All Questions
18
votes
0answers
460 views
How to show that this weak scheme is a cubature scheme?
Weak schemes, such as Ninomiya-Victoir or Ninomiya-Ninomiya, are typically used for discretization of stochastic volatility models such as the Heston Model.
Can anyone familiar with Cubature on ...
12
votes
0answers
1k views
How do different methods and techniques used in pairs trading compare?
I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score.
I am wondering if anyone has ...
10
votes
0answers
138 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 ...
9
votes
0answers
322 views
Law of an integrated CIR Process as sum of Independent Random Variables
It is known (see for example Joshi-Chan "Fast and Accureate Long Stepping Simulation of the Heston SV Model" available at SSRN) that for a CIR process defined as :
$$dY_t= \kappa(\theta -Y_t)dt+ ...
8
votes
0answers
80 views
rugarch: Joint estimation leads to different results
I want to fit an ARMA-GARCH model to my data using rugarch package in R.
First of all, I look at the acf and pacf:
...
8
votes
0answers
182 views
Measuring Behavioral Finance Effects in Fund/Portfolio Manager Analysis
I want to know if there are some standardized measures to evaluate how irrationally human a portfolio manager is. Are there any performance measures or scorings for behavioral finance effects? How ...
7
votes
0answers
127 views
How to estimate the following model?
Suppose I have the following model:
$$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 ...
7
votes
0answers
71 views
Regression in liquidity risk model of Jarrow/Protter
In the paper "Liquidity Risk and Risk Measure Computation" authors describe a linear supply curve model for liquidity risks in presence of market
impact, i.e. impact-affected asset price $S(t,x)$ is ...
7
votes
0answers
287 views
Can we use White's reality check to compare two Sharpe ratios?
I read a paper from Ledoit and Wolf that proposes a method to compare two Sharpe ratios and a paper from White that proposes a method to compare $n$ trading rules.
My question is: Can we use White's ...
7
votes
0answers
193 views
performance of historical VaR parameters
An historical VaR measure is parameterized in terms of the confidence level and also number of periods. Specifically, the $\alpha$% T-period VaR is defined as the portfolio loss x in market value over ...
7
votes
0answers
235 views
What are the major characteristics of natural gas volatility and options?
Seasonality is a big deal in the natural gas markets. My understanding is that they are broadly divided into summer and winter, with seasonality in both price and the volatility.
What does this ...
6
votes
0answers
114 views
Optimization procedure for entropy pooling
I was wondering if those who used the entropy pooling code provided by Attilio Meucci had issues with the optimization procedure (especially regarding the fminunc function in Matlab). When I stress ...
6
votes
0answers
194 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 ...
6
votes
0answers
117 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
0answers
542 views
Modelling with negative interest rates
For a project, I am interested to model the impact of recently negative interest bonds on the portfolio. The literature on modelling negative interest rates is limited, and the only theory I could ...
6
votes
0answers
126 views
How to get an analytic result for option price based on this model?
I defined such a model for stock price
(1)....
$$dS = \mu\ S\ dt + \sigma\ S\ dW + \rho\ S(dH - \mu) $$
, where $H$ is a so-called "resettable poisson process" defined as
(2)....
$$dH(t) = ...
6
votes
0answers
264 views
Probability distribution of maximum value of binary option?
A binary option with payout \$0/\$100 is trading at \$30 with 12 hours to
expiration.
Assuming the underlying follows a geometric Brownian motion (hence volatility remains constant), what ...
6
votes
0answers
212 views
Transformation of Volatility - BS
I have recently seen a paper about the Boeing approach that replaces the "normal" Stdev in the BS formula with the Stdev
\begin{equation}
\sigma'=\sqrt{\frac{ln(1+\frac{\sigma}{\mu})^{2}}{t}}
...
5
votes
0answers
133 views
VaR model Unconditional Coverage Tests: Is this extension of Kupiec POF test correct?
Background: Kupiec P. in 1995, published paper "Techniques for Verifying the Accuracy of Risk Management Models" on Journal of Derivatives, v3, P73-84, it's a Unconditional Coverage Tests designe for ...
5
votes
0answers
69 views
How to perform Empirical Mode Decomposition?
I am trying to use the EMD applied to EURUSD open price to train a machine learning algo (RVM).
I have run only once the EMD on my training set and once on the training+test set.
The results on the ...
5
votes
0answers
199 views
option chain data visualization, sunburst
I think option chains are not represented in the best way. With more and more options products coming out and trading on the various exchanges, I see vendors struggling to keep up with a good way to ...
5
votes
0answers
153 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 ...
5
votes
0answers
152 views
How to build an electricity portfolio for an electricity production company?
I am referring to an electricity production company. Company is located in AsiaPac. The power is generated using Natural Gas fired combined-cycle power plants. Then this electricity is distributed to ...
5
votes
0answers
100 views
Replicating portfolio and risk-neutral pricing for interest rate options
For equity options, the pricing of options depends on the existence of a replicating portfolio, so you can price the option as the constituents of that replicating portfolio. However, I am not seeing ...
5
votes
0answers
114 views
Testing for stock market herding over short periods
The literature has well established methods for testing stock market herding over a decent time window.
Are there any ways that have appeared in the literature to test for stock market herding over ...
5
votes
0answers
192 views
Can Hurst exponent be used to characterize nonlinear dependence in time series?
It appears to me that the answer is no, because Hurst exponent measures persistence in terms of autocorrelation, which is a linear measure. So even if a time series of asset returns is driven by ...
