Questions tagged [finance]

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Resources for finding quantitative finance examples using excel, VBA and access

I am seeking to increase my knowledge in the quantitative finance field. I would be grateful if someone could point me to useful resource online, where I can find working examples of they types of ...
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0answers
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Merton's portfolio problem with constraints

Suppose the investor can invest in a Black-Scholes market with one risky asset $S$ with drift $\alpha$ and volatility $\sigma$ and a riskless asset $B$ with a riskless rate of return $r$, and the ...
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Hasbrouck's information share

Given a cointegrated set of price series, I am trying to compute the Hasbrouck's information share, as described in page 12-13 of this article. page 7-8 of this article I have the vector error ...
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2answers
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Which process is the most commonly used for modeling stock prices?

I'm thinking of writing a master's thesis about pricing options using Levy processes, but I wonder if these processes are actually used for modeling stock prices or not (and which specifically)? And ...
4
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3answers
317 views

Compute the price of a derivative

Consider the payoff function \begin{align*} f(x)=\begin{cases} 3 & \text{if }x\leq 30, \\ 33-x & \text{if }30<x<35, \\ -2 & \text{if } x\geq35. \end{cases} \end{align*} How would I ...
4
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2answers
685 views

Convergence of Spot and Futures prices

Any explanation I've found explaining why future and spot prices converge over time seem to only focus the explanation on why the spot and future price must be equal at maturity. I understand that if ...
4
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1answer
570 views

What is the stambaugh bias? Why is it important for predictability regressions?

What is the Stambaugh bias? Why is it important for predictability regressions? Can anyone explain it in simple terms?
4
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1answer
695 views

Finding arbitrage opportunity

Find an arbitrage opportunity in this market. Can anyone explain how to mathematically solve this exercise with for example solving a system of linear equations?
4
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2answers
863 views

Covariance between two stocks in a two-factor model

I am studying the Arbitrage Pricing Theory using Pairs Trading: Quantitative Methods and Analysis.In page 44 the author gives an example on how to calculate the covariance between two stocks. I will ...
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2answers
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What is time-varying risk premium? Forecasting stock returns

I am trying to understand the concept 'Time-varying aggregate risk premium'. Here is an extract from a Forecasting book, written by Rapach and Zhou, "However, rational asset pricing theory posits ...
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4answers
3k views

How do banks actually make money on mortgages [closed]

This is a bit of a subjective question and relates primarily to the UK market There are a number of banks who are lending at BOE + 1.49% (ie: 1.99 %) whilst at the same time accepting deposits paying ...
4
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1answer
336 views

Closed form solution of PDE of Option Price

Let $V=V(S_t,t)$ be the option price and \begin{align} V_t+\mu\,S\,V_S+\frac{1}{2}\sigma^2\,S^2\,V_{SS}=0\\ V(S_T,T)=\ln (S_T)^{2}. \end{align} My question: How can I obtain a closed form solution of ...
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1answer
274 views

Barrier Option from binomial tree

What is the smallest information structure that is required for using the binomial tree to calculate the price of a barrier (up-and-in) option? My gut feeling is any node below the node that reaches ...
4
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1answer
703 views

Struggling with tau in Black-Litterman

According to the omega formula in B-L tau is used in the Omega estimation to determine the degree of uncertainty given to views of the investor: So, if tau is given a low value then the inverse of ...
4
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2answers
462 views

How do I price $P(t)=P(t,T_{n})+\sum_{i=1}^{n}[P(t,T_{i-1})-P(t,T_{i})]$?

Derive the pricing formula $$P(t)=P(t,T_{n})+\sum_{i=1}^{n}[P(t,T_{i-1})-P(t,T_{i})]$$directly, by constructing a self-financing portfolio which replicates the cash flow of the floating rate bond. $P(...
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2answers
808 views

Fama and French data: Replicating research

Is there any data out there on the Fama and French (1993) paper? I am not talking about their factor data available on their website, I am interested in reproducing their factor calculations. I am ...
4
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1answer
267 views

Linear-Boundary Crossing Problem for Brownian Motion

This is a question I came across while reading: $W = (W_t)_{t\geq{0}}$ is a standard BM. Let $\mu\in \mathbb{R}$, and let $\tau_{a}^{\mu}$ = $\inf(t>0;W_t = a + \mu{t})$ be the first passage time ...
4
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1answer
154 views

Abstract algebra in economics and finance

Are there any applications of abstract algebra (group theory, rings, fields etc.) in any branch of either economics or finance?
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385 views

Relationship between diversification and standard deviation

Explain the relationship between diversification and standard deviation: There are two general principles that should govern investment behaviors in a world of efficient markets, where one has the ...
4
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2answers
167 views

Why is there inconsistency in WACC vs unlevered return?

