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comment Estimating Beta from unevenly spaced price history
This sounds like the same problem faced when doing model fitting on tick and order book data - do you have any handy references to the conversion from simple regression to using proper MLE when transitioning to asynchronous event data?
Apr
3
comment Weighted average implied optionlet/swaptions volatility
Everything (capped floater, CMS) will have one "implied volatility" which recovers the price. I am not sure you can find this number by weighting pieces of the input implied volatility surface, especially since usually one hand-picks which particular caplets/swaptions to calibrate the model to in the first place. There might be some rough relationship between the implied volatility and the local volatility surface, when pricing with local volatilities, but in general, I am not aware of any such relationship.
Feb
23
comment How are quants able to verify whether their calculated prices are any good
On the sell-side, one could argue that a 'good' model is one whose a posteriori replication PNL exceeds the quoted margin, or perhaps one that allowed you to sell the deal in the first place (depending on your level of cynicism). On the buy-side, assuming you aren't hedging, then a posteriori, the models which identify options that are mis-priced under P are the good ones. There's a big difference between models which are widely used, models which match the market well, and models which capture asset dynamics accurately. papers.ssrn.com/sol3/papers.cfm?abstract_id=2365294
Feb
20
comment Which interest rate model for which product
I look forward to hearing from someone with more front office experience than me, but the rule of thumb as I understand it is that one must use a model that can capture the dynamics and risks to which your product is exposed. So, a one-factor model is fine for a cap, since the cap is basically exposed to the risk of the level of the yield curve, and that's it. However, it's not sufficient for a spread option, since the dynamics of the spread can't be adequately modeled with one factor. I, too, would appreciate a more rigorous reference for this though!
Feb
12
comment Lower bound of ITM Calls when computing Implied Volatility
Ditto on checking your forward/rates/dividends. Likely you are using the wrong discount curve.
Feb
11
comment Reasoning for Bloomberg's short rate volatilty calculation
That doesn't sound right, definitely help help that and escalate until you get a better answer.
Jan
30
comment Position Sizing For Ratio Pairs Trade
Might be simpler to use some measure of dollar risk (fractional empirical kelly criterion), then see what the ex ante leg commitments are that result in a 4-sigma loss of the desired dollar risk. The trouble is that this may over-size your legs since the ex ante volatility is likely lower than the in the ex post stop scenario, meaning the 4-sigma stop will be much further away than expected.
Jan
17
comment Inflation modelling
quantlib.org/slides/qlws13/acar.pdf This has an overview of some common approaches, including the Linear Gauss Markov with Jarrow-Yildirim dynamics. For volatility data, you should look for zero-coupon and year-on-year inflation caps and floors.
Jan
12
comment Scaling Intervals in Diffusion Process
$\mu$ scales with dt, and $\sigma$ scales with $\sqrt(dt)$, so for your example above, $\mu = 10*\frac{2}{12}$ and $\sigma = 0.2*\sqrt(2/12)$, and $dt = \frac{1}{6}$, not 1/3
Jan
12
comment Expected value of Black-Scholes
If you use a biased estimate of the volatility, you will get a biased price for the option.
Dec
31
comment Random Brownian Simulation Startling Results
I was incorrect in my off-hand comment - the correct factors for an unbiased game are 1.25 and 0.75. Note that if you are still using arithmetic payoffs in your 50:50 game then yes it will be biased. EDIT: also note that even in an unbiased geometric game, where your expectation is 100, the "win percent" as you've defined it will be very low
Dec
16
comment Random Brownian Simulation Startling Results
It's a biased game. Try playing with win factor=1.25 and loss factor=1.25^-1=0.8.
Nov
24
comment Potential pitfalls in the use of correlation
Some people regress against price levels to get a measure of realized skew. Above, the interpretation could be that a certain level of uncertainty was priced into the CDX spread, and since then it's been suppressed from the CDX (which has nothing to do with the skew). Without knowing exactly what the red series is, it's hard to be certain, but this looks like a case for volatility/risk suppression by central bank intervention. All that said, I don't think correlation of the series is the correct approach.
Nov
10
comment Black-Scholes: Why the focus on volatility?
Given your question is not really about the mathematics, but perhaps the philosophy of implying volatility, you might enjoy ito33.com/sites/default/files/articles/0601_ayache.pdf
Oct
23
comment From Fourier Transforms to Option Values
Your question is tagged with heston - are you asking about how to value vanilla options with FFT under the heston model specifically?
Oct
14
comment How does the 2-factor Hull White model propagate the forward rates curve?
By ZC I mean zero coupone.
Jul
31
comment How do you handle order tracking (without unique Lot ID's)
If you are having this problem, you must not be using everything the broker is offering you, I can't imagine an API that doesn't let you uniquely identify specific fills, and hopefully even which order they come from (though that might not be possible).
Jul
15
comment how to calculate more efficient volatility figure than historical volatility?
Yeah, I quite liked using the drift-independent volatility estimator outlined here: atmif.com/papers/range.pdf But as others have commented, I don't think this is quite what is being asked.
May
15
comment Overnight Index Swaps
Isn't this a discount quoting convention as with repos? ie - this is how the yield is quoted
Apr
16
comment How do you know if if an option is priced correctly?
That was an excellent, nuanced answer. It motivates me to wonder whether historically, options prices have been fair compensation for the risk of expiring in the money.