Questions tagged [modeling]

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0answers
30 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 ...
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22 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. ...
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1answer
70 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 ...
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2answers
211 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 ...
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1answer
86 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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63 views

LIBOR Rate in Short-Rate Models

Hey I have problem with understanding the relation between short rate $r$ and LIBOR rates (which we need to calculate payoff from FRA, Caps, Swaption etc.). We know that Zero-Coupon Bond price is $$P(...
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0answers
37 views

Hull-White model for yield curve prediction

I am using the Hull-White model (extended version of Vasicek) to predict Canadian zero-coupon bond yield curves. Most of the time the model does a pretty good job of fitting the real curve in terms of ...
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1answer
187 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 ...
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44 views

Ideal daily leverage assuming Laplace distribution

Assumption; Laplace distribution is a reasonable representation of an index daily change. Starting out with index historical annualized CAGR and standard deviation. I find the Laplace distribution ...
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0answers
59 views

Does anyone have all of Paul Wilmott's "Spreadsheets and VBA" files?

I couldn't find it on his website and the only ones I have are the files contained in the Introduction to Quantitative Finance's CD.
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1answer
734 views

Can an IRS have a different payment calendar by leg?

I have to model IRS in an IT system and I have a question related to this modeling. Can an IRS have a different payment calendar by leg ? Thanks and regards
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0answers
30 views

How to estimate lambda from NAGARCH submodel in R

I am trying to estimate the model="fGARCH", submodel="NAGARCH" from the rugarch package in R. However, when I am estimating the parameters, only omega, alpha, beta and gamma are ...
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2answers
239 views

Is it a problem that there are so few stocks in the generalized Black Scholes market? [duplicate]

In the standard Black Scholes market there is only one stock. In the generealized market there can be a finite amount, but my impression is that there are few stocks in the market. The real world ...
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1answer
123 views

Reconciling Two Claims About Volatility Under Fat Tails

I have read the Wikipedia article on volatility, and Nassim N. Taleb's Incerto, and found two statements attributed to Mandelbrot's views, which appear to be in contradiction. Taleb (who was mentored ...
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1answer
76 views

Generalized Linear Mixed Model (GLMM) for the probability of default of corporates

I work in the financial industry and we want to implement an internal rating model for our clients (think corporates large or mid , banks etc. some listed on an exchange some others not). We want to ...
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1answer
59 views

Non-fixed stationary "conversion"

Dear users of StackExchange, I was wondering why the log returns of a fixed period of time is such a common use in "transforming" a time series into a more stationary one? I thought that ...
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0answers
53 views

Do we model stock prices using non-Markovian processes in continuous setting?

In a continuous setting, is it common to model stock prices using non-Markovian processes ? If so, do you have some examples of models ? Or is Markovianity something "embedded" in the ...
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44 views

How do I deal with nonexistant data in a time series with an irregular frequency?

I am trying to do some time series analysis on the margin resulting from three specific commodity futures contracts and ultimately forecast the margin. The margin is calculated as M = F1 + F2 - F3. I ...
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109 views

In Lopez de Prado's Advances in Financial Machine Learning, what is meant by "unnecessary labels"?

In Lopez de Prado's Advances in Financial Machine Learning, Chapter 3, Prof. Lopez de Padro talks about dropping rare labels: ...
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0answers
47 views

Kalman Filtering theory and application in Finance models under asymmetric or incomplete information

Why do we need Kalman Filtering theory in dynamic models in finance when we consider an environment of asymmetric or incomplete information? I understand that this has to do with the update of the ...
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46 views

Which exact interest rate should I use for valuing equity index futures (ie. SPX, MXEA)?

I'm trying to build a model that values futures for equity indicies like SPX. For example, this product link here. I know that the model is simple (please correct me if I'm wrong): $$ S_{T} =S_{0}e^{(...
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0answers
148 views

Other statistical financial modeling textbooks like Risk and asset allocation by Attilio Meucci

I recently read about the book (Risk and asset allocation) written by Attilio Meucci and I found those statistical modeling and inference methods quite robust in my point of view, although there are ...
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1answer
69 views

Should stock return series be modeled with a parametric distribution, or an autoregressive function? [closed]

If I have prior knowledg that a stock return series follows a parametric distribution, such as a Student t-distribution with 4 degrees of freedom, without actively looking for prior knowledge of ...
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1answer
399 views

Mean Reverting Heston Model?

