Community Digest

Top new questions this week:

Use of interest rate swaps in liability-driven investing

You probably have home across recent events in the UK bond markets. The Financial Times article "The reason the BoE is buying long gilts: an LDI blow-up" from Sep. 28, 2022 goes through why ...

interest-rates derivatives yield-curve interest-rate-swap leverage  
user avatar asked by AK88 Score of 4
user avatar answered by Jan Stuller Score of 3

Aggregation of (cross-sectional) Factor model

Suppose I have a large factor model for security returns, i.e. I have a vector $\mathbf{Y}(t) \in \mathbb{R}^{P}$, with factor loadings $\mathbf{\beta} \in \mathbb{R}^{P \times K}$ over a set of $K$ ...

regression factor-models risk-models factor-investing factor-loading  
user avatar asked by bfg Score of 3

Variance of the log returns in jump diffusion with time-varying jump sizes

I'm trying to calculate the variance $\mathrm{var}\left(\log\frac{S\left(t\right)}{S\left(0\right)}\right)$, where the dynamics of the stock $S$ follows a jump-diffusion process given by $$\frac{dS\...

jump-diffusion merton-model  
user avatar asked by Skumin Score of 2

Hagan's explanation of the Local Volatility model

Long story cut short: I am asking why the Local Volatility function can be thought of as a function of the underlying, when in fact it appears to be the function of the strike. Long story: The well-...

options option-pricing stochastic-calculus local-volatility sabr  
user avatar asked by Jan Stuller Score of 2
user avatar answered by Frido Rolloos Score of 3

Definition of continuously compounded yield for perpetual defaultable coupon bond

In continuous-time asset pricing, the price of a defaultable perpetual coupon bond is given by $$P(V) = \frac{c}{r}\left[ 1- \left(\frac{V}{V_b}\right)^{-\gamma}\right] + (1-\alpha)V_b \left(\frac{V}{...

fixed-income bond asset-pricing continuous-time default-risk  
user avatar asked by Luca Gi Score of 2

Interpolating implied volatility term structure when IV is sampled at fixed delta points

According to the accepted answer to a question in this site on the interpolation in the term structure of volatility surface: A simple linear interpolation on implied variance along iso-moneyness ...

options implied-volatility volatility-surface  
user avatar asked by Special Sauce Score of 2
user avatar answered by jherek Score of 1

How do you handle non integer time intervals in Quantlib for options pricing (ie intraday pricing)

I'm using QuantLib (python version) for options pricing, and am trying to figure out how to handle non integer dates. If you try and price an option at 9:30 AM and at 4 PM, you should get different ...

options option-pricing programming quantlib  
user avatar asked by Nezo Score of 2
user avatar answered by Luigi Ballabio Score of 3

Greatest hits from previous weeks:

How useful is the genetic algorithm for financial market forecasting?

There is a large body of literature on the "success" of the application of evolutionary algorithms in general, and the genetic algorithm in particular, to the financial markets. However, I feel ...

quant-trading-strategies forecasting algorithm  
user avatar asked by Graviton Score of 59

What is the difference between convertible bond and bond with warrant?

One site suggested the difference is that the warrant in the bond with warrant is a fixed price on company stock. E.g. for a \$1000 bond, you can buy 500 shares at \$2 each. And that convertible bonds ...

convertible-bond  
user avatar asked by Michael Johansen Score of 6
user avatar answered by Marc Shivers Score of 6

What are some useful approximations to the Black-Scholes formula?

Let the Black-Scholes formula be defined as the function $f(S, X, T, r, v)$. I'm curious about functions that are computationally simpler than the Black-Scholes that yields results that approximate $...

options option-pricing black-scholes optimization  
user avatar asked by knorv Score of 63
user avatar answered by olaker Score of 56

What is the difference between volatility and variance?

How do volatility and variance differ in finance and what do both imply about the movement of an underlying?

volatility variance  
user avatar asked by Jaydles Score of 36
user avatar answered by Dirk Eddelbuettel Score of 28

Implied interest rate from FX swap

This is not homework. I am trying to calculate the implied interest rate of one currency (C2) using an FX swap and the interest rate of another currency (C1 - base). I have the following: Spot: 7....

interest-rates fx forward  
user avatar asked by PBD10017 Score of 9
user avatar answered by perry Score of 9

Except Zipline, are there any other Pythonic algorithmic trading library I can choose?

Except Zipline, are there any other Pythonic algorithmic trading library I can choose? Especially, for backtesting?

python backtesting algorithmic-trading  
user avatar asked by Terence Ng Score of 46
user avatar answered by J. Morris Score of 30

Integral of Brownian motion w.r.t. time

Let $$X_t = \int_0^t W_s \,\mathrm d s$$ where $W_s$ is our usual Brownian motion. My questions are the following: Expectation? Variance? Is it a martingale? Is it an Ito process or a Riemann ...

stochastic-calculus brownian-motion  
user avatar asked by Toofreak Score of 47
user avatar answered by Gordon Score of 58

Can you answer these questions?

Why is Implied Volatility more important than skew for put spread pricing?

It is said on page 26 of the book "Trading Volatility: Trading Volatility, Correlation, Term Structure and Skew" by Bennett (2014) that: A rule of thumb is that the value of the OTM put ...

options volatility implied-volatility spread-options  
user avatar asked by dopller Score of 1
user avatar answered by Cloudman88 Score of 0

How does one get exposure to stock borrow rates?

Suppose I am long equity borrow rates, but I don't know exactly when borrow will increase. What is the most effective way to trade this? The naive strategy of borrowing the stock now and then lending ...

equities swaps yield  
user avatar asked by actinidia Score of 1

Comparative statics on $c/r$ using fundamental asset pricing equation

Consider the fundamental asset pricing equation for a perpetual coupon bond: $$rP = c + \mu P' + \sigma^2/2 P''$$ with standard boundary conditions $P(\bar x) = \bar x$ and $\underset{x\rightarrow \...

fixed-income bond asset-pricing continuous-time  
user avatar asked by Luca Gi Score of 1
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