Questions tagged [modeling]
The modeling tag has no usage guidance.
0
votes
2answers
60 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 ...
1
vote
0answers
45 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
votes
1answer
152 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
votes
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 ...
0
votes
4answers
89 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
vote
1answer
86 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
votes
1answer
40 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
vote
1answer
161 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
88 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
votes
2answers
64 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
votes
1answer
204 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
vote
2answers
90 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
149 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 ...
-1
votes
1answer
34 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
votes
0answers
163 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)
...
0
votes
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
votes
1answer
444 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
vote
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
154 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
44 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
vote
0answers
43 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
vote
0answers
90 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
vote
1answer
134 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
votes
2answers
202 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
votes
2answers
466 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
183 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
votes
0answers
59 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
votes
0answers
193 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
71 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
votes
0answers
36 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
vote
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
votes
1answer
58 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
votes
2answers
46 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
180 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
votes
0answers
227 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
votes
1answer
358 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
votes
0answers
35 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
436 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 ...
7
votes
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
votes
3answers
833 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
votes
0answers
70 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 ...
1
vote
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
votes
3answers
405 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
vote
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
84 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
votes
2answers
91 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
465 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
63 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 ...
