3
votes
2answers
1k views

Computing the Sharpe Ratio

The building blocks of the Sharpe ratio—expected returns and volatilities—are unknown quantities that must be estimated statistically and are subject to estimation error. The main problem I have is ...
2
votes
1answer
240 views

Implementing nonlinear optimization to find model free implied volatility using Matlab

I am trying to calculate model free implied volatility $\sigma_{MF}$ for a relative performance index using the following method: $\sigma_{MF}^2=2\sum_{i} [\frac{C(T,K_{i})}{K_{i}^2} - ...
6
votes
1answer
263 views

Upper bound concerning Snell envelope

Consider a non-negative continuous process $X = \left (X_t \right)_ {t\geq 0}$ satisfying $ \mathbb E \left \{ \bar X \right\}< \infty $ (where $ \bar X =\sup _{0\leq t \leq T} X_t $) and its ...
3
votes
1answer
329 views

Multiple Discrete Dividends

Using the recombining tree model as described in Haug's Option Pricing Forumla one can factor in multiple future discrete dividends when calculating the option value and greeks. What's unclear is ...
8
votes
2answers
3k views

Why do we use GARCH(1,1) to predict volatility?

What makes GARCH(1,1) so prevalent in modeling especially in academia? What does this model has that is significantly better than the others?
0
votes
2answers
169 views

Interpretation of PCs

I have computed PC1 and PC2 wts on future contracts derived from cumulative log differences. How can I use them to get back the theoretical price of each contract using those 2 pcs? Thanks in ...
2
votes
0answers
435 views

Markov-Switching E-GARCH with R

I am looking for a R library for modeling a Markov-Switching E-GARCH process. In other questions at StackExchange related to GARCH models, the package rugarch is often mentionned. Do you recommend it ...
6
votes
1answer
1k views

What different methods of pairs selection exists? (For Pairs trading)

(I'm quite new to quant finance so I'm not sure if this is an eligible question.) I've decided I want to backtest pairs trading on the Nordic stockmarket. So I would guess there exists different ...
0
votes
1answer
141 views

how to quantify non-fundamental risk if variance is 100% discounted?

If there's better vocabulary, forgive me. If you were required to ignore variance as risk, how would you quantify non-fundamental risk? Many thanks in advance!
2
votes
1answer
600 views

R ARMA-GARCH rugarch package doesn't always converge

I'm trying to compute the standard ARMA(1,1)-GARCH(1,1) as shown in this answer for an entire index,just to store in a database to quickly lookup values for back ...
0
votes
2answers
322 views

What stock market indicators to model based on twitter feed? [closed]

We are developing an algorithm that models twitter users and groups of words that may indicate real world events. One application is modelling elections, i.e which party is likely going to win. ...
4
votes
2answers
744 views

Why doesn't a simulated delta hedging process go to zero?

I put together a simple simulation of delta hedging a set of options with an underlying and it seems that the fluctuations of the price still seem to affect the final outcome. The reason, I understand ...
2
votes
1answer
171 views

How to calculate two-time scale variance?

I am having trouble understanding how to calculate two-time scale variance as I do not have a strong mathematical background. Suppose I want to calculate the TSRV at 5 min intervals. Do I calculate ...
3
votes
2answers
940 views

What continous adjustment methods are firms using for futures backtesting?

There are several methods available between data vendors and associated software programs to adjust futures contract data for historical simulations. Some of the methods are: 1) Back or forward ...
2
votes
1answer
226 views

What are $d_1$ and $d_2$ for Laplace?

What are the formulae for d1 & d2 using a Laplace distribution?
3
votes
2answers
76 views

Imputed values in a multi-index

I have an equal-weighted index on a number of different Indices (from US, Europe and Asian markets). This compound index is constructed from a time series that has missing values (for example, those ...
4
votes
0answers
179 views

is there a mapping from Altman Z-score for private companies to bond ratings or probability of default?

