All Questions

430 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 ...
170 views

How to deal with different amount of td's in computing Sharpe Ratio

In calculating the Sharpe Ratio, should I take into account the days were I have 0 return due to non-trading day? Another user posted a similar question but this was related to trading days with no ...
231 views

Iterating through every path of a Trinomial Tree

I am attempting to come up with an algorithm to iterate through every possible path of a trinomial tree and am having difficulties coming up with one. Is there any literature on this or has anyone ...
190 views

Foward-start option pricing

Consider a probability filtred space $(\Omega, \mathcal F, \mathbb F, \mathbb P)$, where $\mathbb F = (\mathcal F_t)_{0\leq t\leq T}$ satisfing the habitual conditions and is generated by $1 d$- ...
263 views

Non-arbitrage theory and existence of a risk premium

Consider a probability filtred space $(\Omega, \mathcal F, \mathbb F, \mathbb P)$, where $\mathbb F = (\mathcal F_t)_{0\leq t\leq T}$ satisfing the habitual conditions and isgenerated by $1 d$- ...
2k views

Gamma vs. Volatility Risk

Original Question: What is the link between Gamma and the Volatility Risk? It leads me to ask: - What is the Volatility Risk definition and what are the good practices to measure it? Thinking about ...
615 views

Software for backtesting outside strategies (CSV transaction upload)

I've developed some software which generates sets of trades, and I'd like to backtest those trades. My software currently outputs a CSV file with details of each trade: ...
429 views

Testing Significance of Correlation

Lets say I have the returns of two stocks(stock1 and stock2). Now without running a regression, I lag one of the variables, calculate the correlation between the two stocks and repeat this process as ...
1k views

High-Frequency Traders and Front Running: What order types are they using? [closed]

I often hear in the news that High-Frequency Traders can front-run incoming trades because they are faster at acquiring information and to execute trades. I also read that speed is only a necessary ...
932 views

Fitting distributions to financial data using volatility model to estimate VaR

I want to fit a distribution to my financial data using a volatility model to estimate the VaR. So in case of a normal distribution, this would be very easy, I assume the returns to follow a normal ...
1k views

Value at Risk Monte-Carlo using Generalized Pareto Distribution(GPD)

I have created a VBA program to calculate VaR by using Monte Carlo, I have simulated Brownian Motion. This method might be ok for 100% equity portfolio, but let's say this portfolio may have fixed ...
516 views

Regression with Lagged variables

I am new to regression analysis. Let's say initially I have a linear regression x = alag(x1) + blag(x2) + clag(x3) -- eq 1 I want to predict the price x based on the the price of x from previous ...
174 views

monthly contract volume required for penny increments?

Have the exchanges disclosed their criteria? Does anyone have a best guess based upon observations of volume (however you wish to define it)? Please no qualitative answers.
4k views

Using variance ratios to test for mean reversion

Can you use the variance ratio test to determine whether or not a time series is mean reverting? I'm using the Lo.Mac function in the ...
238 views

Testing Black Scholes Analytical Options Pricer

I've written some code to calculate European option prices using the Black-Scholes analytical method. Can somebody recommend a good way to test that code? I have looked at option pricers online like ...
2k views

Stochastic modeling of stock price process

Apart from the model of Geometric Brownian motion is there any other "widely accepted" stochastic model to characterize the dynamics of a stock price process?
315 views

Obtaining a consistent covariance matrix for stochastic volatility processes

What is the condition for underlying stochastic volatility processes to give a consistent covariance matrix? I read in Hull that in order to have a consistent covariance matrix, volatility parameters ...
108 views

Risk factors for 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 the main risk ...
1k views

Data Synchronization

I'm working on market trends. I have daily prices for 33 assets from different markets. I was wondering if there is a way to cancel the effects of different opening/closing times. I have been told ...
457 views

Why do long-term equity return forecast models use dependent observations?

I've been reading up on different models used to forecast the equity risk premium, and I've seen a couple of papers that had questionable methods. For example, this paper by Javier Estrada goes into ...
600 views

Does the geometric Ornstein-Uhlenbeck process have stationary variance?

I know that the long run variance of the standard OU process is $\lim_{s\rightarrow \infty}\mbox{Var}(P_{t+s}|P_t) = \frac{\sigma^2}{2\theta}$ I'm using the geometric version of the process. I ...
106 views

Assessing Forcasting with Correlated Residuals

Trying to use a linear regression model to forcast the CPI. I noticed that when I took a moving average of the residuals, though homsokedatisc and nonautocorrelated(ie they squiggle up&down with ...
980 views

YTM and current yield

Which of the following statements is correct? a. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must also exceed its coupon rate. b. If a bond’s yield to maturity ...
230 views

Portfolio risk-return when assets have limited and inconsistent historical data / time series?