To evaluate an enterprise we can discount free cash flow by either the unlevered required rate of return or the WACC. With Tax we have: $WACC=R_e \frac{E}{E+D}+R_f\frac{D}{E+D}(1-t)$ where $R_e$ is ...
4
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1answer
373 views

Ledoit Wolf shrinkage with constant correlation prior with tawny and Riskporfolios

I am trying to use R to perform the shrinkage of covariance matrix towards constant correlation as defined in 'Honey, I Shrunk the Sample Covariance Matrix'. I see there are two packages where this ...
4
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2answers
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What are the assumptions in the first-stage of Fama-MacBeth (1973)?

According to the CAPM, the expected return of asset $i$ is: $E(Z_i) = \beta_{im} E(Z_m)$ where $Z_m$ is the excess return on the market portfolio, and $Z_i$ is the excess return of asset $i$ over ...
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1answer
3k views

Risk Free Rate vs LIBOR

Theoretically, in pricing derivatives, most textbooks refer to the risk-free rate. What is obtainable in practice? The risk-free rate or the LIBOR rate?
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2answers
120 views

Computing $\gamma$ and $\mu$ at the efficient frontier

Consider the condition which the weights of any portfolio belonging to the efficient frontier satisfy: \begin{equation} \gamma\boldsymbol{wC} = \boldsymbol{m} - \mu\boldsymbol{u}\end{equation} ...
4
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1answer
137 views

Optimal Choice of exceeding time

Suppose you hold a share from company $Z$ whose vaue at time $t$ is $S_0+\sigma B_t$ where $B_t$ is Brownian Motion and $\sigma$ denotes some volatility. Now lets assume that company $Z$ may go ...
4
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1answer
418 views

Yahoo finance, interactive chart and historical prices are different

I am very new to the stocks. I checked the TNTE.AS stock on Yahoo Finance website. Here it provides "Interactive Chart" and "Historical Prices". But I found they are showing different values. For ...
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184 views

Which finance models have enjoyed particular success in recent years?

I am looking for a list of recent developments of models in mathematical finance. By recent, I mean this last decade. Which models have been developed and introduced during this period, being met ...
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0answers
116 views

How do I calculate the present value of a credit default swap?

I am paid 20 million every time a bond drops to a new low over a 120 month period. I need to know how to find the present value of such an arrangement if there is a continuously compound interest of 5 ...
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721 views

signal processing + finance? [closed]

I am a postgrad student doing a master in Signal Processing and I have graduated from an engineering school I was wondering if there are any jobs in finance that are opened to people having this kind ...
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2answers
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Choosing the right statistical test for Mutual Fund Performance Evaluation

How do you suggest I do this? I would like to perform a statistical test to check if: the aggregate alpha of all funds equals 0. the aggregate beta of all funds equals 1. Data Sample of 1000 ...
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2answers
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Why does the short rate in the Hull White model follow a normal distribution?

Consider Hull White model $dr(t)=[\theta(t)-\alpha(t)r(t)]dt+\sigma(t)dW(t)$ when we solve the SDE above we have $r(t)=e^{-\alpha t}r(0)+\frac{\theta}{\alpha}(1-e^{-\alpha t})+\sigma e^{-\alpha t}\...
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3answers
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where can i get data for foreign exchange order flow

I need data for my thesis research on liquidity of foriegn exchange for order flow (aggregated daily) per currency traded for a period over the last 10-15 years. help!!
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2answers
295 views

Pricing In Real Life vs Theory

When selling/buying vanilla call options, do one price them according to some pricing formula (i.e Black-Scholes)? Or is the only point using pricing formulas to find the implied volatility and then ...
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3answers
170 views

Parameters variation in fundraising financial model

I have created quite a large financial model in Excel with lots of input parameters which (after all calculations) have an influence on the output business indicators. Among the input parameters are ...
3
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2answers
285 views

Fama and French (market premium) factor

Currently I am using the Fama and French 3 factor model to explain the performance of mutual funds using monthly returns from 2000 to 2017. I use two market proxies: (1) RM-RF, obtained directly ...
3
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1answer
1k views

Why is Overnight LIBOR lower than BoE Base Rate?