On wikipedia, there is a formula to calculate the Altman Z-score for private companies: Z-score estimated for private firms: T1 = (Current Assets − Current Liabilities) / Total Assets T2 = Retained ...
2
votes
1answer
779 views

Multiple (linear) regression

I am looking for some inputs on a pair trading strategy that I am trying to improve with some semi-fundamental input. The basic idea is to use multiple linear regression to estimate the price of a ...
4
votes
1answer
279 views

time in time series database - UTC or local

I strictly store UTC time stamps inside time series files or databases, mainly to allow processing several time series together. Timezone information is kept with each time series file or item, so ...
0
votes
2answers
83 views

Intangible assets as underlying for Futures contracts

How is it possible for a Futures contract to have an intangible underlying? For example, to my knowledge, there exist Futures that have interest rates as their underlying, come delivery date, how is ...
5
votes
2answers
4k views

Daily returns using adjusted close

I want to chart the daily returns of a stock, and I'm using Yahoo finance data to download historic data. I was told to use Adjusted Close, but there seems to be an issue with this. For ANTO.L, you ...
2
votes
1answer
230 views

Testing for stationarity in large sample sizes

I keep struggling with testing 9 samples if they are stationary. Each of these samples is a real valued time series with 714.000 values. If I use the KPSS test with the each compleete sample set, the ...
3
votes
2answers
318 views

NYSE binary data, convert to ASCII

The data product "TAQ NYSE Order Imbalances" from the New York Stock Exchange is in a format that is described pretty well in sections 4.8, 4.9, 4.10, and 5 of the document "NYSE Order Imbalances ...
4
votes
1answer
327 views

Quantitative risk model for an open real estate mutual fund in Europe

How useful are quantitative techniques for the risk analysis/management of a open real estate fund? I am thinking about an approach for Europe (US and other markets are probably quite different - ...
6
votes
1answer
608 views

What do eigenvalues/eigenvectors of the yield/forward rates covariance matrices mean?

I have 5 bonds (with maturities 1,2,3,4,5 years) which I calculated the yield curve for 10 days. I also calculated the forward rates from the yield rates. Now I've been told to calculate the ...
8
votes
2answers
2k views

Kelly criterion and Sharpe ratio

Whats the relationship between the Kelly criterion and the Sharpe ratio? $$ f=\frac{p(b+1)-1}{b} $$ where $f$ is a percentage of how much capital to place on a bet, $p$ is the probability of ...
-4
votes
2answers
197 views

How to use mean-variance weights in practice (when going short is allowed)? [closed]

I have calculated my optimal portfolio weights following the mean-variance framework where I go $w_1$ in the risky asset and $1-w_1$ in the risk free rate. I get the following result: $w_1$ = 1.5, ...
3
votes
2answers
948 views

Position management and market-making techniques

Suppose, there is a HF strategy (agent) that is based on order book microstructure, and it is able to make good executions locally. More formally, in average its execution price is better than asset ...
5
votes
4answers
1k views

Usage of Random forests in Quantitative analysis of stocks

I have a question about Random forests and how they could be utilized in trading? I heard Random forests are used for classification, is that accurate? If so, could someone give an example of what ...
2
votes
1answer
747 views

How to calculate implied volatility and greeks in Bull Put Spread option strategy?

Ok, obviously I am buying lower strike put and selling higher strike put. What is the recommended volatility and greeks to consider in my trade? Volatility: Average volatility between both legs? ...
3
votes
3answers
160 views

How to work out weights for a portfolio based on an inverse ratio with positive and negative values?

I am trying to work out how to determine weights for the assets in order to form a portfolio. The ratio I am using is EV/EBIT, hence the smaller the better. The problem is I don't know how to handle ...
1
vote
0answers
108 views

What to do with linear regression or regression splines outside of the training range?

This is a cross-post from here In my question on a load forecast model using temperature data as covariates I was advised to use regression splines. This really seems to be a/the solution. Now I ...
4
votes
5answers
7k views

How to calculate stock move probability based on option implied volatility and time to expiration? (Monte Carlo simulation)

I am looking for one line formula ideally in Excel to calculate stock move probability based on option implied volatility and time to expiration? I have already found a few complex samples which took ...
2
votes
3answers
126 views

What do these maturity codes mean?

