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Jul
12
comment Simulation of Heston process
@Matt59: actually, it's not that simple. The volatility is zero, but the stock price still grows at the mean rate. On top of that, volatility is negatively correlated with the stock price, so the paths for which negative volatility occurs are more likely to correspond to paths with relatively large stock prices.
Jul
11
comment Simulation of Heston process
Another indicator is the Feller condition, given by $F = 2\lambda v_{\text{mean}}/\xi^2$. If $F>1$ then the volatility is strictly positive. But in your case $F=.08$. This is so small, that I suspect you are generating a lot of paths with negative volatility.
Jul
11
comment Simulation of Heston process
Quick guess: your choice of parameters are "extreme". You have a vol of vol of 200%, since eta=2. The MC simulation can generate negative volatility which you compensate for. But if the negative volatility occurs frequently, then the error can grow quite large.
Jun
26
answered Option Pricing Model Calibration In Practice
Jun
18
comment How do you deal with Inflation lag in a MC simulation?
Thanks for your answer. Yes, I've accounted for the lag in payment and fixing, but that's not the part I'm having trouble with. In your last paragraph you mention "... referred or interpolated from the published index levels ...". I don't fully understand what you mean by that... Do you perhaps suggest some form of extrapolation from the April month to infer the June 1st level?
Jun
16
asked How do you deal with Inflation lag in a MC simulation?
Jun
14
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Jun
14
awarded  Nice Answer
May
30
comment Speeding up computations: when to use Quasi and standard Monte-Carlo in pricing
Yes, thanks. I corrected it.
May
30
revised Speeding up computations: when to use Quasi and standard Monte-Carlo in pricing
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May
30
answered Speeding up computations: when to use Quasi and standard Monte-Carlo in pricing
May
30
comment Implied Vol vs. Calibrated Vol
Implied vol always refers to "the volatility you plug into the BS equation to get out the price". The price can be the market price or it can refer to option prices predicted by other models. It depends on the context.
Apr
28
revised (Re) normalisation of random variable in Monte-Carlo simulations
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Apr
28
awarded  Student
Apr
27
revised (Re) normalisation of random variable in Monte-Carlo simulations
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Apr
27
answered (Re) normalisation of random variable in Monte-Carlo simulations
Apr
25
revised A problem involving random walks from Shreve
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Apr
25
answered A problem involving random walks from Shreve
Apr
22
answered KeyError in Python code used to determine a trade signal for Pair Trading
Apr
11
answered Compute the (Net) Present Value