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2 votes
1 answer
168 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
0 answers
41 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 ...
5 votes
0 answers
55 views

Predatory trading as a game of size

Predatory trading has been addressed in literature frequently. I have read for example Brunnemeier (2005) but that paper mostly addresses predatory trading surrounding a preexisting distressed trader. ...
1 vote
0 answers
46 views

Question about the "VolZScore" in this article about applying the Boids algorith to equities to find flocking behavior

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 ...
0 votes
0 answers
52 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 ...
0 votes
0 answers
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 ...
4 votes
3 answers
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 ...
0 votes
0 answers
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 ...
0 votes
1 answer
81 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
0 answers
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
1 answer
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 ...
0 votes
0 answers
41 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 ...
0 votes
0 answers
46 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 ...
0 votes
1 answer
71 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
1 answer
112 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 ...
0 votes
0 answers
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 ...
3 votes
2 answers
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 ...
8 votes
5 answers
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 ...
38 votes
2 answers
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
0 answers
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 ...
0 votes
0 answers
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 ...
3 votes
0 answers
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 ...
0 votes
0 answers
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 ...
0 votes
0 answers
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)...
0 votes
0 answers
40 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" ...
3 votes
1 answer
385 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 ...
0 votes
1 answer
395 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 ...
2 votes
0 answers
132 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 ...
4 votes
1 answer
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), ...
0 votes
0 answers
35 views

References/Direction on what functional of wealth to optimize for a given goal?

I seem to have gotten stuck trying to approach trading strategy development from a financial mathematics(?) perspective. To start, let: $T \gt 0.$ $\mathcal{T}$ be a closed non-empty set of $\mathbb{...
3 votes
0 answers
151 views

How to calibrate an O-U process based on historical data?

Background: I have been working on my master thesis project for the last few months and gave the final presentation on the 2023-06-01. As a part of the master thesis project, I did a complete ...
2 votes
1 answer
287 views

Is there a general approach to predicting future (vanilla) option prices in practice?

I realize that this question may be verging on asking for the proprietary/"secret", so if suggestion of a general approach that doesn't divulge details isn't really possible, I understand. ...
14 votes
2 answers
2k views

Models crumbling down due to negative (nominal) interest rates

Given that the negative interest rates on a lot of sovereign bonds with maturity under 10 years are trading in the negative (nominal) interest rate territory (recently also the short term EURIBOR has ...
11 votes
7 answers
8k views

What distribution to assume for interest rates?

I am writing a paper with a case study in financial maths. I need to model an interest rate $(I_n)_{n\geq 0}$ as a sequence of non-negative i.i.d. random variables. Which distribution would you advise ...
1 vote
1 answer
515 views

Understanding out-of-sample performance metrics for Realized Volatility

I fitted several models on a realized volatility process and then proceeded to obtain out-of-sample results. I'm struggling to interpret these results apart from to tell model A seems better than ...
1 vote
1 answer
131 views

Term Structure Modelling - Why model the state prices and not an asset or rate

When modelling stocks we specify the model in terms of the dynamics of the stock itself (e.g. in Black-Scholes, Heston and SABR - often denoted $S$). However, as I am reading about Term Structure ...
6 votes
3 answers
2k views

Modelling and forecasting mixed frequency financial data

I was wondering if someone could provide some guidance to me. I would like to Combine various financial data of mixed frequencies (some daily, weekly, some quarterly) to a composite index. I have ...
1 vote
0 answers
183 views

how to estimate Geometric Brownian Motion parameters on long timeseries [closed]

I'm working on a 50-years financial timeseries and I would like to simulate GBM paths from it. The first thing I'm supposed to do is to estimate the drift $\mu$ and the volatility $\sigma$ parameters. ...
19 votes
2 answers
3k views

How to build a regime-switching model which knows its own limits?

In recent months I've come to the conclusion that there are not only certain regimes in the markets (like bear or bull) but phases where all models fail because we are in uncharted territory. The ...
12 votes
3 answers
808 views

What is a commonly accepted econometric model for volume?

What is the gold standard econometric model for volume? Base model for price changes is the autoregressive (AR) model and GARCH(1,1) for volatility. Is there any survey about econometric models used ...
0 votes
2 answers
208 views

Is there any utility to being able to predict an assets current price?

I was playing around with some models, and I'm able to predict a stock's current price based on the current prices of other stocks. This model is extremely accurate, although I can't see any use of ...
1 vote
0 answers
45 views

Fitting model between security price and intraday volatility

I'm trying to construct a model which shows how much the closing price of a security ($P_t$) differs from the VWAP of that security on that day ($VWAP_t$). I'm calling this measure the "VWAP ...
0 votes
1 answer
136 views

Applying the Gordon stock model when there is one change in the dividend growth rate [closed]

Below is a problem I did. I am hoping somebody can confirm I did it correctly, or tell me where I went wrong. Problem: ABC Corp. has just paid a dividend of \$3 per share. You—an experienced analyst—...
0 votes
1 answer
227 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
0 answers
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
0 answers
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. ...
2 votes
0 answers
448 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 ...
0 votes
1 answer
178 views

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 ...
2 votes
2 answers
922 views

Why would exchange rates follow a geometric brownian motion?

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 ...
0 votes
1 answer
123 views

Out of Sample Results Decay Rapidly With Prediction Window or Embargo

So I am beginning to dabble my toe into quantitative finance and am trying to validate some model results and am having difficulty thinking about what they tell me. Here's my situation: I'm trying to ...

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