# Questions tagged [modeling]

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### Is there a good book/blog on applying statistical methods in finance? [closed]

I am learning a lot of tools in statistics, but I am having a hard time figuring out where I could apply these methods in finance, especially in relation to investment and trading. Is there a good ...
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### Searching for two papers of H.Leland with regards to capital structure

I am searching for two papers of H. Leland which I assume previously were online, as many published papers have cited them. The first work (Lecture notes) extends the Leland(1994a) model by ...
53 views

### Calibrate a model parameter with an error function

Suppose I want to find the implied volatility using an option model from market prices. Surely I can find the implied volatility for each strike price ($k$ different strike prices) for a given ...
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### Pros and cons of mean equation equal to zero in a GARCH model

I fitted a standard GARCH model. The mean equation has no AR or MA terms. All the coefficients in the variance equation are significant at 5%. However the mean equation has a constant term equal to ...
35 views

### How can I estimate a dynamic GARCH model using a Kalman filter methodology in R or MATLAB?

Does anyone know of any R or MATLAB packages for estimating GARCH models using Kalman filtering or any other state-space methodology? I would like to estimate a GARCH so that not only the variance, ...
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### tick/book data vs bar data, worth the infrastructure investment?

For reference, I am talking on behalf of a small group of math/stats graduate students as well as software engineers (we are 6 total), we know each other for years and decided to make a small (private)...
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### modelling known regime shifts

I wish to model a price time series with a known regime shift: electricity price before during and after the introduction of a carbon price. The time series looks like this: you can see the jump in ...
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### How to measure synchrony in financial time series

I have a multivariate time of series of monthly capital flows, the data is stationary and after plotting the all series together in one graph, the oscillatory was very clear in trends of the variables....
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### Insight on how factor models achieve dimensionality-reduction?

Going through the literature on factor models, I keep seeing the phrase "dimensionality reduction" and how factor models allow for the modelling of assets in high-dimensional cases, and I would ...
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### Adjust the Capital Market Line For Margin Interest

Modern Portfolio Theory assumes unlimited borrowing and investing at the risk-free rate. Of course, this is not realistic; margin interest costs several multiples of the RFR, especially for portfolios ...
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### Framework for analyzing transaction history

After many years of being discretionary trader I'm finally moving to systematized trading. I have all the transaction history from my broker I want to be the basis of my models. Is there a framework ...
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### Measuring corporate size relative to world GDP

