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1d
comment The use of GARCH
@lehalle, sure that would be nice to have, maybe you could write up an answer that includes all that? I am sure the community will attach a fair value to your answer and also assess a relative fair value to this answer as well.
2d
comment Impact of Implied skew variations on future prices
As the paper correctly pointed out, conventional skew measures are often influenced by the volatility level and kurtosis. You can start with a simple OLS and also try what a weighted least-squares approach. You may also want to look at lead-lag effects.
Mar
25
comment How to account for correlation between strategies when they are added linearly?
well then make adjustments as I suggested in the first part of my answer; adjust weights up and downward based on pairwise correlations between strategy returns, though I would also take into account the correlation between return variations. I will edit my answer to provide more specific recommendations.
Mar
25
comment How to account for correlation between strategies when they are added linearly?
I do not fully understand your comment. M-V optimization does exactly that. It takes the return volatility of each asset into account and optimizes the weights as function of return volatility.
Mar
25
comment The use of GARCH
@lehalle, does it not directly address the question and answer it with which steps to take?
Mar
25
comment Proof oriented introductory text?
I think Shreve's 2 books are an excellent read but it would help to have some rudimentary background in measure theory. But I think all the books you recommended are pretty good. I would add to the list Rebonato's Volatility and Correlation which focuses mostly on interest rate derivatives. It is also fairly technical though less so than Shreve's books. +1
Mar
25
comment What is the fair price of this option?
I think the key point here is "perpetual".
Mar
25
comment Why the Black-Scholes formula can be used in the real world?
@vonjd, I have not voted on your answer but your comment " In a way if you priced derivatives with real world measures you would double count risk preferences because these are already included in the underlying" is factually incorrect. One should arrive at the same price of a derivative if one priced it via real-word probabilities and discount factors, given one knew them. Maybe that is why some users took issue with your answer. Just a hunch...
Mar
24
comment Rich Volatility, Poor Volatility
care to vote or comment on why any of the provided answers is not sufficient?
Mar
17
comment Rich Volatility, Poor Volatility
all I know is that those are pretty much how prop vol traders price volatility. Of course one can sell vol because its high and buy because its low (or vice versa), but I find that a losing proposition. Volatility is a financial product like everything else, there are factors that impact volatility and some of those are the volatilities of impacting fundamental factors. Take oil for instance: If implied volatility of supply disruptions, vol of inventories, and vol of other fundamental factors are low then high implied vol levels of oil are most likely mispriced.
Mar
16
comment Rich Volatility, Poor Volatility
Interesting thoughts. Though is it fair to conclude from your comments that you do not find value in determining the explanatory "variables" into vol regime shifts? For example, volatility in delivery costs or times, volatility of oil supply, changes in political volatility in regions that impact oil prices generally, volatility in demand for oil end-products, volatility in weather conditions, and the like?
Mar
13
comment Where can I find literature (books, articles, etc.) about basic HFT / arbitrage strategies?
Let's not make this personal please. I read through your answer and I just did not feel it addresses the question and I provided a detailed explanation of my rational. Nothing personal.
Feb
25
comment Why implied volatility is less for the back month option even though the back month option is more expensive
quant.stackexchange.com/questions/4936/…, and the fact that an option price is not only a function of implied volatility.
Feb
21
comment Under what circumstances would one want to delta hedge a straddle
A straddle at initiation does not have to be exactly delta neutral, not even an ATM or ATMF one. To make it delta neutral, it depends on the exact underlying we talk about and hence how you set the strike of the straddle. You can trade the gamma in the straddle and buy and sell the underlying during the life-time of the option.
Feb
21
comment Under what circumstances would one want to delta hedge a straddle
your risk is your time decay, for example. It is a real and relatively estimable risk but nonetheless a risk. Too frequent hedges can become costly and can make that exercise costlier than the benefit it pursues.
Feb
20
comment Under what circumstances would one want to delta hedge a straddle
That is not entirely accurate. Even if you do not "have a view on the direction of the underlying" it can still be advantageous to not delta hedge. The real question is whether the risk outweighs the cost of the hedge or not.
Feb
20
comment Under what circumstances would one want to delta hedge a straddle
Your question is not clear. Are you asking about a zero delta exposure at contract initiation or during the life time of the position?
Jan
26
comment When are implied and real world parameters the same?
@NathanMeibergen, I saw the answer and I do not fully understand why you need a derivation to prove your claim. An the same token, the one and single reason a risk-neutral probability is different from real probabilities being the existence of risk premiums in the real world
Jan
26
comment When are implied and real world parameters the same?
@Student T, All right, that nonetheless does not change that the answer is pretty obvious. Not sure an academic paper or derivation is necessary to prove that, but then I am addicted to simplicity rather than academic hoops.
Jan
26
comment When are implied and real world parameters the same?
I am afraid I do not fully understand your question. Yes, of course implied and future realized expectations are identical in the absence of risk premiums. They are also identical if the market priced future expectations correctly which is rarely if ever the case. What is your real question?