5
votes
2answers
2k views

How does one go from measure P to Q(risk-neutral) when modeling an asset paying dividends?

I am really having a terrible time applying Girsanov's theorem to go from the real-world measure $P$ to the risk-neutral measure $Q$. I want to determine the payoff of a derivative based an asset ...
8
votes
1answer
356 views

Is there a closed-form solution for the partial autocorrelation function of a Markov regime-switching process?

Consider a Markov Regime-switching process $X_{t}$ with $k$ regimes represented by $s_{t}$ such that $$X_{t}=\mu\left(s_{t}\right)+\epsilon_{t}$$ and $$\epsilon_{t}\sim ...
2
votes
5answers
7k views

Exercising an American call option early

I have seen the rationale behind why it is never optimal to exercise an American call option early, but have a question about it. If the option strike price is $E=\$20$ and it expires at $T=1yr$, if ...
10
votes
5answers
638 views

Is it ever possible that---because of illiquidity---exercising an out-of-the-money option is better than directly buying the stock?

Is there a case, where due to illiquidity, exercising out-of-the-money options could be better than directly buying the stock? When a stock is too illiquid, there are some costs because of this ...
4
votes
1answer
259 views

What's the best way to test/validate an interest rate lattice model

I have some implementations of interest rate lattice models. I would like to verify their performance. What would be the best approaches? Currently I compare pricings of some interest rate dependent ...
3
votes
2answers
2k views

GJR-GARCH Model In R

Any idea how to estimate GJR-GARCH models in R? Is there any particular library like fGarch that supports such models?
8
votes
3answers
583 views

Which greeks do you need to hedge if you want to implement an implied-volatility security?

Assume you want to create a security which replicates the implied volatility of the market, that is when $\sigma$ goes up, the value of the security $X$. The method you could use is to buy call ...
4
votes
1answer
272 views

Reference on Electronic volatility trading [duplicate]

Possible Duplicate: Looking for a recommendation for a real life volatily trading book. I recently came in contact with a quant desk that traded volatility. The discussion only highlited my ...
0
votes
1answer
263 views

Where to find introductory material on leveraged loans?

What are some good, preferably free, introductions to leveraged loans, also known as syndicated loans or bank loans? The introduction should describe the basic mechanics and very importantly provide ...
3
votes
1answer
352 views

Cross Bid and Ask prices for Forex trading

I am using ITCH protocol to get the Market Data information for Forex and trying to implement LOB on it and what i have noticed is that Bid and Ask prices are crossing very often. Should that be ...
3
votes
2answers
325 views

How is someone's Sharpe ratio recorded and communicated?

When I read about, say, some hedge fund wanting people with such-and-such Sharpe ratio, how is that ratio recorded and communicated to the interested party? I mean, do people just take it on faith ...
5
votes
2answers
814 views

Is the binomial model wrong?

In the standard MBA one-period binomial model, the value of an option is $v = \frac{1}{R}\bigl(\frac{u - R}{u - d}V(sd) + \frac{R - d}{u - d}V(su)\bigr)$ where $R$ is the realized return over the ...
6
votes
2answers
3k views

How to build a mean reverting basket?

I have been playing with mean reverting pairs, but seems that most of the low hanging fruit (ie pairs) have been squeezed already. I would like to start with mean reverting baskets (>2 securities) in ...
6
votes
3answers
692 views

cointegration applied to Portfolio Construction & Risk management

There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc. But there ...
9
votes
3answers
910 views

Implementing a Fast Fourier Transform for Option Pricing

So, I'm in need of some tips regarding a small project I'm doing. My goal is an implementation of a Fast Fourier Transform algorithm (FFT) which can be applied to the pricing of options. First ...
7
votes
1answer
295 views

When pricing options, what precision should I work with?

I'm wondering if there's any point at all in double-precision calculations, or whether it's ok to just do everything in single-precision, seeing how the difference on non-Tesla GPUs for single and ...
5
votes
1answer
881 views

HFT - How to define and measure latency?

