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I would argue that indeed none of the so-called stylized facts you mentioned can be explained by classical economic theory. That there was a gross delta between the predictions of classical economic theory and empirical data was foremost found out by Benoit Mandelbrot as far back as 1963 in his seminal paper: The Variation of Certain Speculative Prices In ...


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I think there is a slight misconception into the purpose of an economic theory. The market is a complex entity to be modeled and yes, it is neither efficient nor arbitrage free but it is trading and there is a price process that corresponds to the market one. You could say that classical economic theory has failed, but I would argue the idea of a theory is ...


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According to me, you should be consider the use of the fractal distribuion/law power distribution in risk management. Currently, those topics are up-to-date in the risk management area and, more generally, in finance since those probability distribution should predict financial risks better than actually the Normal distribution do (see, e.g., the fat-tails ...


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Yes and no :-) Portfolio VaR = CV1 + CV2 + CV3 + CV4 is correct. To safeguard my answer, I looked this up from thinxlabs.com The individual component VaRs from the assets in the portfolio should add up tho the total portfolio VaR. The equation is as follows. But you need to calculate another VaR for each account, if you want to use CV on those. The ...


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Classical economics cannot "explain" volatility smiles, but neither does it preclude their existence. Economics is far more abstract than financial "quant"modeling and answers very different questions. In the more abstract framework of economics, volatility skew, mean reverting volatility, bubbles, and crashes are all conceivable scenarios. ...


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Recently I found a book on earnings trading but did not have time to read thoroughly. Trading on Corporate Earnings News - John Shon I also had spent some time to see earnings surprise effects and it is a quite interesting but not easy to use topic. There is certainly a jump if the estimates and announced earnings have a large mismatch but the magnitude ...



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