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Questions tagged [models]

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1answer
34 views

Usage of calculations / models in decision making [on hold]

This is probably extremely naive and a dumb question but how are models used to profit? If firms use the same popular calculations / models in their decision making, wouldn't they all come to the ...
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1answer
39 views

Understanding Walter's Dividend Policy Model

I'm trying to understand the justification for the mathematical formulation of the Walter model (1956), which provides an equation for the price of a stock based on present value of dividends and ...
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0answers
33 views

Calibrate an HJM model in a multicurve setup

I am a mathematician and I'm working on my thesis on Financial Mathematics. I studied this model HJM in a multicurve setup: $$ \begin{cases} df(t,T)=a(t,T)dt+\sigma(t,T)dW_t & (\mbox{rik-free})\...
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0answers
64 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 ...
4
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1answer
51 views

Negatively Correlated Assets with similar medium-term trends

Theoretically, one could have stock prices with returns $\rho_1(k)$ and $\rho_2(k)$ having mean values $\mu_1$ and $\mu_2$, but still be negatively correlated with $$ \mathbb{E}[(\rho_1(k)-\mu_1)(\...
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0answers
58 views

What model do market makers in equity derivatives commonly use to price, hedge, and fit the IV surface?

What is the industry standard/common model used by market makers in equity derivatives to trade across the IV surface?
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0answers
27 views

Free DCF model database

Over the years, I have accumulated quite a few DCF models (some are my own and some are from others). I am wondering if there is any website where I can upload mine and download those of others so ...
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0answers
49 views

looking for a simple realistic parametric volatility model

Which parametric volatility is realistic to test quickly and qualitatively a model? I do not wish to fit market quotes but would like to have a non-trivial volatility with skew or smile to do some MC ...
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0answers
47 views

mean reversion model estimation - what method?

how can I estimate this model for mean reversion?
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2answers
360 views

Interest Rate Models cheat sheet - Need for advice

I'm trying to get through the litterature of interest rate models for some time now. As I don't have any experience working with them, I started looking for some kind of a cheat sheet that would ...
3
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1answer
93 views

Problem at deriving Bachelier formula with interest rates

In the Bachelier model, I have difficulties with a certain step. I want to figure out the distribution of $S_T$, which is the price process in the Bachelier model. So far I could state that ($\mathbb{...
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0answers
29 views

Has there been studies done on changes in model performance post-crisis?

My question is, has there been done any studies on whether the efficiency and accuracy of pricing and risk-management of derivatives using different models and algorithms has changed after the ...
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2answers
75 views

Is it possible to adapt Fama French Model with a 6 factor Model?

I am currently working on my thesis and I was wondering if it was possible to add a new factor to the five model one. This new factor would include the ESG's characteristic of the stock. I would like ...
1
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1answer
54 views

CRR model arbitrage free

I'm currently studying this proof In this proof the author defines a probability measure $$P^*[\{\omega\}]=(p^*)^{k(\omega)}(1-p^*)^{T-k(\omega)}$$ on $$\Omega=\{\omega=(y_1,\ldots,y_T)|y_i=\pm1\}$$...
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1answer
125 views

rationale for maturity adjustment formula in basel IRB formula

For capital requirement, rwa is computed as a product of terms including a K (unexpected losses). (As shown is the summary from wikipedia : https://en.m.wikipedia.org/wiki/Advanced_IRB ) K is ...
2
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1answer
104 views

What's the logic behind binomial model ups and downs?

I want to understand what is the underlying logic in the calculation of u and d in a binomial model. $$ u = \exp\Bigl(\sigma \sqrt{\Delta t} \Bigr), \quad d = \exp\Bigl(-\sigma \sqrt{\Delta t} \Bigr)...
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1answer
46 views

Sum disappearing when we assume constant some elements to be constant over time [closed]

I have the dividend discount model, which is the following expression: $$ P_{j,t} = \sum_{\tau=1}^{\infty}D_\tau(1+g)^\tau(1+r)^{-\tau}=\frac{D_{\tau+1}}{r-g} $$ Where $D_t$, is the dividend at time ...
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0answers
97 views

Architecture of a global pricing library with immutable payoffs

By global pricing library I mean a library handling equity, rate etc, hybrid products having several models (BS, LV, SV, LSV) having several numerical methods (analytic formula, MC, PDE FD/FE) I ...
1
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1answer
278 views

What is market standard model in equity, FX and interest rates exotics?

Is there any industry consensus about the model to use for pricing exotics in equity, FX and interest rates? I assume that for vanilla options they all use Black model, but how about exotics? Also, ...
2
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1answer
116 views

Standard GARCH(1,1) model with external regressors

I have a queastion how does a standard GARCH(1,1) model with external regressors in mean and variance euqations look like ? I know that standard GARCH(1,1) model without external regressors has the ...
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0answers
65 views

What kind of ARMA-GARCH model is that?

My question is what kind of ARMA-GARCH model is the following equation and how to specify it in rugarch R module: $$r_{t+1}- r_t = \alpha_0 + \alpha_1r_t+\...
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1answer
146 views

Good references on Heston Model?