I have read and heard a lot about latency. But I can't find any solid information that explains how latency is defined and measured. When people say they have achieved millisecond or nanosecond ...
4
votes
1answer
661 views

Can American options with no dividends and zero risk-free rate be treated as European?

Let's say you've got American options on a future of a stock index. There are no dividends, and no risk-free rate either (assume $r=0$). Can these options then be treated as European from the ...
3
votes
2answers
253 views

MPT: Adding constraint on minimum asset weight

I'm new to finance in general, and recently read about Modern Portfolio Theory. Now I'm wondering how to add the following constraint on asset weights: Each asset weight $w_i$ should either be $w_i ...
5
votes
5answers
7k views

Why use swap-rates in a yield curve?

I have a question concerning interest yield curves. Many institutions use the Libor-swap rate curve as a yield curve. Let's be precise and say that we want the yield curve to be the curve that gives ...
1
vote
0answers
543 views

Using volatility cycles to switch between trend following & range bound trading? [closed]

"...a low volatility environment is usually a good environment for trend following strategies; see Jez Liberty’s state of trend following report here..." ...
4
votes
1answer
186 views

How do brokers charge for locates?

Few quick questions on how locates work. How do brokerages charge for locates? They charge based on volume? How long you need the locate (I assume an one day is max)? Do the brokerages ...
4
votes
3answers
2k views

VaR implementation using quantlib?

I am thinking of writing a VaR framework for my existing system, using quantlib to do the bulk of the calculations. Despite several searches, I have not as yet come across a quantlib VaR ...
2
votes
1answer
144 views

Good reference on sample autocorrelation?

I'm not a statistician but I'm writing my thesis on mathematical finance and I think it would be neat to have a short section about independence of stock returns. I need to get better understanding ...
10
votes
2answers
417 views

Exploiting breakdowns in correlation of estimated volatility

In the attached image I have a plot of the rolling correlation of 90-day historic volatility (using the Garman Klass estimator based on Sinclair's Volatility Trading) of JPM v. the S&P. As can be ...
3
votes
1answer
557 views

What are some applications of bioinformatics or genetics to generating alpha in U.S. equities?

There are many disciplines that have contributed to how one model's risk and return. Physics introduced Brownian motion and RMT. Machine learning has helped to solve complex portfolio construction ...
2
votes
2answers
988 views

Resequencing of MsgSeqNum in FIX 4.2

I am trying to achieve the following functionality using QuickFIX for FIX 4.2 Send a couple of orders and make sure they’re filled. Then disconnect. Change the incoming (from Broker) sequence number ...
5
votes
4answers
1k views

Stock Price Behavior and GARCH

In my (limited) understanding, the behavior of a stock price can be modeled using Geometric Brownian Motion (GBM). According to the Hull book I'm currently reading, the discrete-time version of this ...
3
votes
0answers
316 views

Real time stock volatility

Is there any need for real time weighted volatility on a tick by tick basis for equities? If you had that access to that, what could you do with it?
7
votes
2answers
184 views

Is there an optimal covariance one would want forecasts to have?

Often in a quant process, one will generate a time series of return forecasts and use them in some sort of optimization to generate a portfolio. Generally, there will be a covariance matrix of market ...
2
votes
0answers
147 views

What is the highest frequency greek for options on futures on bonds?

I'm considering exchange traded options of futures on bonds. Options on bond futures are usually American, thus the Black model is out of question. Which is the most imporatant Greek with respect to ...
6
votes
3answers
229 views

How to measure investors' “experienced” volatility?

In asset allocation, you usually send reports to your clients where you will report the volatility of its portfolio. Assuming you only have monthly returns, you will compute volatility over a ...
2
votes
0answers
351 views

What is an appropriate hedge ratio for hedging a credit instrument with equity of the same issuer?