Lets say we have "today's" snapshot of asset allocation and need to determine the 6mo, 1 yr and 5 yr risk and returns of this portfolio. If the time series for every asset is very long, longer than ...
489 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 ...
Assume a money market has interest rate process $R(t)$. In Shreve's Stochastic Calculus for Finance II, formula (5.2.17) on page 215 defines the discounted process as D(t) = e^{-\int_0^t R(s) ds}. ... 2answers 194 views How does the number of free dimensions of a model affect its required size of sample? Adding more variables to a model usually increases its accuracy. However, without adequate analysis it could also lead to curve fitting. Another question (How much data is needed to validate a ... 1answer 433 views Calculating the probability of a price change using an options pricing formula I don't know if I'm doing this right and I'd greatly appreciate help. I'm trying to use an option pricing formula to backout the likelihood of the Euro dropping below 1.27, even for a minute, at any ... 2answers 217 views changes in open interest vs changes in underlying volume Has a relationship been noted? Mostly, I'd like to know if the open interest increases on an underlying, does the underlying usually see increased trading? My guess would be "yes" since MMs can ... 3answers 5k views Does implied vol vary for calls vs puts? Volatility skew tells us that options with the same maturity at different strikes can have different implied vol. However, can a corresponding call and put for the same strike and maturity have ... 1answer 190 views Hedging with actual volatility: problem understanding the math behind the result From this paper. page 3 We get that the total profit at expiration is the difference in value between the price of the option with actual volatility and the one with implied volatility. I have tried ... 1answer 443 views Where can I get historical ticker change database? There's 30 days worth of data at http://www.otcmarkets.com/marketActivity/symbol-changes - but I'm really looking for the past 10 years, or 5 years if only that is possible. Any dice? The closest ... 0answers 406 views Mean Reverting Spread I have constructed a mean reverting spread using two indexes. I know they have to be mean reverting, but when plotted side by side they are mean reverting for a little bit and then deviate and head ... 2answers 304 views Black-Scholes and Fundamentals So basically dS_t=\mu S_tdt+\sigma S_tdWt and \mu=r-\frac12\sigma^2 I have just been thinking about this later equation. This is very interesting because it ties together risk-free ... 1answer 365 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 ... 0answers 371 views Call options portfolio: what would the underlyings' moments to be maximized? Let you have only three underlyings, like SPY, TLT and GLD, and you want to buy n_{1} Call options on SPY, n_{2} Call options on TLT and n_{3} Call options on GLD... with a limited budget, that ... 0answers 93 views Problems with exact Heston simulations I am just wondering if there is any problem with the so-called "exact" Heston simulations? So far what I have seen are the good things about it, what are the disadvantages? Because if it is so ... 1answer 1k views Matlab - Differences between rng and rand I was trying to run some Monte-Carlo simulations and if I used: rng(seed, 'Twister'); For some reason I would get "Option Values Can not be Negative" errors in the blsimpv function, but if I just ... 2answers 238 views Credit risk data I am trying to get historical data for credit risk and do some analysis on it as a school project. I thought CDX index might be a good proxy for typical credit risk data, but I am not sure. Typically ... 3answers 204 views How to justify a model that could not predict external factors? I'm building some models, for example, Bad Loan (NPL) rate. It's based on historical simulation method -- basically it's saying the future behavior could be predicted by history data. However, this ... 5answers 38k views Mapping symbols between tickers, Reuters RICs and Bloomberg tickers Is there any known solution (preferably open source) to map between ticker symbols, Reuters and Bloomberg symbols. For example: Ticker: AAPL Reuters: RSF.ANY.AAPL.OQ Bloomberg: AAPL US Equity ... 0answers 360 views Correlation Sensitivity Suppose I have 2 stocks S_{1} and S_{2}: \begin{align} & dS_{1}=rS_{1}dt+\sigma_{1}S_{1}dB_{1}\\ & dS_{2}=rS_{2}dt+\sigma_{2}S_{2}dB_{2}\\ & dB_{1}dB_{2}=\rho dt \end{align} Then I ... 2answers 549 views Why the implied volatilities calculated are so different I Calculated facebook option(expired in 12/4/13) Implied Volatility with the Bisection Method. The program will be attached at the end. The results for different strike prices are so different: ... 3answers 636 views Central Limit Theorem and Lévy processes Lévy processes are self-decomposable and independent on any non-overlapping interval, so how come the distribution of the process at time T,\phi(T), which is the sum of N i.i.d with law \phi(T/N) ... 1answer 407 views Stepwise Cointegration This is more of a general question at this point, but if my thought process makes sense I will follow up with an R implementation. I have read a number of papers on cointegration analysis for pairs ... 2answers 120 views Endogeniety of Black-Scholes I know this is a naïve question but how does the BS formula have a closed form solution? It seems from what I am reading Price impacts delta, price influences volatility which in turn influeces delta ... 1answer 310 views Examples of investable factors via factor funds/ETFs In the draft chapter about hedge funds of his forthcoming book Andrew Ang postulates the dawn of new factor funds (p. 35 ff.), i.e. funds that directly target factors like volatility, value-growth, ... 3answers 450 views Kolmogorov-Smirnov test Is Kolmogorov-Smirnov test self-sufficient to prove normal distribution of a time series? And then test efficiency of a market? 2answers 1k views Is drift rate the same as interest rate in risk-neutral random walk when using Monte Carlo for option pricing? When using following risk-neutral random walk\delta S = rS \delta t + \sigma S \sqrt{\delta t} \phi where $\phi \sim N(0,1)$. Now when a text mentions drift = 5% does that mean that interest ...
How does $\Theta$ change for deep out-of-the money options? Looking at the below graph, it seems the time decay is highest for ATM options and increases rapidly as we approach maturity of the option. ...