I am looking for good bibliographic references on Heston Model and Stochastic volatility models in general. Does anyone know any good introductory/intermediate references on this topic?
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1answer
235 views

Natural Gas Modelling

In job adverts for natural gas/power trading it states knowledge of supply and demands models for these commodities. Does anyone know of any good papers or primers on S&D modelling?
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0answers
33 views

Determining the Relationship Between Monte Carlo Breaks and Model Volatility

I'm looking for a statistical test to understand the relationship (if any) between the model volatilities of a stochastic process, and the occurrence of 'break', defined as the instance when an ...
0
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1answer
104 views

Spreadlock derivatives

I would like to price a spreadlock forward swap and a spreadlock swaption but I don't find in the web any research article. Would you please provide me with some freely accessible papers on the web ? ...
0
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1answer
72 views

Single Model Accuracy Estimation

I'm working on a model to estimate CDS prices, and want to backtest it against a historical timeseries. What are some error/goodness of fit measures that I can use for this purpose outside of RMSE? I'...
0
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1answer
93 views

different Z-spreads for a same company

A same company has two different bonds. I expected the Z-spread to be close for both bonds (since my representation of the Z-spread is the spread due to credit-risk proper to the company). Here is an ...
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3answers
140 views

Besides arbitrage opportunities, are there other properties that real world markets cannot have

The article "What is ... a Free Lunch?" nicely explains why market models with arbitrage opportunity are unlikely to describe financial markets of the real world. Are there other properties of ...
3
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1answer
335 views

Scaling (Data prep) & Feature selection for the financial Data for LSTM Models

Overview I'm training an index e.g. FTSE100, where I have 8 years of past data (daily). I also have a list of its constituents. For each stock, I have the following features: ...
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0answers
195 views

Proof positiveness condition CIR dynamic

Ciao All. I'm studying the CIR model and this question came out. Usually the Ornstein-Uhnlenbeck dynamic is used to build the CIR model: let $$ dX_t = aX_t + \sigma dW_t $$ where $a \in \mathbb{R}$ ...
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2answers
721 views

What is model-free finance?

I have run across the term "model-free finance" (e.g. there was a Thalesian talk in London recently), yet haven't found any real definition of it nor anything really substantial. Could you point me ...
5
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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 ...
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1answer
75 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
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1answer
332 views

Short-Interest Rates Models - Geometric Brownian Motion?

in a paper of Brennon&Schwartz (1977), they model embedded bond options by using an stochastic interest rate model which follows a geometric Brownian Motion. Now they claim that this assumption ...
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2answers
774 views

What are the significant implications of the long-run average variance rate and why Engle won the Nobel Prize for ARCH model development?

In a ARCH(m) model we have $$ \sigma_n^2=\sum_{i=1}^{m} \alpha_i u_{n-i}^2 $$ where $u_i$ is defined as the continuously compounded return during day $i$ (between the end of day $i-1$ and the end of ...
3
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1answer
289 views

Relation between price changes and trading volume (market impact)

It is quite a well-know phenomenon that trading volume has an impact on a stock price: the more you buy the higher is a price because of demand increment. I'm wondering about models that can describe ...
3
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0answers
99 views

VAR models when examining relationships between financial markets

When researchers examine lead-lag relationships between credit default swaps and (as an example) stock markets, many use Vector Autoregressive Models (VAR). They want to find out what market "is ...
3
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0answers
90 views

Electricity Prices: Change of measure in practice

I'm working on a model of electricity prices. I have empirical data $X(t)$ and managed to find a reasonable fit given by a Levy process $\hat{X}(t)$. I understand in theory what a risk-neutral ...
1
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1answer
176 views

Why change numeraire for the LIBOR Market Model

There are two form of LIBOR Market Model that has a drift introduced. I would like to know in plain english explanation why do practitioners use these changes of measure. Are there any significance to ...
1
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1answer
145 views

How to compute the Value-at-Risk of an equity portfolio hedged using futures contracts?

I would like to have your opinions about how to calculate the VaR of a hedged portfolio using futures contracts. I have tried several "black box" softwares and none of them make too much sense. The ...
1
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1answer
297 views

Use of ACD to model transaction durations

I am using a simple ACD (autoregressive conditional duration) model with expoential or Burr distributed residuals and 1 lag, i.e. ACD(1,1). I am modelling durations for transactions data on a 'medium'...
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0answers
46 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 ...
8
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2answers
398 views

Confusion with volatility smiles implied by different models

I am reading a book "The concepts and practice of mathematical finance" by Mark Joshi. In Chapter 18 he discusses the shapes and dynamics of smiles under different models. I do not understand what is ...
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0answers
290 views

Basel Basic CVA Approach Model Foundations

I am working on CVA (credit valuation adjustments). The Basel committee released consultative document reviewing the CVA Risk Framework 'Review of the Credit Valuation Adjustment Risk Framework (2015)'...
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2answers
107 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 ...
2
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1answer
209 views

Mix of Arithmetic and Geometric Brownian Motion

Talking with some traders the other day, I found out that they were using a pricing model based on a mix between a geometric brownian motion and an arithmetic brownian motion to price certain ...
2
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1answer
121 views

Help understanding factor modeling, solving for residuals

I am trying to understand and implement a factor model, and I think I might be having some issues. I am trying to solve for the residuals in the equation: $$ R_{i} = \sum_{A=1}^{K}\beta_{iA} f_{A} + ...
30
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5answers
5k 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 ...
2
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1answer
192 views

Loss given default for Agency MBS

The question is regarding the LGD of Agency MBS. Although Agencies never defaulted, the Basel framework requires to calculate the Agency MBS LGD for capital requirement. The closest benchmark I can ...
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0answers
191 views

How to perofrm a simple GARCH simulation example?

How is it possible to simulate one million of tick data for, say EUR-USD price, using a GARCH model? For example, how do I simulate $X_i$ for $i = 1 \dots 1000000$, with $\text{mean}(X)=X_0 \...