# Questions tagged [modeling]

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### What are the most common methods to model fat tails in the changes of asset prices?

I was wondering what the most common, or most popular, ways - in both academia, and industry - there were to model the fat tails of volatility in asset prices changes. I am presuming a basic Brownian ...
179 views

### Preferred Option pricing model [closed]

I am at Uni studying mathematical finance and wanted to know which is most preferred /widely used model by Finance Industry Practitioners from the list below. Fourier Transform for option pricing ...
1 vote
52 views

### Modeling compounded RFRs with Vasicek

I’m wondering if simple interest rates models, like Vasicek, could be successfully used for modeling compounded setting-in-arrears rates (compounded SOFR for example)? As far as I see I can do that ...
69 views

### Predatory trading as a game of size

1 vote
46 views

In this article, "Flocking behavior of US equities": https://www.cs.dartmouth.edu/~lorenzo/teaching/cs174/Archive/Winter2013/Projects/FinalReportWriteup/ira.r.jenkins.gr/final.html They use ...
56 views

### How to mathematically model Bid and Ask as two separate processes, and combine into a Price process?

Let's say you were modeling bid and ask as two separate processes. With their own mean and variance. And with the constraint that ask must be greater than or equal to bid. How would you then ...
36 views

### Option pricing model adjustments in practice

I’m trying to understand significant differences in theoretical options pricing data that I‘m seeing. I’m new to this, so I suspect I’m missing something obvious. Taking a fixed set of inputs 1, when ...
4k views

### Geometric brownian motion vs. Ornstein Uhlenbeck

I'm looking at the SDE of Geometric brownian motion(*): $$d X(t) = \sigma X(t) d B(t) + \mu X(t) d t$$ (with analytic solution $X(t) = X(0) e^{(\mu - \sigma^2 / 2) t + \sigma B(t)}$) and the SDE of ...
35 views

### YUIMA: Drift and diffusion parameters must be different?

I am currently working with the Yuima package and trying the estimate the parameters of a CARMA(p,q) model to real data. Using the eacf function of the TSA package a ARMA (2,1) process is recommended ...
83 views

### Simulating the Term Structure of Interest Rates in the CIR model

I have successfully implemented the CIR model of the short rate, and now want to use these short rate paths to construct distributions of various tenors - 2y, 3y, 5y, 10y for example - across the ...
1 vote
35 views

### Inverse differencing in continuous time

I want to fit a continuous time ARMA (CARMA) model to traffic data $T_t$. After removing trend and seasonality I need first order differencing to obtain stationarity. Then I fit a CARMA model (yuima ...
1 vote
94 views

### How to construct continuous futures contracts with multiple maturities

I am trying to replicate the Schwartz-Smith (2000) model and having an issue understanding what the data is and how to generate it. Specifically, the authors use a table of continuous futures with ...
42 views

### Risk aversion and inter dependency in finance

In almost all papers that I read in quantitative finance trying to model a situation where several financial agents interact the distribution of the individual risk aversion is considered as ...
48 views

### Explicit pythonic building of Flat Forward Curve using Changes assumed from central bank meetings to price FRAs

This question is related to the following questions asked previously, primarily the first: Using QuantLib to build Flat Forward Curve using Changes assumed from central bank meetings to price FRAs ...
72 views

### Two-period binomial model probability question

I have started to work with given two period binomial model S(0)=100 u=1.25 d=0.8 r=0.05 and the market probability of stock going up each period is p=0.55. I am trying to calculate two probabilities; ...
1 vote
114 views

### Is the impact of "small" orders on market dynamics more than is commonly assumed?

When modeling the dynamics of a market, a common assumption is that the impact of a "small" (e.g. very low percentage of daily traded volume) order on current and future observations of the ...
71 views

### Potential Future Exposure for vanilla swap

I need to calculate the PFE for vanilla swap. I wonder if it makes sense to simulate the MC scenarios with a 1-factor Hull white model. In my opinion, this model only allows parallel curve ...
375 views

