2
votes
1answer
736 views

GARCH(1,1) prediction in R - Basic Questions

Background to question: Hi, I was trying to fit a GARCH(1,1) model to the variance of log returns of a series, and ARMA(0,0) for the mean. I was using the fGarch package to do this. The aim of the ...
2
votes
1answer
2k views

ADF test in R yielding perfect cointegration. How is this possible?

I am using the famous conintegrated pairs tutorial to just different stocks for cointegration. The adf.test yeilds perfect cointegration, which I feel must be incorrect. Here is why: When I run ...
5
votes
2answers
1k views

Is Vasicek risk neutral?

I am a bit new to this, and am trying to understand the concepts of the risk neutrality in interest-rate models. What I can't seem to understand is why the Vasicek model is risk-neutral? Following ...
1
vote
3answers
3k views

Is there a Bloomberg field for a bonds (upcoming) coupon dates?

For a specific bond I need to calculate the time until each of the upcoming cash flow payments (for obvious reasons). So I wondered if there is a field (bulk data) that gives me all the dates of the ...
2
votes
2answers
242 views

What is most reasonable approach to determine side of a multi-leg options order?

Say, 4-legged multi-leg options order with below leg ...
2
votes
1answer
236 views

SDE simulation: P or Q?

Let's take a GBM under $P$: $dS=\mu dt+\sigma dW_{t}^{P}$ and then under $Q$ $dS=r dt+\sigma dW_{t}^{Q}$, where $dW_{t}^{Q} = dW_{t}^{P} + (\mu - r)/\sigma dt $ Now, let's say that I have ...
2
votes
2answers
382 views

Correlated Wiener processes of different factors

I'm relatively new in this field, so I have a couple of points that I need to clarify. I would like to know how I can estimate the correlation matrix necessary to implement a Cholesky decomposition ...
8
votes
1answer
641 views

Price functions based on order book events

Assume some equity traded on a given exchange based on an electronic limit open-order book $B$ that makes sequential updates as a function of time $t$. What are "natural" or common price functions $P: ...
6
votes
1answer
568 views

When does the Epps effect start?

Wikipedia defines the Epps effect as follows: In econometrics and time series analysis, the Epps effect, named after T. W. Epps, is the phenomenon that the empirical correlation between the returns ...
4
votes
2answers
2k views

What is the best alternative of Quantlib library

We need to build a Fixed Income Portfolio Risk Analytics solution. Somehow due to administrative reason we can't use Quantlib which is written in C++, even call it through SWIG via JNI. We have tried ...
0
votes
1answer
104 views

Bond duration as estimation to holding return

I am really struggling to prove to myself that when we can estimate the one-year holding period return for a three-year zero by using the following estimation: S3 - Duration2*(f1,3- S3) Where Sn is ...
9
votes
1answer
451 views

What good papers of short term (<30 seconds) volatility estimation [duplicate]

I am looking for good papers of short term (<30 sec) volatility estimation AND short term volatility forecasting. Do you have something in mind ?
2
votes
3answers
573 views

Time Series or Regression

I'd like to research the impact of certain events and characteristics on the liquidity of the stocks over time. I've got a sample of 200 stocks and I use several measures of liquidity (Amihud, Bid-Ask ...
0
votes
2answers
453 views

Volatility Scaling

Since the VIX is an annualized volatility, to convert it into other frequencies we must divide by the square root of time. So to convert a VIX of 15 into daily volatility, we would need to divide $$ ...
0
votes
1answer
98 views

Plain vanilla risk parity with trends forecasting power

I have built an asset allocation model (plain vanilla risk parity) but I would like to adapt the initial asset allocation with respect to potential futures changes in the trends of the assets under ...
1
vote
1answer
150 views

What's wrong with this asset growth simulation?

Sorry if this is too basic, but I have this spreadsheet that simulates asset growth of a portfolio under a given return and risk using MPT. Here is a plot of probability distribution of asset ...
1
vote
1answer
2k views

How to apply Ljung Box Test?

