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Questions tagged [modeling]

The tag has no usage guidance.

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1answer
30 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 ...
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0answers
45 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.
1
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1answer
107 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 ...
1
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1answer
136 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'...
1
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1answer
44 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 ...
2
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3answers
188 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 ...
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0answers
47 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?
4
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1answer
224 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 ...
2
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2answers
76 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 ...
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4answers
93 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 ...
1
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1answer
176 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 ...
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1answer
41 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?
1
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1answer
164 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 ...
1
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1answer
99 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 ...
0
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2answers
69 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 ...
3
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1answer
252 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 ...
1
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2answers
95 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 ...
2
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1answer
150 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 ...
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1answer
35 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 ...
0
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0answers
197 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) ...
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0answers
27 views

What ratio distribution to use to model ROI?

I am looking for a parametric distribution to model ROI in advertising, defined as the ratio of return to the advertising expenditure. Ideally something with a conjugate distribution. Is beta prime ...
10
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1answer
506 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 ...
1
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2answers
48 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 ...
5
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1answer
160 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 ...
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1answer
46 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 ...
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0answers
49 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 ...
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0answers
104 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 ...
1
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1answer
156 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 ...
4
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2answers
241 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 ...
2
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2answers
585 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 ...
2
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1answer
200 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 ...
4
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0answers
60 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 ...
1
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1answer
72 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 ...
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0answers
38 views

Multi-Variate linear modeling: how to calculate mathematically vs brute force genetic optimization

I have a hand full of daily economic data. I am currently using a brute force approach. Genetic optimization is only used when k is very large. This method is beautiful to me, but isn't valuable ...
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0answers
46 views

Binary or Multiclass Classification?

So I've been using ensemble methods to model stock price movement, using intraday per-minute data in the OHLCV format, with the prediction being a 1 if the future close goes up, and 0 if it goes down. ...
0
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1answer
59 views

What relevance might the Modigliani-Miller theorem have for weight of evidence?

Suppose in computing weight of evidence based on financial ratios of some bank, one finds that their debt ratio and equity ratio have largely (you pick how large I guess) differing weights of evidence....
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2answers
49 views

Is “interest” positive or negative in the “free cash flow to firm” model?

FCFF = net income + non-cash charges + interest x (1 - tax rate) - long-term investments - investments in working capital My intuition is: if the company is receiving interests payments, then the ...
1
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1answer
198 views

Extending risk neutral measure to insurance/mortality filtration

In insurance mathematics, one often models the underlying of an insurance policy with a Black Scholes model on a filtered probability space $(\Omega,\mathbb{Q},\mathcal{F},\mathbb{F}=(\mathcal{F}_{t}))...
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0answers
240 views

Good books on predictive modeling (for alpha signal research)

In terms of books on predictive models, I find ESL (elements of statistical learning) trying to cover too much and serves more like a reference, instead of explaining and developing the theories for ...
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1answer
373 views

Trouble understanding lookahead bias

I understand lookahead bias is pretty common industry knowledge. But I cannot wrap my head around how I am introducing it and could use a nice and easy explanation. Here's my thought process. I have $...
0
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0answers
37 views

What is the whole list of assumption that Ho Lee model was under?

What is the whole list of assumption that Ho Lee model was under? Please briefly describe how was each assumption match the real world finance/economics applications so that it shows how the model ...
1
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1answer
493 views

Matlab implementation for modelling stock price process

I am trying to model the stock's price process. Let's assume volatility and risk-free rate is given. I've come up with the code below to try and model the price process with the geometrical Brownian ...
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3answers
1k views

Model to Predict the Change in IV of an Option

I am looking for a model that would allow me to predict the change in the Implied Volatility of an option based on a hypothetical change in the market. The goal is to create a better simulation of ...
11
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3answers
910 views

What's the correct choice for modeling correlated stock prices?

Let's assume we're happy with simulating $n$ stocks as geometric Brownian motion (GBM). But say we also want the prices to be correlated. When I searched around for how to construct correlated paths, ...
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0answers
71 views

Vol specifications under Heath Jarrow Morton framework

What are some of the common forward vol specifications under HJM framework used in the industry. I guess most common would be 2 and 3 factor models, but any pointers to more details would be very ...
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0answers
46 views

How to reduce data dependence for empirically assessing option pricing model performance?

I am preparing a paper about mitigating assessment failures for option pricing models. For the sake of simpliciy, suppose we are talkin about European options. In basic terms, what I would like to say ...
2
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3answers
413 views

Mean and standard deviation of price series with Kalman

I like to calculate the mean and standard deviation of a price series, using the Kalman filter. I am somehow stuck with the deviation, or have some problem in understanding, which my research could ...
1
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1answer
1k views

Why is the Black 76 model not considered an interest rate model?

The Black 76 model is one of the standard models for interest rate derivatives like pricing caps, floors, swaptions, etc. The Black 76 model is given as $$dF_t = \sigma F_t dW_t$$ so it models the ...
0
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1answer
90 views

Is there a specific meaning to the word “convoluted” in maths or mathematical finance?

I'm reading about copula estimation in the book Financial Modeling Under Non-Gaussian Distributions by Jondeau, Poon and Rockinger. They say that full maximum likelihood can be difficult because of i) ...
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2answers
99 views

Model which fully incorporate OHLC data (higl ald low also)

OHLC data are one of the most popular kind of data available. Are there models which could incorporate all the information provided by OHLC - regular 1-minute frequency data for example ? Usually only ...