I'm working o a model where corporate revenue / world GDP is a dependent variable of some stuff (based on the model proposed in this paper: http://www.scielo.br/scielo.php?pid=S1807-76922009000200002&...
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While this may be awkwardly-titled, I hope that my question becomes clearer upon reading. So this is what I gather about Factor Models: they are statistical models set up to explain the returns, ${... 1answer 85 views ### Exponential Smoothing - Alpha greater than 1 Simple stats question. I'm having trouble finding anything in the literature as to why the smoothing coefficient can never be greater than 1. This question was started by me doing time series ARIMA ... 0answers 44 views ### How to create an Efficient Frontier graph with one constant asset at 5% of the portfolio and two other assets fluctuate between remaining allocation? Creating an Efficient Frontier graph with Stocks and Bonds over a 0%/100%, 10%/90%, 20/80%, .... 1answer 35 views ### CMS BondEdge “cash flow testing” (forecasts) and market values CMS BondEdge is able to produce a stream of cash flows for a portfolio of bonds, by cusip, over a variety of interest rate scenarios. In the "cash flow testing" exercise at insurance companies, these ... 0answers 56 views ### Local volatility model equivalent reformulation Do we have a equivalent formulation of the local volatility model, where the SDE of the model would be on the volatility and S would be a functional of the the volatility and time? Thanks. 1answer 130 views ### Bitcoin dynamics - C++ Simulation I would like perform a simulation of Bitcoin future prices given a sample of the 4 past years (2014-2018). My problem is that I do not know what model to use! For common stocks I used the geometric ... 1answer 149 views ### Mathematical models for personal finance decisions I'm doing some bibliographic research on mathematical models for personal finance decisions. I should like to ask whether you know any of them, because the research that I did on Google Scholar haven'... 1answer 52 views ### Backtesting model results, but backtesting output sampled at different frequency than model output So, I'm trying to backtest a model that computes P&L. This model pulls sensitivities on a weekly basis and applies market shocks to these sensitivities to project quarterly P&L. I want to ... 3answers 238 views ### Adjustments for Multicollinearity in Returns-Based Style Analysis I am currently researching how to estimate a portfolio's effective mix (essentially figuring which weights to hold in broad indices that would have produced most similar return patterns). Sharpe's ... 0answers 54 views ### Preferred Stock pricing model I am trying to build a model to price a preferred stock. I want to model the dividends as random payments. I can't find any papers online on the subject. Does anyone have a reference for me? 1answer 388 views ### why calibrate volatility and fix the mean reversion I have had a few experiences or chats with teammates about the Hull-White model. The famous model has 2 parameters : The volatility The mean reversion Very often I hear that the mean reversion has ... 2answers 79 views ### Failing Jarque-Bera test but residuals looks normal on q-q plot and histogram If I'm failing the Jarque-Bera test but the residuals still appear to be normally on a qq plot and histogram, is it acceptable to say that my residuals are approximately normally distributed? Asked ... 4answers 98 views ### How to test the linearity assumption of a model? Let's say I want to have a model that projects income over a stressed period. I have a marked-to-market component that shows the P&L of trading book positions during this stressed period. Along ... 1answer 406 views ### Is this the correct way to forecast stock price volatility using GARCH I am attempting to make a forecast of a stock's volatility some time into the future (say 90 days). It seems that GARCH is a traditionally used model for this. I have implemented this below using ... 1answer 42 views ### Smoothing of Implied Volatilty I'm using ATM 30D implied volatility in a model I'm building, but need to smooth out the data. Is the best way just to use exponential smoothing or are there any better alternatives? 1answer 185 views ### How to understand the role of stochastic differential equations models in finance, in particular in managing portfolios? I just begin to read Stochastic Volatility Modeling by Lorenzo Bergomi. I t is very inspiring to me, but there are some statements which confuse me and I would like to ask for help here. In the ... 1answer 120 views ### MPT Efficient portfolio /Asset allocation When finding the optimal allocation using markovitz, the model will return '0' weights for assets that are "inefficient". What is the standard way for dealing with these weights if all assets have to ... 2answers 96 views ### Procedures to follow when VaR model fails backtest I was wondering what the correct procedure is to follow when a VaR model fails a backtest (either conditional coverage and/or independence tests)? Assuming I am restricted to using a historical VaR ... 1answer 400 views ### Monte Carlo model with multiple assets step by step Here are the following steps to calculate Monte Carlo VaR. I am learning how to proceed with each steps and I would need somebody who can explain. Do I have to create only 1 vector in step 4 (even if ... 2answers 102 views ### Distribution of data for GBM I am running some Monte Carlo simulations with GBM on time series of commodity prices. First of all, the price data is annual between 1900-1950. I would firstly like to know if it is bad practice to ... 1answer 155 views ### Why Arent There Long Rate Models? You have short rate models, https://en.wikipedia.org/wiki/Short-rate_model, but there doesnt seem to be any long rate models. I find this weird as in options modelling you model the whole smile, not ... 1answer 39 views ### How to interpret the accuracy result of the forecaste? I'm trying to forecast the vacancy rate of multifamily rental property. I have the data from 1992 until today. I'm trying to fit a model with the serie without the last 2 observations. I only need ... 0answers 266 views ### How Machine Learning model addresses adverse action concerns -credit scorcard? How to find the variables involved in the decision to report adverse action when the origination scorecard is developed using Machine Learning - XGBOOST with monotonic constraints (80 variables) ... 1answer 720 views ### Market Making Strategies Found by Hamilton-Jacobi-Bellman Equation Im working my way through the book "Algorithmic and High-Frequency Trading" (AHFT) by Cartea, Jaimungal and Penalva and i'm curious to see how the market making model with an exponential utility ... 2answers 52 views ### Modeling exercise notice time using lattices? I am interested in modeling callable (say European) bonds which have a time gap between when the future call exercise is decided and when the call actually occurs (payoff) - say 7 business days. I am ... 1answer 181 views ### how are financial data with sparse and asynchronous features imputed in predictive modeling? I watched a presentation from a large quantitative finance firm that spends a lot of effort around predictive modeling. One of the points the presenter emphasized was that they deal with a lot of ... 1answer 54 views ### Which expression of$S_t$to use under the Black-Scholes model? I am currently looking at example exam questions relating to the evolution of a stock price under the Black-Scholes model. However, I am confused by seemingly inconsistent expressions used for the ... 0answers 73 views ### “Correct” way to average OAS of multiple securities? Suppose one wants to compute an OAS on a portfolio of securities, but one can only compute the OAS of the individual securities. Is there a "best" way (under some metric) for one to go about doing ... 0answers 146 views ### Vega with SVI Gatheral bumps How would one go about computing a vega profile of an exotic derivative where the volatility surface is modeled using Gatheral's SVI parameterization? In particular, I am thinking about bumping each ... 1answer 221 views ### Lattice pricing of derivatives under multi curve framework (OIS and LIBOR) My goal is to price various derivatives resetting to 1M and 3M LIBOR via using a lattice. I have calculated an OIS curve for discounting and adjusted 1M and 3M LIBOR forward curves to be consistent ... 2answers 330 views ### Physical commodity trading quantitative risk return model I am very new to commodities, I was previously in portfolio management/optimization (Black Litterman Markowitz etc). I am now a Buy-Sell analyst for Petrochemicals, and need to understand the basic ... 2answers 895 views ### Accrual in Default Derivation of Credit CDS Curve In Trading Credit Curves Part I by JP Morgan we have that each point on a credit (CDS) curve represents: $$PV(\text{Fee Leg}) = PV(\text{Contingent Leg})$$ which is$$S_n \sum_{i=1}^{n}\Delta_i ... 1answer 291 views ### Monte Carlo Simulation of price processes before I ask my question I want to illustrate what I think I know about Monte Carlo simulation: say I want to simulate the price paths of one European Call Option with fixed strike and maturity in the ... 0answers 66 views ### Equity Options - “How do I build a forward simulation model with regards to shocks in spot pricing and IV?” I am trying to build a "What-If" Portfolio, consisting of a total of 20 options, across different tenors, strikes (delta), but on the same security. Simply put, the objective is for me to test the ... 1answer 76 views ### Use of fBm when$H<1/2\$

Let H be the Hurst parameter of the Fractional Brownian Motion. Are there any useful areas in mathematical finance where the fractional brownian motion with H<1/2 is used? From all the articles I ...