10
votes
3answers
1k 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 ...
10
votes
2answers
686 views

Reference request: Survey article on GPU in Finance

I would like to get and idea of how people use GPUs in finance. I can find some specific papers or books on the subject. GPUs in binomial model, finite difference, monte carlo,... But I couldn't ...
10
votes
1answer
384 views

How does one measure the effect of latency on potential returns?

I am looking to evaluate the hypothetical advantage one trading system has over another in terms of the possible returns given their latency. Irene Aldridge wrote a piece (How Profitable Are ...
10
votes
5answers
631 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 ...
10
votes
4answers
1k views

What books should any quantitative portfolio manager or risk manager have as reference? [closed]

I'm interested to know what are the critical reference texts you rely on for portfolio or risk management? I mean those texts that you come back to because they are chock full of insight and know-how. ...
10
votes
4answers
2k views

What is a “coherent” risk measure?

What is a coherent risk measure, and why do we care? Can you give a simple example of a coherent risk measure as opposed to a non-coherent one, and the problems that a coherent measure addresses in ...
10
votes
3answers
624 views

Literature on generating synthetic time series for testing

I have some market data (daily time series) for bond prices and CDS indices and I would like to generate synthetic versions of these which are statistically "similar" for testing trading strategies. ...
10
votes
5answers
1k views

How to conduct Monte Carlo simulations to test validity of Black Scholes for a specific option?

In reference to the original Black Scholes model, what approach is best to test the model in a rigorous way? Is there a standard approach that can accomplish this in a reasonable amount of time? ...
10
votes
2answers
691 views

Missing step in stock price movement equations

Assuming a naive stochastic process for modelling movements in stock prices we have: $dS = \mu S dt + \sigma S \sqrt{dt}$ where S = Stock Price, t = time, mu is a drift constant and sigma is a ...
10
votes
1answer
2k views

Estimation of Geometric Brownian Motion drift

One can find many papers about estimators of the historical volatility of a geometric Brownian motion (GBM). I'm interested in the estimation of the drift of such a process. Any link on this topic ...
10
votes
2answers
857 views

How to detect structural breaks in variance?

I'm looking for a method to automatically detect structural breaks, I tried Chow test, It works good but it doens't work for breaks in variance. Do you know a test to check strucutural break in ...
10
votes
3answers
4k views

What are the main limitations of Black Scholes?

Pls explain and discuss these limitations, and explain which models can I use to overcome these limitations. Alternatively, provide examples of how to modify the original Black Scholes to overcome ...
10
votes
3answers
820 views

How does UBS hedge its exposure to XVIX ETN?

I am wondering how UBS hedges its exposure to its ETN XVIX. Unless I am grossly overestimating the trading costs, executing the strategy they describe in their prospectus with futures would be quite ...
10
votes
3answers
778 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 ...
10
votes
3answers
720 views

What is the expected return I should use for the momentum strategy in MV optimization framework?

As all research on the momentum strategies are focused on the indicator, i.e. the entry point, there seems not much discussion on its expected return? Though there are some discussions on the exit ...
10
votes
2answers
755 views

When should you build your own equity risk model?

Commercial risk models (e.g., Barra, Axioma, Barclays, Northfield) have evolved to a very high level of sophistication. However, all of these models attempt to solve a very broad set of problems. ...
10
votes
2answers
2k views

Drawbacks & Caveats of using (N)Esper for ESP/CEP in trading systems?

Esper and its .NET port NEsper are components that enable Complex Event Processing (CEP) and Event Stream Processing (ESP) engines. They are especially suitable for trading applications. They can, ...
10
votes
2answers
1k views

What are some computational bottlenecks that quants face? [closed]

What are the current computational (non-network) bottlenecks now in a quant's workflow? What computational tasks would be revolutionary with a 10-100x improvement in performance using general purpose ...
10
votes
2answers
2k views

Is there a standard method for quantifying mean-reversion for use in directional trading?

Assuming a directional strategy (no pairs or spread trades) is there a "standard" method for quantifying mean-reversion? Should auto-correlation, variance ratios, hurst exponent, or some other measure ...
10
votes
1answer
303 views

What approaches are there for stress testing a portfolio?

Wikipedia lists three of them: Extreme event: hypothesize the portfolio's return given the recurrence of a historical event. Current positions and risk exposures are combined with the historical ...
10
votes
3answers
219 views

Does entropy pooling apply to distributions with time-varying drift?

I have a returns process that is drawn from a normal distribution with a nonlinear time-varying drift, so I was wondering if the entropy pooling method still applies or if I need an invariant ?
10
votes
1answer
530 views

Meta-view of different time-series similarity measures?

While I spend most of my StackExchange time on MathematicaSE, I'm in the business and follow the questions and answers on this site with great interest. Recently questions like the following (and ...
10
votes
3answers
305 views

How to account for market movement when some exchanges are closed?