I am checking the closing prices(about 9000+ prices) of the stocks data to test for randomness. The test I am using is Ljung Box test, in MFE toolbox for MATLAB, I used 300 data of closing prices, ...
3
votes
2answers
331 views

Question on yield curve fitting from Wilmott on Quant Finance p.529

My last question is related. At the top of p. 529, it says, "From the Taylor series expansion for $Z$ we find that the yield to maturity is given by $$-\frac{log ...
1
vote
0answers
248 views

Quadratic utility function

May you can help me undertanding the following conclusion: Suppose we have an agent who has preferences over contingent claims, represented by a concave function $U$. This simply means that ...
1
vote
1answer
2k views

VaR for FX forwards

I am trying to figure out some of the commonly used approaches to deal with FX forwards (in a currency portfolio containing spots, forwards and swaps) that would allow me to calculate the one day VaR ...
0
votes
0answers
113 views

Modelling interest rate: AR(2) modelling

I have a time series of spread that follows an $AR(2)$ (Autoregressive model of Order 2). I need an interest rate model that represents that dynamics. What model should I use?
4
votes
1answer
410 views

Yield curve fitting example in Wilmott on Quant Finance p.528

In Wilmott on Quantitative Finance Vol. 2, p. 528, Section 31.4.2, is given a power series expansion for a zero coupon bond $$Z(r,t;T)=1+a(r)(T-t)+b(r)(T-t)^2+c(r)(T-t)^3+\dots$$ then it says to ...
0
votes
1answer
126 views

Physical Option Implied Distribuition

So I got risk neutral probabilities from stock option prices. How can I then map them to a physical measure?
1
vote
1answer
814 views

Breakeven of a delta-hedged option

Basic question to which I surprisingly did not find an answer on here. What's the best approximation to the break-even (with respect to stock price) for an option that was hedged fully at point of ...
1
vote
2answers
76 views

Is “Issuer and Holder with same strike” meaningless?

I've seen a callable putable bond whose first exercise date is an exercise date both for the holder and the issuer. Moreover both strikes have the same value: 100. I wonder what does it mean. I ...
3
votes
1answer
276 views

Effective anti-gaming controls in dark pools

What are some indicators that a dark pool operator has effective anti-gaming controls in place? There are some that prohibit IOCs (immediate or cancel) but is that necessary? It seems like that could ...
2
votes
0answers
292 views

Obtaining the default probability and recovery rate for each credit rating?

I have the following questions for obtaining the credit rating: Given that I have cumulative default probability of each credit rating from Global Corporate Average Cumulative Default Rates ...
1
vote
0answers
610 views

Question about Merton model to estimate default probability and recovery rate of the company

I recently come across Merton's model to estimate the default probability and recovery rate of the company. Here is the inputs ...
1
vote
1answer
244 views

Why use leverage when it does not improve the risk/reward ratio? [closed]

Leverage will increase gains when things go right but will also increase losses when things go wrong. Mathematically speaking, it does not change the risk/reward ratio (or does it?). Since ...
1
vote
1answer
136 views

Is it better to hedge or reduce the position size? [closed]

Traders hedge to reduce their risk. However, wouldn't reducing the position achieve the same results while keeping the risk management process simpler? At least, one need not worry about making the ...
1
vote
1answer
87 views

Can you hedge a derivative with a CASH|spot product or does it have to be another derivative instrument

Consider you have a SWAP (any kind) to hedge this SWAP, you will most likely use another Derivative,but can you use a cash|spot product to hedge this. Like Cash Equity or FX Spot
6
votes
0answers
132 views

Applications of distance correlation

This question mentions distance correlation. Where has this concept been applied to financial data and provided new insight? Do you know any examples or references?
0
votes
1answer
72 views

how to extract moments of GB from moment generating function?

