete under the stochastic volatility model? I know that if there are more random sources than traded assets, then the market is incomplete but ...
11
votes
1answer
660 views

Quantitative Analysis Games on Investing?

I have been playing a quantitative investing game (instructions here) that is actually quite interesting, teams have some time to decide their next moves. It requires all kind of knowledge such as ...
11
votes
1answer
716 views

Any recommendations for textbooks for an undergraduate course in mathematical finance? [closed]

I'll teach an introductory course on mathematical finance in the near future. The course is intended to entertain and broaden some well-prepared advanced undergrad mathematics majors, some physics ...
11
votes
1answer
1k views

How do I price OANDA box options?

How do I price OANDA box options without using their slow and machine-unfriendly user interface?: http://fxtrade.oanda.com (free demo account) sells "box options": If you already know what a ...
10
votes
4answers
5k views

What is a martingale?

What is a martingale and how it compares with a random walk in the context of the Efficient Market Hypothesis?
10
votes
7answers
819 views

Keeping a track record honest

I want to start a blog/newsletter and maintain a track record of trades I recommend. I have a never-expiring demo account for this purpose. How do I keep this track record "honest"? Three months ...
10
votes
9answers
8k views

Is there any thing out there as a substitute for KDB?

thanks a lot for your discussions on the original post. following your suggestions, let me re-phrase a bit : kdb is known for its efficiency, and such efficiency comes at a terrible price. However, ...
10
votes
8answers
5k views

Why does implied volatility show an inverse relation with strike price when examining option chains?

When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts. As a current ...
10
votes
5answers
13k views

how to derive yield curve from interest rate swap?

According to some textbooks, to derive the yield curve, quote overnight to 1 week: rates from interbank money market deposit, 1 month to 1 year: LIBOR; 1 year to 7 years: Interest Rate Swap; 7 ...
10
votes
3answers
4k views

What is Ito's lemma used for in quantitative finance?

Further to my question asked here: prior post and which left some points unanswered, I have reformulated the question as follows: What is Ito's lemma used for in quantitative finance? and when is it ...
10
votes
3answers
1k views

Hedging stocks with VIX futures

It seems that VIX futures could be a great hedge for a long-only stock portfolio since they rise when stocks fall. But how many VIX futures should I buy to hedge my portfolio, and which futures ...
10
votes
6answers
3k views

References for developing an automated trading system?

I am looking for references on the architecture of automated trading systems and the trading algorithms behind them. I am more interested in system development than analysis. A couple of books I ...
10
votes
10answers
22k views

What is the difference between Option Adjusted Spread (OAS) and Z-spread?

I am preparing for the CFA level 2 exam, I got confused by the concept Z-spread and OAS. When a call option is added to a bond, since it is not favorable to the bond buyer, they would require more ...
10
votes
5answers
2k views

Is it possible to use a series of option prices to predict the most likely path of an asset?

I've always wondered about this. If you have a series of options, with the expires spaced let's say one week between them, and you search for each expiration date the option with the smallest ...
10
votes
5answers
979 views

Monte carlo methods for vanilla european options and Ito's lemma.

I understand that by applying Ito's lemma to the following SDE $$dX=\mu\,X\,dt+\sigma\,X\,dW$$ one obtains a solution to the above SDE which is as follows: $${X}\left( t\right) =\mathrm{X}\left( ...
10
votes
5answers
4k views

Using linear regression on (lagged) returns of one stock to predict returns of another

Suppose I want to build a linear regression to see if returns of one stock can predict returns of another. For example, let's say I want to see if the VIX return on day X is predictive of the S&P ...
10
votes
2answers
2k views

Is there a standard model for market impact?

Is there a standard model for market impact? I am interested in the case of high-volume equities sold in the US, during market hours, but would be interested in any pointers.

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