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I can't comment yet on the topic due to my reputation level (so I will throw an answer up) but having just done my MFE capstone research on EVT implementation for VaR. According to my advisor who was a director of a quant research group at Citi before returning to academia, not many people are doing this. My research was to start collecting data comparing ...


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This is pretty simple. Let's assume that $F_X(x)$ is cummulative density function, such that $$F_X(x) = \int_{-\infty}^{x} f_X(x) dx \quad \cdots \cdots (1)$$ where $f_X(x)$ is density function. Differentiating on the both side (ignoring subscript X), we get $$\frac{d}{dx}\, F(x) = f(x) $$ It can be written as; $$dF(x)=f(x) \,d(x)$$ $$F(x+h) - F(x) = ...


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The most correct way if you want to do it with log returns is the way you stated on your first edit, but indeed for daily data the approximation error is negligible.


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If certain broad assumptions are correct (eg, asset prices are continuous in time, markets are efficient) then asset returns must follow a Levy process. Both the Gaussian and Stable distributions are subsets of Levy processes. The question should not be whether Gaussian or Stable is better. Neither are adequate (in fact, many Stable distributions imply ...


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I think, the use of stable distributions in Finance (and, probably, in Economics) is a big mistake. It is essential that the intuitive fact that the stable distributed observations possess a large number of big deviations from empirical mean is not true (see, Lev B. Klebanov, Irina Volchenkova (2015) "Heavy Tailed Distributions in Finance: Reality or Mith? ...


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there is nothing to do with implied distribution from option prices calculated with Breeden-Litzenberer approach. this distribution is "risk-neutral" not "real". consider this as a sort of theoretical and artificial, regarding to real disribution, idea. in the article the author wrote about demand for puts. so they/she calculated these probabilities from ...


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Most traders have no idea what N(d2) is. I see two possibilities (a) they're using the delta of the option for the relevant strike, as seen by whatever model they're using, or (b) they are pricing a digital put on the yuan, using the full skew structure (as a former trader, that's the way I'd do it).



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