### Is there an efficient method or technique to find an arbitrage between two FX dealers?

Crossposted on Mathematics SE I was able to solve the following problem and find the arbitrage but only after spending a long time on it and trying out different possibilites. Is there a method or ...
9k views

### Predicting price movements on a betting exchange

On a betting exchange the price (the odds that an event will happen expressed as a decimal, 1/(percentage chance event occurring) of a runner can experience a great deal of volatility before the event ...
15k views

### How useful is Markov chain Monte Carlo for quantitative finance?

Naively, it seems that Bayesian modeling, structural models particularly, would be quite useful in finance because of their ability to incorporate market idiosyncrasies and produce accurate ...
1 vote
87 views

### Climate Models in Banking - what modeling are banks currently doing?

I'm mostly interested in knowing what banks are doing in Ireland and other Western European countries. I know, from Google searches, that banks are currently doing climate risk stress-testing, but I'm ...
52 views

### Modelling support and resistance using sde

This initiative was sparked by the identification of cointegrated pairs, fitting them to an OU process, and devising an optimal strategy based on the OU process—areas that have already been well ...
156 views

### Models for tick-by-tick / high-frequency data

I've spoken to one or two persons at some market making shops, and I'm under the impression that for modelling tick data, aside from the rise of ML, a pure jump process such as the variance gamma ...
77 views

### Loan modelling using Opensource risk engine (ORE)

The problem is to calculate the cash flow schedule for a simple fixed rate loan where principal amortization periodicity is not equal to interest payment periodicity. For example, amortization is ...
273 views

### Is there a common way that level 2 and time & sales data are analyzed together?

Let's say that for a single asset, we have a data stream from which we receive both level 2 order book updates (price level/quantity updates) as well as time & sales updates (grouped recent trades)...
42 views

### Pricing non-vanilla options on EuroStoxx50 dividend futures

Liquid vanilla EuroStoxx50 dividend futures options quoted on Eurex are calls or puts whose expiries are the same as the expiry of the underlying futures contract. Is there any "simple" ...
390 views

### Target variables in high frequency trading [closed]

Given that we are a market taker (removing liquidity from the limit order book through market orders), what should we be trying to forecast? It seems like the most pertinent thing for us to forecast ...
398 views

### How are order book and trade data consolidated/distilled into a more(?) tractable form for modeling?

Let's say that there's some asset traded on an exchange and that, for this asset, I have access to a snapshot of the limit order book (price level and quantity for bids and offers) and subsequent ...
133 views

### Is there daily SPX level data going back to 1927?

While attempting to model the SPX index over time, I found a source here that purportedly has historical daily SPX data going back to 1789 which very likely seems to be backcasted since the ~500 stock ...
362 views

### Credit Rating vs Bond Yield

I am looking for some references on quantifying the dependence between credit rating and bond yield. I have some data (found some Bloomberg indices which give average yield based on credit rating), ...
35 views

230 views

### Separating jumps and diffusion

I want to model energy prices. I have two markets, lets say market 1 and 2. Market 1 is continuously traded, and I will assume it follows brownian motion. So the value of the asset could be defined ...
1 vote
71 views

### Methods of predicting liquidity consumption

Let's consider limit order book for a certain stock. By liquidity consumers i mean traders that buy/sell shares using market orders. What are the known methods/models for predicting total amount of ...
1 vote
88 views

### Replication of results shown in 'Empirical Asset Pricing: The Cross Section of Returns' by Bali, Engle, and Murray

I'm currently trying to reproduce some results shown in the book 'Empirical Asset Pricing: The Cross Section of Returns' by Bali, Engle, and Murray. More precisely, I try to compute Table 7.3 and 9.1. ...
449 views

### VAR models for log-returns?

I am wondering if Vector Autoregression (and other autoregressive models) is a sound modelling for the daily (not high-frequency!) log-returns of time series from liquid financial markets. One can ...
I'm reading Shreve's Stochastic Calculus for Finance. On page 382, he begins talking about exchange rates: Finally, there is an exchange rate $Q(t)$, which gives units of domestic currency per unit ...