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14

The limitations of the Gaussian copula were well-known among the quantitative finance practitioners before the crisis. See this paper by D. Brigo. To answer the question: no "fat tails" unable to fit the market prices without tweaks (base correlation) which make the model arbitrageable it's a static model (e.g. forward-starting tranches are impossible to ...


12

Value has traditionally been one of the most important stock-selection signals for quantitative managers. However, since the late 2000s, following a rapid flow into quantitative investing, traditional value strategies have lost most of their predictive power and the returns generated from them have also become more volatile. The typical approach of ...


9

If you want a 'pop science' account for it, the Wired article by Felix Salmon is a pretty good start. If you want harder technical stuff, well then you can start at the Wikipedia article and its section on Applications and follow the references: [...] Some believe the methodology of applying the Gaussian copula to credit derivatives to be one of ...


7

There are "perpetual" bonds and preferred shares that are traded in the corporate credit markets that exactly match your conditions above. They are recorded in the 10-K at notional value $X$. The "close-out" feature is an embedded call. You should assume your favorite stochastic interest rate (and/or credit) model and run a PDE solver, tree, or other grid ...


7

Most counterparty agreements specify some sort of ois rate for the interest paid/received on posted collateral. So the OIS rate is the appropriate one to use for discounting future cash flows. Prior to 2008 the OIS/Libor spread was small and stable, so you didn't really need to worry about this, but now it's much larger, so people are taking it into ...


6

I can't speak for all structured products but valuing a MBS is straight-forward, but not easy. It's straight-forward because you just need to calculate the net present value of the discounted cash flows. That said, accurately determining those cash flows is hard. The most difficult cash flows to determine--prepayments and defaults/severity--also have the ...


5

Why does USD based security valuation have to give a thing about what London Banks think? Your question is based on false premises: the USD Libor is not determined by polling London based banks as you seem to believe, but banks on the London money market. The difference is important, as there are—of course—banks which are not based in London and active ...


5

You should use the full yield curve, discounting cash flows at specific dates using the appropriate zero-coupon interest rate. As to which yield curve, that is often a matter of convention. Generally one uses the LIBOR/swaps curve for all but the most liquid products (in which case you use the treasury curve). The curve is constructed from LIBOR/Eurodollar ...


5

You are essentially dealing with two options: $EU\,{Warrant}(S_t) = BlackScholesCall(S_t)+CompoundCall(S_t)$ The Black-Scholes formula is known, and Compound Option pricing has various approaches in research which you may find.


4

I wouldn't put too much faith in IBES forecasts. You may remember this situation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889322 (In case the above link doesn't work, Google "Rewriting History Alexander Ljungqvist"). You'll find lots of excuses for worthless forecasts: http://www.princeton.edu/~hhong/rje-analyst.pdf Below is a graph that I ...


4

To create such a model, you'd start with some data, and then start fitting curves to it. For example, let's take a company where there are reasonable consensus forecasts about the next few years' earnings; and let's assume you've got some time-series data on changes in those consensus forecasts, and changed in the price. You could then fit a model based on ...


3

A paper by Gong, Smith, and Zou (2007) addresses your question exactly. From the abstract: This paper explores the implications of hyperbolic discounting for asset prices and rates of return. Hyperbolic discounting has no effect on the equity premium. However, by making people less patient, causes stock prices to be lower, and interest rates ...


3

Depends on circumstances - if you just trade futures intraday for yourself, secondary market T-bills (http://www.federalreserve.gov/releases/h15/data.htm#fn3) will be good enough.


3

If you assume that you do not have any market risk (a strange assumption, but it would hold for example if you are fully hedged), then a (correctly) collaterlized derivative does not have any net future cash flow. Clearly: if the derivative contract has a cash flow of -X, its value will go down by X and the collateral account will have a cash flow of +X (the ...


