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Questions tagged [models]

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0
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1answer
43 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 ...
2
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0answers
76 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 ...
0
votes
1answer
150 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, ...
1
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0answers
52 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 ...
1
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0answers
58 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+\...
1
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1answer
98 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?
1
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1answer
173 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?
1
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0answers
31 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
votes
1answer
68 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
votes
1answer
62 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
votes
1answer
74 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 ...
1
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3answers
130 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
votes
1answer
282 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: ...
1
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0answers
104 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 $a \in \mathbb{R}$ ...
6
votes
2answers
683 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
votes
1answer
149 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 ...
1
vote
1answer
71 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
votes
1answer
289 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 ...
5
votes
2answers
651 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 ...
4
votes
1answer
273 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 ...
4
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0answers
94 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
votes
0answers
87 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
vote
1answer
151 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
vote
1answer
103 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
vote
1answer
226 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'...
0
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0answers
36 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
votes
2answers
339 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 ...
1
vote
0answers
270 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)'...
0
votes
2answers
95 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 ...
3
votes
1answer
176 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
votes
1answer
108 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} + ...
31
votes
5answers
4k 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
votes
1answer
185 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 ...
1
vote
0answers
153 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 \...
5
votes
2answers
282 views

How to derive this approximation of the risk-neutral expectation of the variance?

On the paper Bollerslev, Tauchen and Zhou (2009 RFS) the authors say about equation (15): The corresponding model implied risk-neutral conditional expectation $$E^Q_t(\sigma^2_{r,t+1})=E_t(\sigma^...
0
votes
1answer
93 views

Motivation: Stochastic Interest rate model

what is a reason that someone might be interested in a stochastic-interest model such as the Chen model? Also can you provide me with a link to an easy to read motivational paper/part of a paper on ...
0
votes
1answer
98 views

Why is the forward rate used for the underlying in Black's model?

Why is the forward rate suitable for being used as the underlying in Black's model? Thanks
12
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3answers
812 views

Validating a Credit Scoring Model without Data

Fellow Quants, Suppose you have a credit scoring model that is developed without the aid of statistics, because (unfortunately) there is no historical default/loss data in your portfolio. The ...
-1
votes
1answer
135 views

Where can I find data source for structural models?

I am starting a project to implement the Black-Merton-Scholes model from this book in R. However, I am looking for, ideally free, data sources. Still I have access to a Bloomberg terminal. Can you ...
8
votes
2answers
1k views

KMV-Merton Probabilties of Default vs Moody's EDF

Moody's used to publish probability of default estimates from their Moody's EDF model, but they have temporarily discontinued it. I understand that the Moody's EDF model is closely based on the Merton ...
2
votes
0answers
37 views

Specifying integration level of time series [closed]

Following model was estimated on 200 observations. How to specify the level of integration of $X_t?$ In brackets there are standard errors and p-value of Breusch-Godfrey test is also shown. $X_t=0,02+...
5
votes
2answers
712 views

Ideas about Stochastic volatility models

I am currently working on comparing different models for modelling the volatility and then pricing vanilla options (I use option prices on real stocks in order to calibrate my models and then I ...
1
vote
0answers
561 views

PDE vs TREE vs MC vs Analytical

One what basis the pricing model can be differentiated for particular trade pricing. For exapmle why PDE or Binomial tree or MC or Analytical method will be consider for pricing any trade. Question ...
3
votes
3answers
155 views

Parameters variation in fundraising financial model

I have created quite a large financial model in Excel with lots of input parameters which (after all calculations) have an influence on the output business indicators. Among the input parameters are ...
1
vote
1answer
23 views

Measure difference between estimations and historic returns

For every day in a year, I have the return on an asset and the CAPM estimation for the return. I want to measure the average difference between the set of returns and set of estimations. So far, I ...
1
vote
1answer
66 views

Is it possible that some types of financial systems can resonate?

Financial systems can certainly be modeled using the same tools physicists use to model dynamic physical systems. The validity of such is evidenced by models such as that developed by Black and ...
8
votes
1answer
332 views

What are the empirical limitations to testing market efficiency?

I have encountered a rather elegant argument about the limitations of empirically testing for market efficiency, involving the central point that we do not know whether a result is due to the "true ...
4
votes
1answer
891 views

ARIMA model, cannot get rid of low order ACF spike

I've gone through all the steps to fit a good ARIMA model - I plotted the data, I looked at the ADF tests, I looked at the ACF plot with no AR and MA terms just a constants. I came up with an ARMA(0,1,...
4
votes
0answers
98 views

Estimating Number of “Day Trades” from Total Volume of Commodity Futures Contract

Looking at futures data I am trying to calculate/estimate the number of "day trades", i.e. positions that were initiated and closed during the same day, as distinct from those positions that were ...
2
votes
1answer
243 views

Negative Eonia rates

I'm curious how the current negative Eonia (Euro OverNight Index Average) rates would impact derivatives pricing. Does it mean that if I post cash collateral to you, I also need to pay you interest? ...