Given a bond and a stock issued by the same issuer, what is the appropriate ratio of bond-to-stock one should hold in order to minimize the specific risk to that issuer? Equivalently, what is the ...
2
votes
2answers
401 views

definition for “the viscosity” in financial market data series

I am willing to calculate and monitor the evolution of extreme-viscosity in the financial markets data series. Wikipedia says "Put simply, the less viscous the fluid is, the greater its ease of ...
1
vote
1answer
455 views

Arbitrage between markets

I'm trying to understand how arbitrage works, but I'm having some difficulties based on some restrictions: I have markets A, B and C. The currencies that are traded are X <-> Y, and X <-> Z. ...
3
votes
1answer
237 views

Does the correlation amongst stocks rise when stock values decline?

Is there any research on whether the correlations among stocks rise when stock indices decline? Which model could account and test for that effect ? Maybe GARCH-BEKK, or some models using copulas?
3
votes
3answers
206 views

Why in general is the variance of volume changes higher than variance of price changes?

Why, in general, is the variance of volume changes higher than variance of price changes? I understand that these two quantities are functions of some very different factors, but I don't understand ...
3
votes
2answers
444 views

Entry and exit points for very short mean-reverting timeseries

I have a model specifying a cointegration relationship on a number of transaction-level timeseries. I would like to specify entry and exit points for trades where these points ideally would be just ...
5
votes
1answer
321 views

What are VIX back-month futures based on?

The VIX calculation is a weighted average of prices for front-month out-the-money options on the S&P index. So for VIX futures, this makes sense for the front month vix futures (being based on a ...
1
vote
1answer
688 views

What precision do I need to calculate implied volatility?

I'm developing a software to calculate the implied volatility of an option using the Black & Scholes formula and a trial-and-error method. The implied volatility values I get are correct, but I ...
5
votes
2answers
316 views

Correlation: Test for linear dependence

Setting the scene: Assume a multivariate GBM with correlation matrix $\Sigma$. Further, one want to estimate the correlation between two of the assets. Assume one has a suitable estimator of the ...
5
votes
4answers
2k views

How to get greeks using Monte-Carlo for arbitrary option?

Let's assume I have an arbitrary option that I can price using Monte-Carlo simulation. What is the general approach (i.e. without relying on specific option type) to calculating the greeks in this ...
3
votes
1answer
272 views

What is augmented data when simulating stochastic differential equations using Gibbs Sampler?

I am reading this paper on Bayesian Estimation of CIR Model. Basically, it is about estimating parameters using Bayesian inference. It estimates this stochastic differential equation: $$dy(t)=\{ ...
13
votes
2answers
843 views

Why isn't the Nelson-Siegel model arbitrage-free?

Assume $X_t$ is a multivariate Ornstein-Uhlenbeck process, i.e. $$dX_t=\sigma dB_t-AX_tdt$$ and the spot interest rate evolves by the following equation: $$r_t=a+b\cdot X_t.$$ After solving for $X_t$ ...
2
votes
1answer
199 views

How to value non-libor swaps (not basis swaps)?

What discount curve should be used for a swap with a fixed leg and variable leg, where the variable leg is based on rate other than Libor (in my case 1-year deposit rate). Hull (5th edition, page 595) ...
9
votes
10answers
19k 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 ...
3
votes
2answers
140 views

What mathematical characteristics are required from the asset price process in order to stay within the RNP framework?

I'm currently doing a course in derivatives pricing and I'm having some trouble wrapping my head around the sweet spot where theory meets reality in terms of Risk Neutral Pricing. I know that the ...
5
votes
1answer
803 views

Automated 10-K XBRL data grab using the SEC file structure

I would like to write a program that takes as input a list of CIK/year/quarter entries. The program should iterate through the list and, for each entry, grab XBRL financial data from the SEC website ...
3
votes
0answers
312 views

Is there a standard method of scaling alpha forecasts to t-cost estimates?

Given a set of monthly alpha forecasts (i.e. standardized z-scores from a multi-factor return model) and a non-linear market impact model (or more specifically, its piecewise-linear approximation), is ...
4
votes
1answer
5k views

Deriving spot rates from treasury yield curve

I've been experimenting with bond pricing using easily available data (treasury auction prices and treasury yield curves on treasury direct). At first I assumed that I could use the components yield ...

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