I'm searching for the moments of geometric brownian motion using the gmm optimization program. the aim is to make the process y(t) of returns follows a normal distribution Are there any packages in ...
3
votes
1answer
152 views

Integration of stochastic total derivative

Super basic question. I think I am doing this correctly, but just want a sanity check. Say I have a stochastic process $r(t)$. Say I have an equation $$d(e^{\beta (t-s)}r(s))=\dots$$ where the ...
1
vote
0answers
113 views

Does it make sense to apply complicated mathematics to calculate with precision when the margin of error is +/-10%? [closed]

This is more of a philosophical question than general question. Quantitative finance applies highly complicated mathematics and has attracted very smart people to this field lately given the high pay ...
0
votes
1answer
518 views

backtesting with open, close, high and low

I am quite notice at the business of backtesting for an automated strategy. I was wondering, can I/should I use High and Low for this purpose? On one hand, the algorithm will see these prices, but on ...
3
votes
1answer
465 views

Pricing Fixed-To-Floater bond in QuantLib

Wandering through QuantLib's Financial instruments documentation, I noticed no class for fixed-to-floater bonds exist. Then I was wondering what a suitable way to price such an instrument would be ...
3
votes
2answers
450 views

Question about the rationale of applying certain recovery rate by ISDA

According to ISDA standard (also here), the recovery rate for senior unsecured is 40%, that of subordinate is 20%, and emerging markets is 25% (both senior and subordinate). I wonder the rationale of ...
2
votes
1answer
197 views

interest rate in cost of carry

What interest rates are used in practice in a stock index / futures arbitrage? I've seen cases, when the assumed rate is 3 months LIBOR, but does it mean, that everyone who does the arbitrage can ...
0
votes
1answer
305 views

adjusted close prices on SP500

When I look at the adjusted close prices of SP500, for example, I notice that the numbers are always significantly below the actual closing. In the explanation of what adjusted prices are, one gets ...
3
votes
1answer
513 views

How does the 2-factor Hull White model propagate the forward rates curve?

I've been trying to get a grasp on some of the basics of interest rate modeling, and am looking to simulate rates using the 2 factor Hull White model, which I am aware offers a more realistic model of ...
7
votes
1answer
511 views

Practical Usage of Wavelets with Real Time Data

There are a lot of papers out there which make attempts to forecast or discuss the benefits of wavelets for frequency decomposition. Oddly, very few discuss the huge boundary effects that are present ...
4
votes
1answer
252 views

Can option prices be characterised by an ODE?

If a stock price, $S(t)$, is governed by a geometric brownian motion. Is it possible to characterise the value of an option $V(S,t)$ as an ODE rather than a PDE (given $S$ is itself a function of ...
4
votes
3answers
661 views

Concave volatility smile

Under what circumstances can implied volatility smile be concave (ATM implied volatility higher than OTM put and call)? I know that a slight concavity is not prohibited by no-arbitrage... What are ...
10
votes
0answers
251 views

Extreme Value Theory possible for portfolios with options?

Say you have a portfolio with long exposure to a few linear assets (stock indices) and short exposure to a nonlinear asset (say call options on one of the linear assets). I am interested in ...
8
votes
0answers
671 views

Examples of Spectral Risk Measures

Let's take the usual definition of a spectral risk measure. If we look at the integral we see that spectral risk measures have the property that the risk measure of a random variable $X$ can be ...
1
vote
1answer
593 views

How to derive zero-coupon rates from IRS?

How can I calculate zero-coupon rates from historical IR swap rates? I have a record of IRS for the past 4000 days and I am want to compute the zero coupon rates based on them.
2
votes
1answer
591 views

Additive portfolio risk decomposition

In his paper Budgeting and Monitoring the Risk of Defined Benefit Pension Funds, Bill Sharpe writes: [...] the sum of the weighted marginal risks of the portfolio components will equal twice the ...
1
vote
0answers
182 views

Forecasting Equity returns using state-space models

I have data for 3 yrs of 5 min prices of various equities. I can construct a linear regression model and try to see the in-sample model performance. But I was wondering whether fitting a state-space ...
2
votes
2answers
720 views

What Forex Services support the ForexConnect API?

I need API access to get ForEx tickers and order books for currency pairs. From what I can tell there is a .Net API called ForexConnect which I can use to get this data. Now where can I get this data ...

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