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Aug
3
comment Why is the mean time-dependent in the Hull-White interest rate model?
the choice of model always should be determined by the specific use case. If you model product with a duration of 30-50 years then sure you are most likely right to assume a long-term mean of around 5%. But if you look to model interest rate products with, let's say, 2 years of maturity then you should hardly plug in a 5% rate in this current environment. Hence some models assume a time varying mean.
Aug
2
comment Why is the mean time-dependent in the Hull-White interest rate model?
Since when are interest rates insulated from time-varying changes? tradingeconomics.com/united-states/interest-rate (chose the start date to be 1971, long-term enough?)
Aug
2
comment Trend in Cointegration relationship
this should answer your question: repub.eur.nl/res/pub/1559/feweco19990414090913.pdf
Aug
1
comment Looking for a recommendation for a Fund Transfer Pricing modelling book
I will look around a bit more but it would help if you could give more specific topics of interest to pinpoint what you exactly are looking for.
Aug
1
comment Backtesting - can you buy/sell at open and closing prices?
@Brian B, I hope you never worked at that certain "prop shop" and I would venture to guess this shop does not exist anymore. Phoning in the securities, direction, and sizes one wants to trade at the close is almost the same as sending your PB a cheque directly (which the PB in turn passes on to their internal facilitation or prop desks who in the meantime pop open another bottle of champagne due to having reached their next pnl milestone).
Jul
31
comment options pricing using vwap
@BrianB, ah now I see what you meant. Yes, agree, and even in 2008 people hugely underpriced the value of liquidity, especially when the CP market went seismic and a number money market funds broke the buck. Or I bet ex Lehman upper management would have paid a much higher price for liquidity in retrospect.
Jul
30
comment Backtesting - can you buy/sell at open and closing prices?
Yes, as realistic as bidding at an auction for a Picasso at 5 dollars. Good luck.
Jul
30
comment How to most optimally perform currency conversions when backtesting on portfolio level?
yes that is how I have done it in the end. Run-time wise it would probably have been the cleanest way because I could have read such time series just in an identical way as the other assets' time series. However, in order to realize a bit more of some sort of "separation of concerns" I stored all dollar crosses (assuming USD is base currency) in a separate in-memory database. (very small footprint as I only use 1 update per day).
Jul
30
comment options pricing using vwap
@BrianB, thanks for mentioning that. Do you have couple products in mind where that was the case? I have traded JGB futures options in the past and felt liquidity was well reflected in the iVol spreads at most times.
Jul
28
comment how to make a distribution model tolerable of trend?
You could research "regime changes" and the handling of those.
Jul
28
comment how to make a distribution model tolerable of trend?
You are basically asking people to design a strategy for you, hardly the purpose of this forum. If your strategy fails when the underlying driver is not mean-reverting then you need to work on a change in strategy approach if you want it to handle environments of high auto-correlation.
Jul
26
comment Do some option pricing models allow for misspecification and what does it mean?
You are saying that "Diverse option pricing models are reported to be misspecified in various studies." Then you ask what it means...I am confused. And I feel you need to supply a lot more information to have readers understand what is under discussion: How do the authors "estimate" the implied volatilities (from what data/model), re-estimate by changing what, what are those "6 sets of option prices". I am afraid the reader cannot extrapolate from the little information in the quote provided.
Jul
26
comment How to most optimally perform currency conversions when backtesting on portfolio level?
Thanks for the comments. I would be more careful if I had to deal with inaccurate pricing data of the instrument itself or estimates thereof (I do take exact pricing into account, so no issue there). However, this question only deals with currency conversions to trade/profile non base currency denominated assets. So, after thinking of it I am pretty sure your advice is sufficient, thanks.
Jul
26
comment How to most optimally perform currency conversions when backtesting on portfolio level?
@chrisaycock, chrisaycock if you like to write up a one-two liner as answer then I am happy to accept it as answer.
Jul
26
comment How to most optimally perform currency conversions when backtesting on portfolio level?
Thanks for your input. I also update currency conversions in live trading once a day thus I think I will run the strategy profiling on historical tick data on daily fx rate conversion updates as well. Technology wise it is not hard to implement tick based updates, in fact that would be the easiest solution to implement. The issue is with performance degradation in terms of tick throughput/second. Any rate update on 10-20 cross currencies would cost several tens-hundreds of microseconds/tick which explodes when running hundreds of millions of data points.
Jul
25
comment How to calculate return rates with negative prices?
@aiguru, I was not talking about an alteration in supply. I am talking about some sort of "load-balancer". You supply it with constant amount x (constant over some defined period) and it balances out short term variations in demand y by outputting x -> y where the balance exits the circuit rather than overloading the grid.
Jul
25
comment How to calculate return rates with negative prices?
@aiguru, interesting. Thanks for that illustration. It is just I thought we live in 2013 and power plants can easily use technology to reduce the produced energy directed to the grid, in fact that is something every household appliance can handle: A variable input of power but a converter that can variably reduce the consumed power depending on settings. Why is that not available on a grand scale?
Jul
24
comment Black--Scholes hedging argument
good to share our knowledge on such board because I appreciate to read about the more rigorous approaches as I am not a mathematician by heart. Cheers ;-)
Jul
24
comment How to most optimally perform currency conversions when backtesting on portfolio level?
For order sizing purposes even a variation of 5% or so has an almost immaterial effect (for example, it makes almost no difference whether I trade 1,000,000 EUR notional based on an outdated conversion factor or 1,050,000 EUR, that would have been correct because the current conversion factor changed by 5% since the update in the system).
Jul
24
comment How to most optimally perform currency conversions when backtesting on portfolio level?
Thanks for your idea and suggestion, it is much appreciated. However, I was purely talking in regards to historical testing and my point was that I try to avoid having to check all fx conversion factors to a certain base currency because it would unnecessarily slow down the profiling process. I think what chrisaycock suggested comes closest to what I will implement because it only "cheats" on unrealized pnl until the conversion rate is updated again a day later or when the pnl is realized, whichever comes first.