2
votes
2answers
311 views
How to calculate Vomma of Black Scholes model
This source (PDF) gives the closed-form for vomma (or volga, i.e. the second derivative of price w.r.t. volatility) of the Black Scholes option pricing model as:
...
3
votes
2answers
130 views
How to simulate one-minute bars data from one-day bars?
I need to generate one-minute bars out of one-day bars to test the performance of an algorithm (speed, memory usage, etc).
I don't need them to resemble real data, but they should be consistent with ...
9
votes
7answers
681 views
When hiring a quant, how can I protect my IP?
I am a one-man operation, and would like to hire a quant for around 4 weeks or work. I am worried that the person I hire might copy my data or the indicators that I have him work on.
What have ...
0
votes
2answers
147 views
Sharpe ratio in days with no open positions
Should I include or not the days a strategy has no open positions (thus no returns) in the Sharpe ratio calculation?
5
votes
0answers
156 views
Alternative ways to understand time-varying comovement between two time-series?
I have been looking into ways to better understand how the dependencies/correlations/etc between two time series can vary over time.
I first thought about using a Kalman/particle filter over a ...
4
votes
1answer
199 views
Derive a short rate model from HJM
Suppose we are assuming the HJM framework. My question is, if it is possible to derive for different choices of the volatility function $\sigma$ (and hence of the drift function) the most common short ...
2
votes
2answers
125 views
Squared and Absolute Returns
I've always wondered why do one use squared or absolute returns to determine if volatility modeling is required for the return series? We understand that there are various tests for its ...
3
votes
1answer
148 views
Choice of epsilon for numerical calculation of vega in binomial option pricing model
I have a binomial option-pricing model (I don't think the details of how its implemented are relevant). However, when I go to calculate vega, I am essentially running the model a second time with new ...
2
votes
2answers
113 views
Comparison of Brownian Motion Expected Drawdown and simulated results
Can anyone tell me whether results as predicted by Brownian Motion for a given mean and std, match what you get by measuring actual drawdown from simulated results over a number of iterations?
0
votes
1answer
152 views
Selecting timeframe for time series analysis
In technical analysis, we may use confluence of direction for 3 timeframes to roughly gauge bias of market now.
Similarly, if we use time series forecasting methods to predict(say daily data-whether ...
1
vote
1answer
93 views
How to determine the prices computationally?
As in previous question mentioned, I attended a course in interest rate theory (I'm studying math). Now I have a question how one calculate this prices in reality. Suppose we assume a simple model for ...
12
votes
2answers
556 views
How do we use option price models (like Black-Scholes Model) to make money in practice?
In quantitative finance, we know we have a lot of option price models such as geometric Brownian motion model (Black-Scholes models), stochastic volatility model (Heston), jump diffusion models and so ...
0
votes
1answer
52 views
Volatility Index Weighting Scheme
Among the several weighting schemes used for constructing volatility indices, which ones are the best for forecasting (realized) volatility? I've constructed a volatility index for emerging markets ...
1
vote
1answer
62 views
Pricing swaptions
What are the approaches available to price a swaption (either European or American style)? So far it seems Black method is the only one used. Thanks!
4
votes
4answers
380 views
What are the advantages/disadvantages of these approaches to deal with volatility surface?
I would like to know if someone could provide a summarized view of the advantages and disadvantages of the approaches on the volatility surface issues, such as:
Local vol
Stochastic Vol ...
1
vote
2answers
116 views
CTD and bond futures
I am reading a chapter on bond futures in Fabozzi's book. It states that without CF (conversion factor) the CTD (cheapest to deliver) would be the bond with the longest maturity and highest coupon. ...
0
votes
0answers
52 views
What are reasonable bounds for historical Price to Earnings?
I am working with the US CRSP universe and have constructed a time series of monthly price-to-earnings back to the early 1960s. I have this for both individual securities as well as for portfolios ...
0
votes
1answer
231 views
Which prediction market model is efficient and simple to use?
For a college project I'm tasked with implementing prediction market. Which model of it I'd better choose?
