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Jul
14
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
Of course must models agree on price. You can implement whatever model you want but if your model under-prices assets your buy-side customers will happily buy from you in size and if you over-price they will sell to you. In either way you will at best be told by your desk head that you mess up and at worst you will find yourself looking for a new job. Keep in mind that most buy side clients request 2 way prices from sell-side desks from a number different competing sources.
Jul
10
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
For most exotic derivatives numerical methods do not exist. You generally end up with some sort of discretization. But in either case taking into account no-arbitrage conditions, a discrete and continuous model must agree on price else the models are not identical and one of the two is wrong. I argue that you can price any derivative with a discrete model but only very few can be priced with continuous models. And to answer your last question (unless I misunderstand your question), absolutely yes, else the models would not agree.
Jul
10
comment What are the main differences between discrete and continuous time models when modeling asset price dynamics?
Sure if you make the steps sufficiently small, else by definition 2 models (1 discrete, 1 continuous) are not exchangeable. And I never questioned the validity of the question itself. Academicians should occupy all their time with this issue, I prefer to have my juniors focus on working the other way around: Pricing is known for assets of specific properties, if a continuous model exists and arrives at such pricing then great, else let's not waste time, wrap up the sleeves and create a discrete model that can properly price the asset at hand.
Jun
10
comment Why parameterize the Black Scholes implied volatility surface?
Very nice answer, and I liked the paper you linked to, thanks. (+1)
Jun
2
comment What is the motivation for index benchmark?
...funds also do not adjust for inflation when they market their return metrics, so why would I care how they perform against the S&P500, just because a fund marketer tells me so. Absolute returns are perfectly comparable and if I lose money on a fund investment I do not go out and celebrate just because the fund performed couple percentage points better than some benchmark. In today's world, where every retail investor can chose to invest in long-short funds, absolute performance should be the core metric and not benchmark performance.
Jun
2
comment What is the motivation for index benchmark?
@user3264325, yes we are interested in risk adjusted returns but the focus should not be on "comparable risk" but on the risk of the very same asset you invest in and it should be about excess returns above the one of "riskless" (or better low-risk) assets. So when I invest I care about expected absolute returns in the context of the risk of its own asset. When you buy house insurance in the MidWest you also do not want to be quoted rates for insurance contracts on earthquake fault lines but want to pay for risk of the very same object you look to insure.
Jun
1
comment What is the motivation for index benchmark?
@user3264325, I am not sure this is a prudent approach. Guess how we all ended up in the midst of the biggest financial crisis since 1929: The "big guy theory" did not work all that great with banks, hedge funds, even money market funds; it does not work well as long as money is involved. We need prudent business practices and regulations, not to limit our freedom but to provide checks and balances because money managers are certainly not holding themselves to fiduciary duties because they truly enjoy doing so.
May
28
comment Volatility of Option
yes as long as you have deterministic r and sigma, as far as I understood the paper.
May
28
comment Volatility of Option
...which then basically sums up most B-S assumptions ;-)
May
28
comment Is there any other way to measure option pricing model performance than proximity to market prices?
..the market, or (b) you derive a model that makes its own asset price level/return prediction in the hope that market prices are dislocated short-term and converge to levels a model predicts.
May
28
comment Is there any other way to measure option pricing model performance than proximity to market prices?
I do not share the same summary of the "academic approach". I do not think that academicians consider market prices as benchmark because they believe in the EMH theory. I can again only repeat that most everyone considers market prices because they function as yardstick against which everything is measures. Even my own models, if market prices do not converge to my model then my model was obviously flawed and not the market. You look to either (a) derive a model as close to market prices as possible in order to price similar assets that may not be traded using inputs that were calibrated to..
May
27
comment Is there any other way to measure option pricing model performance than proximity to market prices?
Your reflection of the common answer of "Why do we take market prices as the prices to be estimated and predicted?" is incorrect: We care about market prices because that is what we trade against. If you believe in emh then you should not ever engage in risk taking. But if you think market prices are NOT correctly valued then you still care about market prices because that is how the profit and loss is calculated against.
May
23
comment Option pricing within the Black Scholes model
is there one in existence?
May
23
comment Why is USD LIBOR used for USD denominated securities?
I am one of the users with least knowledge of curve construction, there are true experts on this site, addressing this or future curve related questions.
May
23
comment What exactly is the OIS Black VOL?
Agree with DatamineR, please see my answer to another question: quant.stackexchange.com/questions/11400/…
May
23
revised Why is USD LIBOR used for USD denominated securities?
added 22 characters in body
May
23
comment Why is USD LIBOR used for USD denominated securities?
I added my own answer, hence built my earlier comments above into my answer.
May
23
answered Why is USD LIBOR used for USD denominated securities?
May
22
comment The implied volatility surface and the option Greeks - to what extent is the information contained in their daily movements the same?
Not really. It all depends what sensitivities you try to derive. If you look at sensitivities of certain variables to changes in the implied volatility then those hardly correlate with, for example, theta, the sensitivity of the option price to the passage of time.
May
22
comment Implied Correlation using market quotes
I deleted the above comments as I added another answer, credit to your comments.