Community Digest

Top new questions this week:

Margrabe option: change of numeraire versus conditioning and numerical integration

I am having a slight brain meltdown because I do not seem to be able to understand the following basic thing. Consider a BS economy, and two assets $X$ and $Y$ $$ dX = \sigma X dW $$ $$ dY = \nu Y dZ ...

black-scholes spread-options  
asked by ilovevolatility 3 votes
answered by Daneel Olivaw 2 votes

Is there an issue with estimating future returns from autocorrelated returns?

I have a time series $X_t$ generated from a standard GBM $$dS_t = \mu S_t dt + \sigma S_t dW_t$$ If I take the log returns over a rolling window of length $l$ $$r^{(l)}_i = \log \left( ...

returns estimation auto-correlation  
asked by PyRsquared 2 votes
answered by M. Austin 1 vote

Using Implied Volatility for Portfolio Optimization

Hello I am interested in portfolio optimization . Previously I when I have done portfolio optimization I would take the historical returns of a stock and use them to perform a mean variance ...

portfolio-management portfolio-optimization modern-portfolio-theory quant-funds  
asked by Pelumi 2 votes
answered by ilovevolatility 2 votes

Process with negative quadratic variation

Today seems to be question day for me, sorry. The complex process $$ dX = i\sigma dW $$ where $i = \sqrt{-1}$ and $dW$ is a standard (real-valued) Brownian motion will have a negative variance ...

stochastic-processes stochastic-calculus brownian-motion  
asked by ilovevolatility 2 votes
answered by user1987 2 votes

Backtest overfitting - in-sample vs out-of-sample

Recently, I read a great paper by De Prado et al. on backtest overfitting problem in Quantitative Finance titled Pseudo-Mathematics and Financial Charlatanism: the Effects of Backtest Overfitting on ...

backtesting algorithmic-trading machine-learning  
asked by Metod Jazbec 2 votes
answered by vonjd 1 vote

Steven Shreve: Stochastic Calculus and Finance

The lecture notes have the following theorem: Let $\theta\in \mathbb{R}$ be given and $B(t)$ stands for the Brownian motion which is a martingale, then $Z(t)=exp\{-\theta ...

stochastic-calculus brownian-motion martingale normal-distribution  
asked by Nav89 2 votes
answered by KeSchn 5 votes

Understanding Ornstein Uhlenbeck Parameters

I am trying to fit an O-U process to a discrete time series (log prices). I am calculating the reversion rate and the mean level from coefficient of the linear regression between the log prices and ...

programming stochastic-processes ornstein-uhlenbeck  
asked by drakedog 1 vote

Greatest hits from previous weeks:

What do the terms in-sample and out-of-sample estimates mean in MVO?

How do the in-sample estimates and out-of-sample estimates I so often hear authors refer to in emperical analysis of MVO differ?

statistics portfolio-management optimization modern-portfolio-theory  
asked by jairus thomas 7 votes
answered by SRKX 7 votes

Stressed Value at Risk vs Value at Risk

Just read some materials about SVaR. Is there only holding period that changes in comparison to VaR methodology?

risk-management var  
asked by Ascorpio 2 votes
answered by AfterWorkGuinness 2 votes

Copulas simply explained

I try to understand the basic idea of copulas, however I am still struggling and hope that someone can help me. I understood that in general a copula is a function which links several marginal ...

distribution copula multivariate dependence density  
asked by jeffrey 7 votes
answered by Henry E 7 votes

Derivation of the tangency (maximum Sharpe Ratio) portfolio in Markowitz Portfolio Theory?

I have seen the following formula for the tangency portfolio in Markowitz portfolio theory but couldn't find a reference for derivation, and failed to derive myself. If expected excess returns of $N$ ...

optimization modern-portfolio-theory mean-variance  
asked by Slow Learner 15 votes
answered by John 12 votes

how to interpret the GRS F test values?

I'm comparing the performance of Fama French three factor and Carhart four factor models. For the regression analysis, I have used the 25 Value Weighted portfolios sorted on size and B/M. The Table ...

fama-french  
asked by rahaa 3 votes
answered by Matthew Gunn 7 votes

How to identify technical analysis chart patterns algorithmically?

I'm working on a small application that will provide some charts and graphs to be used for technical analysis. I'm new to TA but I'm wondering if there is a way to algorithmically identify the ...

algorithm technicals indicator  
asked by miggety 31 votes
answered by Tal Fishman 27 votes

Worked examples of applying Ito's lemma

In most textbooks Ito's lemma is derived (on different levels of technicality depending on the intended audience) and then only the classic examples of Geometric Brownian motion and the Black-Scholes ...

stochastic-calculus reference-request itos-lemma  
asked by vonjd 21 votes
answered by emcor 20 votes

Can you answer these questions?

Benchmark of a Dollar Neutral Strategy

A dollar neutral strategy invests the same amount of money long and short without accounting for the volatility (risk) of either side. Depending on volatility you either end up positively or ...

quant-trading-strategies modern-portfolio-theory benchmark  
asked by mea43 1 vote
answered by demully 0 votes

How to find the volatility indices corresponding to equity indices?

I have a list of equity indices that I got through Eikon API (with Python). I successfully got their time series but at this point I would need the corresponding implied volatility, which is not ...

volatility equities implied-volatility  
asked by Matteo 1 vote

Risk-neutral price of $H=e^{X_T^1+X_T^3}$

Let $B=(B_t^1,B_t^2,B_t^3)$ a $\mathbb R^3$-valued Brownian motion. Let $r_t$ (risk free rate) be bounded and deterministic. Let consider the DISCOUNTED market $$d\overline ...

options option-pricing black-scholes risk-neutral-measure asset-pricing  
asked by Buddy_ 1 vote
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