Is there a name for a variation on the Heston Stochastic Process Model where not only the underlying volatility but the asset price itself is mean-reverting? I'm looking to model long term equity ...
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0answers
21 views

What are different types of response variable we can consider while developing quant model

I was trying to understand the response variables used in the quantitative trading/investing model development. This question may not look good but I searched on google and could not find results. ...
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1answer
252 views

Why do we not use copula for forward starting options?

Why do we use copulas for spread options but do not use them to correlate random variables across time, such as in the forward starting option?
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0answers
47 views

Quantifying Mortgage Refinance Incentive: Why define the Refi Incentive as the log of Mortgage Rate/Market Rate

I'm reading this research article, where they are using survival analysis to study mortgage prepayments. In this article they define the mortgage holder's incentive to refinance as: $Refi = log(Mr_t$ $...
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1answer
153 views

PnL due to model recalibration and its relationship with hedging error

Consider the case where at t=0, I calibrate my model to the market, but at t=1 my model is no longer able to recover the price in the market, so it needs recalibration. Say I have delta hedged my ...
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1answer
45 views

In your experience, when trying to predict something that occurs, do you model with a fixed time period?

Let's say you are building a simple model (like the classroom examples) of trying to predict, given past information, if the stock goes up or down in the future. One could, like in classroom examples, ...
2
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1answer
139 views

Do different prices under different models admit arbitrage?

There are many models for interest rate. If two people use two different models to price the same interest rate derivative, and come to two different prices, doesn't that admit an arbitrage? How ...
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0answers
164 views

How are Autocallables modelled?

What models are used to price autocallables ? Should we talk about Heston/SABR models which talking about this topic ? Any reference link is welcome.
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0answers
89 views

Is there a good book/blog on applying statistical methods in finance? [closed]

I am learning a lot of tools in statistics, but I am having a hard time figuring out where I could apply these methods in finance, especially in relation to investment and trading. Is there a good ...
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0answers
62 views

Searching for two papers of H.Leland with regards to capital structure

I am searching for two papers of H. Leland which I assume previously were online, as many published papers have cited them. The first work (Lecture notes) extends the Leland(1994a) model by ...
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1answer
75 views

Calibrate a model parameter with an error function

Suppose I want to find the implied volatility using an option model from market prices. Surely I can find the implied volatility for each strike price ($k$ different strike prices) for a given ...
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2answers
604 views

Pros and cons of mean equation equal to zero in a GARCH model

I fitted a standard GARCH model. The mean equation has no AR or MA terms. All the coefficients in the variance equation are significant at 5%. However the mean equation has a constant term equal to ...
2
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0answers
76 views

tick/book data vs bar data, worth the infrastructure investment?

For reference, I am talking on behalf of a small group of math/stats graduate students as well as software engineers (we are 6 total), we know each other for years and decided to make a small (private)...
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0answers
81 views

modelling known regime shifts

I wish to model a price time series with a known regime shift: electricity price before during and after the introduction of a carbon price. The time series looks like this: you can see the jump in ...
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3answers
209 views

Insight on how factor models achieve dimensionality-reduction?

Going through the literature on factor models, I keep seeing the phrase "dimensionality reduction" and how factor models allow for the modelling of assets in high-dimensional cases, and I would ...
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0answers
86 views

Framework for analyzing transaction history

After many years of being discretionary trader I'm finally moving to systematized trading. I have all the transaction history from my broker I want to be the basis of my models. Is there a framework ...
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0answers
53 views

Measuring corporate size relative to world GDP

I'm working o a model where corporate revenue / world GDP is a dependent variable of some stuff (based on the model proposed in this paper: http://www.scielo.br/scielo.php?pid=S1807-76922009000200002&...
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1answer
267 views

Why do Factor Models set up their factors differently from regression?

While this may be awkwardly-titled, I hope that my question becomes clearer upon reading. So this is what I gather about Factor Models: they are statistical models set up to explain the returns, ${...
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1answer
439 views

Exponential Smoothing - Alpha greater than 1

Simple stats question. I'm having trouble finding anything in the literature as to why the smoothing coefficient can never be greater than 1. This question was started by me doing time series ARIMA ...
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1answer
89 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
71 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.
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1answer
224 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 ...
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1answer
170 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'...
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1answer
131 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 ...
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3answers
324 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
79 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?
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1answer
979 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 ...

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