I want something useful and simple enough for other people to quickly understand and use. ...
4
votes
0answers
144 views
Asymmetric Volatility Modeling (Interpretation)
I am currently writing a paper on asymmetric volatility modeling of brent, gold, silver, wheat, soybean and corn from 1986-2012 and divided them into 4 sub-sample periods (i.e. 1986-1991, 1991-1997, ...
4
votes
2answers
205 views
Generate correlated random variables from Normal and Gamma distributions
I want to generate a random vector $z$ of dimension $k+m$ with some given correlation matrix $\Sigma$, such that the first $k$ elements of the vector are distributed normally and the last $m$ elements ...
2
votes
3answers
155 views
What data transformations to use in regression of credit spreads on equity prices?
Clearly there is a strong relationship between credit spreads and equity prices (both theoretically and empirically). But how would one go about formulating a regression which seeks to explain this ...
3
votes
1answer
143 views
What is the “leverage effect” for stocks?
I've read the so-called "leverage-effect" for stocks models the fact that if a company is leveraged, its volatility should increase as the stock price moves lower and closer to the level of debt.
Can ...
3
votes
1answer
81 views
Value options when the currency’s risk free rate is negative?
How would you handle a negative interest rate in index/equity options valuation?
An example would be negative rates for short term maturities for Swiss Frank (CHF).
2
votes
1answer
560 views
How to fit ARMA+GARCH Model In R?
I am currently working on ARMA+GARCH model using R. I am looking out for example which explain step by step explanation for fitting this model in R. I have time series which is stationary and I am ...
1
vote
1answer
138 views
BDT model implementation
I am looking for a nice and readable description of how to implement BDT model: $d log(r(t)) = [\theta(t)-\frac{\sigma'(t)}{\sigma(t)}log(r(t))]dt + \sigma(t) dW$.
I assume I already have ...
2
votes
3answers
197 views
What is the clean price and dirty price of a risky bond?
Following up on this question: Yield of a risky bond, what is the definition of clean and dirty prices for a risky (defaultable, catastrophe, etc.) bond?
I would think the dirty price should ...
3
votes
0answers
61 views
Resources to read more about/learn how implied pricing works
I was looking at this video today:
http://www.cmegroup.com/education/interactive/webinars-archived/implied-price-functionality.html
on implied pricing. And am aware that implied orders/pricing ...
2
votes
4answers
298 views
Why is short term implied volatility typically higher?
Why do short term implieds move more than long term?
0
votes
0answers
104 views
what's analytic calculation formula for multi-option cross gamma?
I knew it's d^2v/dx1dx2, but I don't have the explicit function of v=f(x1,x2). How do you come up with gamma/cross gamma matrix?
Thank you very much.
2
votes
1answer
241 views
Regime switching in mean reverting stochastic process
Let you have a mean reverting stochastic process with a statistically significant autocorrelation coefficient; let it looks like you can well model it using an $ARMA(p,q)$.
This time series could be ...
2
votes
1answer
86 views
Inflation swap liquidity versus inflation-linked bonds
In which markets are inflation swaps considered liquid enough to be the primary instrument for measuring market inflation expectations (compared to say, inflation-linked bonds)?
Are there specific ...
5
votes
2answers
290 views
What is the mean and the standard deviation for Geometric Ornstein-Uhlenbeck Process?
I am uncertain as to how to calculate the mean and variance of the following Geometric Ornstein-Uhlenbeck process.
$$d X(t) = a ( L - X_t ) dt + V X_t dW_t$$
Is anyone able to calculate the mean ...
1
vote
2answers
294 views
Early execise of American Call on Non-Dividend paying stock.
Let us consider an American call option with strike price K and the time to maturity be T. Assume that the underlying stock does not pay any dividend. Let the price of this call option is C$^a$ today ...
4
votes
1answer
151 views
Rubinsteins Implied Binomial Tree - how to calculate the cumulative returns
I am working on Rubinsteins IBT and use the following paper to implement this into excel:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=541744
the original paper can be found here:
...
