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Questions tagged [modelling]

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16
votes
5answers
10k views

What is a regime switch?

I've come across the term regime switch in volatilities when reading about the modelling of interest rates but could not find a definition for a regime switch and what a regime is. Can somebody give ...
12
votes
8answers
6k views

Sources of Machine Readable News

I'm starting on a project that involves correlating and forecasting Forex time series to news releases. I'm aware of sources such as Thomson Reuter's machine readable news and Dow Jone's Newswire ...
11
votes
3answers
567 views

Why do people always seek finite-variance models for option pricing

For the purpose of getting fatter tails than the Guassian, I have seen people for example use $\alpha$-stable processes to model the stock. But in that case they end up using 'tempered' versions of ...
9
votes
3answers
5k views

Option Pricing Model Calibration In Practice

I'm curious how an option pricing model like the Heston model is calibrated in practice. Here's how I imagine it happens: Let's say I have access to the most recent option prices on a given stock ...
7
votes
3answers
1k views

The Basis of Using Technical Indicators as Inputs

In the process of my research I very often come across academic papers regarding modelling and trading strategies that in one way or another incorporate some technical indicators. For example in some ...
7
votes
2answers
1k views

Is it too important that my residuals be normal? I am Using an ARMA/GARCH model

I am trying to fit an ARMA/GARCH model to a time series. I found that the best candidate is an ARMA(1,0) + GARCH(1,1) with gaussian white noise It has coefficients with p-values near cero and the ...
5
votes
2answers
174 views

Extensions of CIR

I could need some advice on extensions of the CIR model. The standard CIR reads $dr(t)=\kappa(\theta-r(t))dt + \sigma \sqrt{r(t)} dW(t)$. A possible extension, if we would like the short-rate to ...
5
votes
1answer
156 views

Are processes with independent increments (which are not Lévy) used in finance?

From Jacod and Shiryaev's Limit Theorems for Stochastic Processes, we get the following definitions. Definitions: A process with independent increments (abbreviated PII) $X = (X_t)_{t \geq 0}$ on a ...
3
votes
2answers
8k views

Null and Alternative hypothesis for multiple linear regression

I have 1 dependent variable and 3 independent variables. I run multiple regression, and find that the p value for one of the independent variables is higher than 0.05 (95% is my confidence level). I ...
3
votes
3answers
694 views

CIR model and calibration

I am new to quantitative finance. We know that in the CIR model the short rate can't go negative. My question then concerns calibration of CIR to a ZCB yield curve. Is it (and why?) possible to ...
3
votes
0answers
684 views

GARCH modelling and forecasting

I have a few questions regarding GARCH modelling and forecasting and it would be great if someone could help me. I am modelling the log return of oil spot prices using various GARCH models: GARCH, ...
2
votes
1answer
155 views

Risk neutral modelling of a stock

Suppose a stock $S$ follows $$dS(t) = \alpha(t)S(t)dt + \sigma(t)S(t)dW(t),$$ where $W(t)$ is a Brownian motion under $P$. Also suppose there is a short rate process $r(t)$. My question would be is ...
2
votes
1answer
82 views

Which methods are there to determine the price of futures contracts?

Which method apart from the cost of carry model exists, and which works best in real life? How does the market expectations impact on the futures price?
2
votes
1answer
88 views

EGARCH formulation

I am a bit confused about the formulation of the EGARCH(1,1) model. First, we have the error term: $\epsilon_t=\sigma_t*\zeta_t$, where $\zeta_t$ is white noise. Now the EGARCH(1,1) should be: $$ log(...
2
votes
1answer
55 views

Forecasting default rates using a macroeconomic model

I am trying to forecast corporate default rates using macroeconomic data. I have a few explanatory variables (all the variables are explained in figure 2), which range from 2000 to 2017. On this ...
2
votes
0answers
3k views

Models for simulating FX movements

My goal is to develop a model to simulate long term FX movements. (I am not sure if long term makes any difference, but if it does I am more interested in long term fx movements) These Monte Carlo ...
1
vote
1answer
36 views

Passage from dates ranges to real numbers in modelling : which market practice?

Let's say I model a 6M forward Libor rate as a process $(L^1_t)_t$ that's a diffusion, with in view a Monte-Carlo (MC) pricing of some product. At some point I will have real life dates $T_i$'s that I ...
1
vote
1answer
110 views

Modeling independent variables that have an asymmetric impact on the dependent variable

I'm trying to regress a dependent variable on an independent variable that has an asymmetric impact. E.g., the dependent variable is much more responsive to an increase in the independent variable ...
1
vote
0answers
1k views

How to backtest Value at Risk Models using Conditional and Unconditional tests?

I am trying to carry out backtesting on a number of Value at Risk figures i obtained using var/covar, historical, and monte carlo simulation. The two methods im using are the Kupiec test (...
1
vote
1answer
459 views

LIBOR 3M and 1M from Vasicek model

I would like to discuss my approach toward modelling of interest rates with respect to its downsides and advantages. My problem is to forecast daily LIBOR 3M and LIBOR 1M over a particular time ...
0
votes
1answer
44 views

goodness of fit metric

I am trying to approximate the returns of asset A by means of a linear combination of other assets A'=aB0+bB1+c*B2.... I have this quite figured out but I'm not sure what a good metric for goodness ...
0
votes
1answer
159 views

Local volatility parametrization using the spot

Is it possible to estimate the local volatility using the spot price S at time t instead of the strike price K and the expiry date T ? Any help would be appreciated.
0
votes
0answers
43 views

Dependence modelling in Finance

we have copula as a function of cdf of random variables to describe how they are related to each other. I have one question in my mind that, how can we generate a new copula function?
0
votes
1answer
501 views

Margin modelling to backtest futures investment strategy

Let say that I have access to continuous daily time series for 20+ years of data for E-mini S&P 500 Index Futures. I have a long/short strategy to backtest that places orders either on open or ...