Questions tagged [modeling]
The modeling tag has no usage guidance.
1
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0answers
34 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 ...
-1
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1answer
39 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?
0
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1answer
104 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
vote
1answer
81 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
60 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 ...
2
votes
1answer
132 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 the step 5 please. Which numbers from the Cholesky ...
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0answers
29 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
votes
1answer
145 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 ...
0
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0answers
27 views
Project IRR with multiple years of initial investment
Assuming a CF sequence of -,+,+,+,+... the calculation of IRR using IRR or XIRR depending on the periodicity of cashflows is straightforward.
Also, I am aware that assuming a CF sequence of something ...
-1
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1answer
33 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
120 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
387 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
votes
1answer
146 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 ...
-4
votes
1answer
42 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 ...
1
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0answers
35 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 ...
1
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0answers
66 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
102 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
165 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
357 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
votes
1answer
164 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
54 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 ...
0
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0answers
168 views
Technical approach to Key Rate Duration Hedging
I currently work for a Firm that hedges Mortgage Servicing Rights using a combination of vanilla swaps, Eurodollar Futures, MBS Pass-Throughs and Swaptions. We asses the fair value of the MSR asset ...
1
vote
1answer
65 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 ...
0
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0answers
34 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 ...
1
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0answers
44 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
55 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....
-1
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2answers
42 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
vote
1answer
162 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}))...
2
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0answers
213 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 ...
0
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1answer
335 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
34 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
vote
1answer
380 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 ...
6
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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
766 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, ...
0
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0answers
69 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
44 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
votes
3answers
396 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
votes
1answer
81 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) ...
0
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0answers
54 views
Risk neutral density of a VG process
In the following paper by Madan et al.
http://engineering.nyu.edu/files/VGEFRpub.pdf
The Variance Gamma (VG) process is discussed. The VG process is built on the VG distribution which has three ...
0
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2answers
87 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 ...
5
votes
1answer
1k views
GARCH volatility modeling, squared returns, and convergence
After reading some more of Volatility Trading, I decided to try to make a simple volatility model using daily log returns of an ETF I follow. It turns out "simple" is sort of relative. Unfortunately, ...
5
votes
1answer
439 views
Model reference price of Limit order book
first of all, the description of this Stackexchange forum says its for professionals or academics. I'm doing a lot of self studying and with that I was able to understand some white papers but still I'...
2
votes
0answers
60 views
Calibration of intensity model
I could use some advice on calibration of stochastic intensity models. I am thinking that the CIR model is most suitable, as it can not take negative values (when feller condition is satisfied).
I ...
31
votes
5answers
4k views
Why aren't econometric models used more in Quant Finance?
There is a big body of literature on econometric models like ARIMA, ARIMAX or VAR. Yet to the best of my knowledge practically nobody is making use of that in Quantitative Finance. Yes, there is a ...
2
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0answers
103 views
Problems with a Black-Scholes modified equation
I haven't really studied much financial mathematics until about 2 months ago so I'm quite new to this stuff, so I'm sorry if this is a trivial question. At the moment I'm trying to work out what the ...
3
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3answers
305 views
Is there a way to meaningfully generate daily returns from monthly?
I have a set of 7 investments in a portfolio and I need to optimize the weightings based on some exposures to various markets/styles/economic factors. I was hoping to do some sort of simple exposure ...
5
votes
2answers
201 views
What is the effect of mean-reversion on an upper barrier knock-out call option?
Consider a mean-reverting normal model for an underlying
$dX^{(1)}_t=-\kappa X^{(1)}_tdt+\sigma^{(1)} dW^{(1)}_t$,
for fixed time-independent constants, $\kappa$ (mean-reversion) and $\sigma^{(1)}$ (...