Daily data, such as open and close prices, is often available for much longer periods than high-frequency data. However, whenever backtesting any strategy that examines instruments traded in different ...
10
votes
1answer
543 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 ...
10
votes
2answers
359 views

How to “uncluster” a set of financial data?

I am attempting to evaluate and compare the profit factor of different "test runs" of a FOREX trading strategy. My problem is that, despite an average time between orders of 2hr+, some of these runs ...
10
votes
2answers
1k views

Where to find Greeks for futures to form delta-hedged futures portfolio of S&P 500 index/futures

I can't find S&P 500 index (SPX) futures data with Greeks to create delta-hedged portfolios. Do these data exist? I have access to most of the common data sources. In the meantime, I am trying to ...
10
votes
1answer
309 views

Intuitive explanation of the Hansen-Jagannathan bound

The Hansen-Jagannathan bound states that the maximum Sharpe ratio of a portfolio can't exceed the ratio of the standard deviation of a stochastic discount factor to its mean. I more or less understand ...
10
votes
2answers
687 views

Quantitative Derivatives Trading vs. Time

Most quantitative investment strategies focus on the changing prices of a commodity or equity over time. Derivatives, however, make this more complicated. How can I apply quantitative strategies to ...
10
votes
2answers
414 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 ...
10
votes
2answers
977 views

Simulating Returns

I'll start this off with a rather broad question: I am trying to simulate returns of a large number of assets within a portfolio of different classes - equity and fixed income in a first step, say 100 ...
10
votes
1answer
246 views

How do you characterize dividends for equity options?

While many systems like to treat dividends as a continuous yield when pricing equity options, it works quite poorly for short-dated options. In the short run, deterministic dividends are clearly the ...
10
votes
1answer
642 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 ...
10
votes
1answer
415 views

Comparing backtesting returns with real trading returns

I have 10 years of backtested simulated performance of some trading strategy (using historical prices), and N months of actual trading performance. What statistical test can I do find out if I'm on ...
10
votes
2answers
360 views

How to estimate the following model?

Suppose I have the following model: $$r_t=\sigma_t * \epsilon_t$$ where $r_t$ is the return at time t, $\sigma_t$ is the volatility, the model used to model this volatility is an exponentially ...
10
votes
2answers
352 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 ...
10
votes
1answer
315 views

A non parametric study of VaR with kernel density

I'm working in order to compare the calculation of the VaR between the methodology of copulas and kernel density, all this by using the software r. The process that I follow is: Obtain a sample ...
10
votes
1answer
354 views

Is Arithmetic Return Bias Basis of Low Vol Anomaly?

An observation in capital markets is that the connection between return and risk (measured as volatility) is not that straightforward (at least not as modern portfolio theory assumes). One interesting ...
10
votes
1answer
380 views

Creating an n-factor Certainty Equivalent Discounting Formula

Brealey & Myers provide a certainty-equivalent version of the present value rule, using CAPM, as follows: $$PV_0=\frac{C_1 - \lambda_m *cov(C_1, r_m)}{1 + r_f}$$ $PV_0$ - Present Value of cash ...
10
votes
1answer
333 views

What weights should be used when adjusting a correlation matrix to be positive definite?

I have a correlation matrix $A$ for an equity market that is not positive definite. Higham (2002) proposes the Alternating Projections Method, minimising the weighted Frobenius norm $||A-X||_W$ where ...
10
votes
3answers
965 views

Where can I find a database of ALL ETFs, sorted by age?

I have a portfolio allocation strategy I want to backtest, but I need a large "universe" of ETFs for it to choose from at each time period. I was thinking of starting with a criteria such as "all ...
10
votes
4answers
312 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 ...
9
votes
4answers
4k 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?
9
votes
5answers
1k views

When to shut down a trend following strategy?

Suppose I have trend following strategy(on close to close data) that is not getting acceptable returns for some time. When should I start thinking about shutting it down?
9
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 ...
9
votes
10answers
18k 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 ...
9
votes
5answers
10k 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 ...
9
votes
7answers
6k 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, ...
9
votes
2answers
990 views

Why Ito calculus?

Coming from physics, I am used to the fact that the Ito interpretation of most natural stochastic equations is wrong, and one should be using Stratonovich calculus instead (of course they are ...
9
votes
3answers
990 views

What tools are used to numerically solve differential equations in Quantitative Finance?

There are a lot of Quantitative Finance models (e.g. Black-Scholes) which are formulated in terms of partial differential equations. What is a standard approach in Quantitative Finance to solve these ...
9
votes
5answers
5k views

Should I use an arithmetic or a geometric calculation for the Sharpe Ratio?

What are the advantages/disadvantages of using the arithmetic Sharpe Ratio vs the geometric Sharpe Ratio? Is one more correct? Or is one better in certain circumstances?

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