3

A condition for correct calibration of the short rate model is that it exactly reproduce the present values of fixed (option-free) cashflows - that is, that it give the same answer as ordinary discounting at the spot rate. If it doesn't, you've done something wrong - sort of like using a model that violates put-call parity. (Actually, it's exactly like ...


3

Take a look at Campbell's 2008 paper "Predicting Excess Stock Returns out of Sample". This paper is in response to Goyal & Welch's paper which argued that excess returns cannot be predicted out of sample. Also see Baekart and Ang's paper "Stock Return Predictability: Is it there?". A good theoretical framework that ties stock return predictability to ...


3

You will find elaborate answers to your question in this excellent new book: Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Gray & Carlisle You can find a good summary over at CXO Advisory Group: A Few Notes on Quantitative Value


3

The importance here is that it actually does not matter in what time zone or market the libor rates are set. Key is that it is supposed (!!!) to be a gauge at what rate contributing banks could borrow funds at in the inter-bank market. Like you can go to any African country and borrow or lend US dollar, so can any Japanese, European, or American bank borrow ...


3

As long as your market is complete and $\tau$ is measurable w.r.t. the filtration generated by the market the continuous cash flow paid until $\tau$ is a hedgeable contingent claim and you have to work under the risk neutral measure.


2

Mortgage backed securities are valued by calculating the net present value (NPV) of cash flows they are expected to generate. These cash flows are predicted using a model that incorporates all the contractual characteristics of the security and the underlying loans, as well as assumptions on things like prepayment speed, default speed, loss severity, and ...


2

The framework for valuing structured finance products in general is based on the nature of the cashflows in the product. Decompose the constituent components of the structure. Make some choices about handling the correlations between assets in the structure. Review the covenants of the structure and their impact on the cashflows (sequence of events). ...


2

The OIS rate is more stable than Libor, right? And according to this article from Risk Magazine: The party that is owed money at the end of the swap will have been paying an OIS rate on the collateral it has been holding, and so the ultimate value of the cash it will receive will be the sum it is owed minus the overnight interest rate it has had to pay ...


2

Claudio Albanese has a paper on the topic of GPUs and CVA computations. Here is one of his papers: link to paper


2

I think the formula you refer to is $$ PV=\frac{C}{r-g} $$ If that's the case, then you do not subtract growth, the minus sign has an advantage on the present value. The initial formula $PV=\frac{C}{r}$ assumes no evolution in $C$, but the other one assumes the that the payment will grow in time hence yes, you get paid for that.


2

We actually managed to come up with the answer to this question ourselves but wanted to share the answer since it might be relevant to others as well. The calculation depends on what method is used to calculate the cost. There is the FIFO, LIFO and the average cost method, see: http://www.accounting-basics-for-students.com/fifo-method.html If FIFO or LIFO ...


2

We can value equity as a call option on the value of the firm, where exercising the option requires that the firm be liquidated and the face value of the debt (which corresponds to the exercise price) paid off. The parameters of equity as a call option are as follows: Value of the underlying asset = S = Value of the firm = 100 Exercise price/Strike ...


2

Pricing always takes place under the risk neutral probability measure. In fact, this would make the price more conservative (i.e. lower) with respect to risk; if you priced it under the true measure you would be putting a smaller hazard rate for this random time. Completeness make the risk neutral probability measure unique. In your case you might have ...


1

There was an error in your expected value, which I have corrected - the probabilities and the binomial coefficient (the "N choose k") should not be raised to the power $c$. With that correction, it is a simple application of the Binomial theorem: \begin{eqnarray} \left(u^cq+d^c(1−q)\right)^N&=&\sum_{j=0}^N {N \choose j}(u^cq)^{j}(d^c(1−q))^{N-j}\\ ...


1

According to this reference there are indeed several types of P/E-Ratios (trailing P/E that is based on previous earnings and forward P/E which is based on projected earnings) Also several books calculate the P/E according to the following formula $P/E-Ratio = \frac{Average Common Stock Price}{Net Income Per Share}$ (Confer source1, source2 and source3) ...



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