According to this site, the current overnight GBP LIBOR is 0.45638%, and the Bank of England base rate is 0.5%. My understanding is that the overnight LIBOR should always be higher than the base rate,...
3
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1answer
274 views

Trying to replicate the Beta of Yahoo in R but am getting an answer that is way off

Yahoo calculates the Beta by using 3 years of monthly returns and using the S&P 500 as a market proxy but I cannot seem to replicate this or even get close using R. I downloaded the data from ...
3
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1answer
80 views

Equity Dilution Question

Prior to equity financing: Market Capitalization is $1B Current Share price: $50.00 Total Common Shares outstanding: 20,000,000 The company wants to raise 100M in equity through stock selling. I ...
3
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1answer
338 views

Evaluation volatility with Garch model

I want to forecast the volatility (with Garch) of a canadian stock in 5 months with daily returns. How many data do I have to collect ? Thanks.
3
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1answer
116 views

Cleaning of high-frequency data

In the paper "Realized kernels in practice: trades and quotes" by O. E.Bandorff-Nielsen etc. cf. https://onlinelibrary.wiley.com/doi/full/10.1111/j.1368-423X.2008.00275.x in the section dedicated to ...
3
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1answer
166 views

Interpretation of Fama French portfolio

I have two portfolios, one "bad" and the other "good". I construct the portfolios by taking the average monthly returns based on some criteria each year. In any given portfolio there could be between ...
3
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2answers
144 views

Verifying two properties of the Clayton Copula

So I'm trying to verify the first two properties of a copula for the Clayton model. The first two properties being: $C(u_1,…,u_d)$ is non-decreasing in each component, $u_i$ The $i^{th}$ marginal ...
3
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2answers
524 views

Why is that a risk averse consumer buys the optimum insurance when there is actuarially fair insurance?

I think I understand the fact that when marginal utilities of the same function are equal (a consequence of the actuarially fair insurance), the independent variables in it must be equal -- right? But ...
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1answer
1k views

How to simulate stock prices with stochastic time change subordinated arithmetic Brownian Motion?

the idea is to simulate price returns thus to be normally distributed i 'am trying to use subordinated arithmetic brownian motion subordinated to time activity (volume) stock prices are following GBM ...
3
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1answer
2k views

How to get started in quant finance? [closed]

I am a programmer and I have no finance background. I am looking for advice as to how to get started in the quant finance industry. My goal would be to have solid understanding about the industry and ...
3
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1answer
1k views

How to choose a tangency portfolio without a risk-free rate

How do you choose an optimal portfolio from the efficient frontier if no risk-free rate is given? I know that if there exists risk-free asset, then you would combine a portfolio from the efficient ...
3
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1answer
145 views

Call options and portfolio of the same options worth less?

A portfolio of long positions in call options with the same maturity and strikes on different assets is worth more than a call option on a portfolio of the same assets with the same weight; i.e. $$\...
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1answer
399 views

Stochastic Differentials - Ito's formula for a self-financing portfolio

Suppose I have a portfolio of stocks $(S)$ and savings account ($\beta_t$) then, the value is $$V = a_t S_t + b_t \beta_t$$ and for this portfolio to be self replicating, we need by Ito's lemma $$dV ...
3
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1answer
200 views

Volatility updating rule using r

I'm trying to program a volatility updating rule using iteration. I start with the well know Heston-Nandi model where the returns dynamics are : with is iid standard normal randome variable, where ...
3
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1answer
103 views

APR and Term to Principal Repayment Schedule Approximation

Is there any established "industry standard" to obtain an approximation for the expected principal repayment schedule for a given loan amount, term in months and APR with monthly payments ? I ...

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