3
votes
1answer
64 views
Is this comment right about subadditivity?
I found this comment in a book I bought about risk management: Risk Management in Banking by Joel Bessis.
This is the well-known rule that states that the sum of individual
risks is less than ...
2
votes
4answers
225 views
Yield of a risky bond
When working with risky bonds, i.e. corporate bonds, what is usually defined as the yield of such a bond? Is it the yield calculated as if the bond was riskless, or is it calculated by properly taking ...
2
votes
1answer
114 views
How to choose model parameters?
I'm studying math and attend this semester a course about interest rates. Now, some questions show up how exactly things are working in the real world.
My examples will be about interest rates ...
4
votes
1answer
137 views
Certain probability statement in discrete mathematical finance
Le'ts suppose the following setting:
We have a filtred probability space $(\Omega,\mathcal{F},P,\{\mathcal{F}\}_{k=0,1})$ and an adapted $\mathbb{R}^d$ valued process $S=(S^1,\dots,S^d)$. Let ...
-2
votes
2answers
194 views
BS and delta hedging questions
I have two related questions concerning Black Scholes and delta hedging. I thought about this two questions, but I could not come up with an answer, so maybe you guys & girls can help me:
If an ...
2
votes
3answers
250 views
Optimizing a currency only portfolio with negative weights
I am testing various optimization methods for a currency-only portfolio. I have a vector of expected returns for the major developed currencies vs. the USD each week (based on a proprietary model). I ...
4
votes
3answers
442 views
Fastest algorithm for calculating retrospective maximum drawdown
Simple question - what would be the fastest algorithm for calculating retrospective maximum drawdown ?
I've found some interesting talks but I was wondering what people thought of this question here.
...
3
votes
2answers
176 views
Why use market capitalization weighted index over PCA?
Why is it so popular to use market capitalization weighted indices instead of taking the first principle component that explains the most variation of the constituents? I haven't yet seen an academic ...
-3
votes
1answer
149 views
Why do we need derivatives? [closed]
I read somewhere that derivatives are the biggest weapons of financial destruction. Why do we need derivatives? If exploiting risk-proneness of people to make profit is the goal, why don't we stop ...
2
votes
0answers
112 views
Yield Curve Volatility
Let you have several issuers, and let each issuer have its yield curve built up with liquid plain vanilla fixed rate bonds.
Each yield curve has its slope and its curvature, and they obviously change ...
3
votes
3answers
139 views
How to see if a set of asset returns corresponds to a known correlation matrix?
Let's say I have an arbitrary set of $n$ period returns for $k$ assets, and a given $k \times k$ correlation matrix (of asset returns), which is known a priori.
Does it makes sense, or is it even ...
2
votes
2answers
226 views
Determining portfolio risk return in R given historical data for individual holdings?
Currently we compute portfolio risk and return via our own C# program. Historical data is stored in a SQL database. We want to compute the risk and return parameters - given a portfolio (i.e. not ...
1
vote
1answer
46 views
Why might a manager consider using an interest-rate in which the notional principal amount declines over time?
Say swap would be used to convert the payments of its portfolio of fixed-rate residential mortgage loans into a floating payment. Why might a manager consider using an interest-rate in which the ...
4
votes
2answers
213 views
How to reactivate a risk mangement rule in an automated process
If some conditions are met (stop loss, trailing stop, take profit...) we will close ours positions (sell/buy) to avoid having more loss or to ensure profit. In an automatic trading system, it is easy ...
7
votes
3answers
519 views
Hidden Markov Model & Its Application
I have started reading about HMM it gives an intuitive idea about what HMM is all about. I am looking out for example where its applied to Equity model using R / Excel. The material which I read so ...
4
votes
4answers
345 views
What sources would you recommend for Real Time Market Data other than Bloomberg/Reuters?
I am dealing with a strategy that is not high-frequency based.
The strategy consumes normalized data from Bloomberg and Reuters.
For US equity market, can someone recommend some real-time data ...