In fitting a curve I found that people are using the following tenors: U1 Z1 H2 M2 U2 Z2 2Y Could you please let me know what exact time periods they stand for? Is there a web page describing ...
6
votes
1answer
454 views

Calculating VaR/CVaR on high frequency data and returns

As we converge on the minute time scale and below for our unit time interval, the return distributions tend to be leptokurtotic and more discretized (due to fixed values such as minimum price ...
3
votes
4answers
587 views

How much does a Grid Computing software cost?

So far, I have been performing computations either on my own computer, or using an in-house scheduler that basically chooses a one of the employees' available workstations to run tasks in the ...
2
votes
1answer
658 views

Predict Quadratic Trend in Time Series

Can anyone kindly point out if I made any mistakes in making predictions using quadratic regression model in time series? I called the predict() function with the appropriate data vector and model, ...
4
votes
0answers
125 views

Simple question concerning Jump process (Lévy process) model for a risky actif price process [closed]

Consider $X= \left( X_t \right)_{t\geq 0}$ is a Lévy process whose characteristic triplet is $\left( \gamma, \sigma ^2, \nu \right)$ and where its Lévy measure is $$ \nu \left( dx\right) = A ...
3
votes
1answer
202 views

Why are there different estimators for stock volatility? (realized variance, RAV, etc)

I am very confused about why different volatility estimators (RV, RAV, BPV, etc) exist. If the goal is to find the best estimator for stock volatility, and volatility is latent, how do I know which ...
5
votes
1answer
696 views

Derivation of Ito's Lemma

My question is rather intuitive than formal and circles around the derivation of Ito's Lemma. I have seen in a variety of textbooks that by applying Ito's Lemma, one can derive the exact solution of a ...
6
votes
1answer
278 views

Consistency of economic scenarios in nested stochastics simulation

I am interested in references on research regarding the consistency of economic scenarios in nested stochastics for risk measurement. Background: Pricing by Monte-Carlo: For pricing complex ...
6
votes
4answers
608 views

What are the options for a mathematician to break into QF without working for a fund?

I have a degree in mathematics, and I've worked as a statistician and done some programming work. I'm very strong in my math/stats/programming background and have browsed some QF books, and I'm very ...
4
votes
2answers
540 views

Statistical significance of a pair trading strategy

How can I test the significance of a pair trading strategy, i.e. that the H0 is "The strategy has no predicting power". I was considering to use the technique in Evidence Based Technical Analysis ...
5
votes
2answers
838 views

Simulation of GBM

I have a question regarding the simulation of a GBM. I have found similar questions here but nothing which takes reference to my specific problem: Given a GBM of the form $dS(t) = \mu S(t) dt + ...
0
votes
1answer
170 views

Numerical difficulties in fitting option prices

In [1], the authors state that "Although some studies apply the curve-fitting method directly to option prices, the severely nonlinear relationship between option price and strike price often leads to ...
1
vote
2answers
150 views

Liquidity in a market risk model based on historical simulation

I would like to model liquidity effects in my risk model which is based on historical simulation. I would like to develop a practical solution that still captures liquidity effects. Most probably I ...
4
votes
0answers
150 views

Estimation of ranks of log-returns via copula

I have successfully chosen and estimate a copula for the ranks of the log-returns of my actions. My question is, since I have worked with the ranks instead of directly the log-returns (in order to be ...
11
votes
2answers
906 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 ...
5
votes
1answer
865 views

Robust Bayesian portfolio optimization in matlab?

I am working through this paper. I want to implement the robust Bayesian optimization (see pages 6 onward) in Matlab using fmincon. Here is a brief overview of my problem: Let $\alpha$ be the ...
3
votes
2answers
349 views

What are the advantages/disadvantages of OHLC over VWAP?

I would like to ask about maybe obvious thing for many people, but cannot find a good answer for it. In many, many places I see OHLC data along with OHLC analysis tools. As I deduce step by step in ...

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