5
votes
0answers
520 views
Volatility-Based Envelopes
I am following an article by Mohamed Elsaiid (MFTA) about Volatility-Based Envelopes - a quite new technical indicator he has introduced, that is being used by Bloomberg. My goal is to get a simple ...
5
votes
0answers
177 views
generating (or tracking) the DJUBS commodity index
Dow Jones and UBS publish one of the most popular commodity index families, the Dow Jones-UBS Commodity Index and its subindices. They provide a detailed manual describing the composition of the index ...
5
votes
0answers
321 views
What is the correct procedure to choose the lag when preforming Johansen cointegration test?
When preforming Johansen cointegration test for 2 time series (the simple case) you need to decide the lag you want to use. Doing the test for different lag levels returns different results: for some ...
5
votes
0answers
462 views
Alternative to Block Bootstrap for Multivariate Time Series
I currently use the following process for bootstrapping a multivariate time series in R:
Determine block sizes - run the function b.star in the np package which produces a block size for each series
...
4
votes
0answers
61 views
Is Unexpected Loss ever used in Basel II?
In Basel II, EL is useful. It's calculated as
$$EL = PD \cdot EAD \cdot LGD $$
in advance IRB (internal rate-based approach),
Correlation
$$R = 0.12 \frac{1 – e^{-50 \cdot PD}}{1 – e^{-50}}
+ 0.24 ...
4
votes
0answers
70 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 ...
4
votes
0answers
130 views
Rate Distortion Minimization in a Python Clustering Algorithm
I'm attempting to solve for $\hat{k}$ clusters, such that the rate distortion is minimized, as described here, however, the answers that I am getting from my algorithm are not following the "Jump" ...
4
votes
0answers
61 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 ...
4
votes
0answers
64 views
Basel CVA VaR with R/WWR
In Basel III the CVA VaR “is restricted to changes in the counterparties’ credit spreads and does not model the sensitivity of CVA to changes in other market factors, such as changes in the value of ...
4
votes
0answers
151 views
Analyzing the angle between vector of weights and vector of returns in mean-variance optimization
I am using the paper "A Sharper Angle on Optimization" by Golts and Jones (2009) as a basis for my (minor) masters thesis in mathematical finance. The paper focuses on the mean-variance analysis of ...
4
votes
0answers
142 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
0answers
96 views
Discrete-time Jump-Diffusion Model
I am wondering if anybody could point me to any literature that talks about a discrete time version of the jump-diffusion model, I am aware that there is a paper by Amin (1993) that shows a discrete ...
4
votes
0answers
88 views
Rolling window Kendall's tau against APARCH(1,1) correlation
Assume you want to forecast the correlation matrix of a stocks' basket (say 15 ~ 20 stocks from different sectors); assume you need to forecast at $T$ days because you will use the forecast ouput with ...
4
votes
0answers
121 views
How to estimate CAViaR (Engle and Manganelli 2004) using non linear quantile regression?
I am trying to replicate results from Engle and Manganelli (2004). The following is one of their specifications,
$q_t(\theta)=\gamma_0+\gamma_1q_{t-1}(\theta)+\alpha|r_{t-1}|$,
$q$ is the quantile of ...
4
votes
0answers
115 views
Is it more accurate to analyze returns on a calendar day basis than a trading day basis?
I'm rather new to the actual practice of this kind of analysis, but it just seems wrong to me to throw Mondays' returns in with the rest without accounting for the passage of time on the weekend when ...
4
votes
0answers
329 views
How to better understand trading signals?
I am looking to get a better understanding of an output from a trading strategy. Basically I have a daily equity curve lets call it $Y_t$. I have defined a bunch of independent variables $X_{it}$ that ...
4
votes
0answers
277 views
ATM volatility versus OTM volatility and directional standard deviation
The forward instrument vol curve is skewed to the downside (50 delta risk reversal, 25 put, 25 call) were trading several ticks to the put).
Is there a smaller standard deviation (in price terms) to ...
4
votes
0answers
458 views
Help With Quant Modelling Software
Im a software developer (freelance) working in investment banking, and I'm looking to improve my CV by gaining a better understanding of the financial quant role and the software used by quants to ...
4
votes
0answers
133 views
Taking into account the correlation in Barrier options on a Basket
In a Barrier option (where the contract cancels when the underlying hits the barrier) I succesfully found the way to compute the probability of a single underlying touching the barrier (with constant ...
4
votes
0answers
403 views
Algorithms for predicting a couple points in the future
I'm familiar with supervised learning algorithms like regression and neural networks which look at a bunch of input points and learn a function which outputs a value (the value varying depending on ...
4
votes
0answers
350 views
Hasbrouck's information share
Given a cointegrated set of price series, I am trying to compute the Hasbrouck's information share, as described in
page 12-13 of this article.
page 7-8 of this article
I have the vector error ...
4
votes
0answers
355 views
Correct way to calculate bond's Yield-to-Horizon
I'm creating some .Net libraries for bond pricing and verifying its correctness with a bond pricing excel spreadsheet (Bond Pricing and Yield from Chrisholm Roth) but I believe it calculates the Yield ...
4
votes
0answers
141 views
Use of Local Times in Option Pricing
I know two applications of local time in option pricing theory.
First, it allows a derivation of Dupire's formula on local volatility in a neat way (i.e. without resorting to differential operator ...
4
votes
0answers
404 views
Back office processing for FX trades
Can someone provide (or point me to) a summary of back office processing nuances specific to FX trading? For example, I know that there are several FX-specific risks that must be managed. They include ...
