Questions tagged [models]

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Running several sets of assumptions through a model in excel [closed]

Hello and thank you in advance for your help! This question is for excel. I have created a dynamic model which outputs estimated annual interest revenue, and it depends on 5 inputs (average term ...
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53 views

Validity of Bermudan Swaption's Price/Greeks

I'm implementing a lot of stochastic models on my own for fun and I'm quite puzzled about the usual procedure concerning the correctnes of Bermudan swaptions prices and greeks ? How can you tell that ...
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Adequate model to payoff

Consider a payoff that pays a certain amount N of a vanilla Call (underlying: S, Maturity= T, strike:K). Every semester date Ts before T, if S>K(Ts), then N is increased by 1. This product seems ...
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1 answer
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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—...
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A question about the Grossman-Miller Market Making Model

I don't have any solid background in finance, but I have a strong mathematics and physics background. I am reading Algorithmic and high-frequency trading from A.Cartea, S.Jaimungal and J.Penalva, CUP (...
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Italy Zero Coupon Yields

I am looking for historical data for Treasury bills and bond yields for Italy on a monthly or daily basis. Where can I get this data?
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Replacement for LIBOR Market Model (LMM)?

With the transition from LIBOR to SOFR, will the LIBOR Market Model be replaced by a new model? Perhaps this has already happened. If yes, what is this new model? If not, will the LIBOR Market ...
1 vote
1 answer
131 views

Expectation of the negative exponential utility function for a Grossman and Miller model

I have the standard $3$-period Grossman and Miller model with $2$ outside traders and $M$ market makers. I'm told: $W_t^{(1)}, W_t^{(2)}, W_t^{(m)}$ is the wealth of the first outside trader, second ...
5 votes
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What are the requirements for no arbitrage to exist in a chaotic/dynamical system?

Consider the continuous dynamical system $$\alpha\ddot{S}+\dot{S}=\mathcal{F}(S,t),$$ such that $\alpha\in\mathbb{R}$ and $\mathcal{F}$ is real and analytic. We assume that if a solution for $S$ ...
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Instrument clustering to maximize model prediction accuracy

I've been developing models for crypto trading. Usually, I use a group of about 25 of the larger market cap currencies and train a model on all of them, however, sometimes I'll use fewer while ...
7 votes
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Seeking criticism of model assumptions

I have been trying to publish a new calculus and options model for seven years. I have been consistently desk rejected, so what I am trying to do is get criticism of my assumptions because they ...
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1 answer
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Heath Jarrow Morton Framework

Can someone please explain Heath Jarrow Morton framework ? Why do we use it ? I understand the logic between equilibrium models and no arbitrage models but i'm struggling to understand the added value ...
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How to define a model's alpha stability?

I find my portfolio's alpha changes with market conndition, although beta doesn't change much. Is there any way to measure alpha's stability? How to make alpha more stable? Thanks.
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2 votes
1 answer
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Put-call parity on SPY

I'm currently trying to model the IV curve for calls and puts on SPY using the Black-Scholes model with dividends. I'm able to calibrate the risk-free rate and dividends so that both ATM IVs match, ...
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10 votes
2 answers
852 views

Risk Model Validation

I have such a general question regarding risk model validation. Which tools are most often used for validation and how does the process work? Could you recommend any books that focus on this topic?
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Why are implied parameters preferred over expectations of future implied parameters?

For example, when we price options on assets under the Heston model, we often compute the volatility of the volatility of the price of those assets implied by the market at time $t=0$ using the market ...
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Algortihm for distributing volume for 1min candle

Context: I have historical 1min prices for stocks, including premarket. However, when importing real-time data, the standard practice in the financial data industry is to give only OHLC (open, high, ...
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1 answer
187 views

Geometric brownian motion small timesteps high volatility

I'm trying to generate some sample geometric brownian motion paths for an asset which is traded 24/7 without interruption and is highly volatile (upwards to 150% implied volatility on options markets)....
3 votes
1 answer
155 views

Non-constant Volatility of the Volatility in Stochastic Volatility Models

In pricing financial derivatives, we often first assume that the volatility of the stock price is constant. $$\mathrm{d}S(t) = \alpha S(t) \mathrm{d}t + \sigma S(t) \mathrm{d}W(t)\text{.}$$ The ...
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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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1 answer
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Margin Requirement model for CCP and non-central cleared OTC derivatives

What the models for computing margin requirement for central counterparty (CCP) and non-central cleared OTC derivatives.
8 votes
1 answer
602 views

Bermudan Swaptions - Payer vs. Receiver (LGM)

There is abundant literature discussing the pricing of Bermudan swaptions and the relevance of single-factor Markov-functional models (e.g. LGM) versus multi-factor market models (e.g. LMM). From a ...
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Model Documentation role [closed]

first timer here,I received an 'inmail' on linkedin from a recruiter regarding a role in model documentation team as part of the quantitative modeling and analytics department of a 'global bank'. The ...
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Career Advice Model Documentation Role (What is it exactly? and transition to wider quant role in future, can't find info online) [duplicate]

first timer here,I received an 'inmail' on linkedin from a recruiter regarding a role in model documentation team as part of the quantitative modeling and analytics department of a 'global bank'. The ...
0 votes
2 answers
73 views

References on cashflow modelling for private equity

I would like to build a model to predict capital calls and distributions of a private equity fund. The first question is: does any of you can address me towards the state of art for it? also machine ...
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1 answer
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Approach for studying price gaps in US equities

A price gap is defined as any day when the high / low / close price bar for that day does not overlap the previous day’s high / low / close price bar. I am interested in studying stock price gaps ...
4 votes
2 answers
247 views

what does the cover page of Guyon and Labordere's Nonlinear Option Pricing represent?

It could be a bit offtopic, but I don't see the link between the contents of the book and the cover page. Thanks
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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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Quantitative Model classification

In the world of Quantitative model risk management, can you please tell me what is Model 1 type, ...
0 votes
1 answer
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Can I dynamically change hyper-parameters of a model?

Question Can I apply different hyper-parameters for different training sets? I can see the point of using the shared parameters but I cannot see the point of using shared hyper-parameters. The ...
1 vote
1 answer
208 views

Stochastic volatility Levy models

Hey I have some questions about stochastic volatility for Levy processes. If I understand correctly, if we change the time in Levy's process by CIR process, the newly received process is not Levy's ...
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modelling FX with crosses: USD conversion on entry and exit, or just exit?

I am backtesting a model that trades currency crosses (i.e. EurGbp) at a fixed $1 mln per trade and was curious if I need to a) account for my currency exposure to GBP on both ends of the trade or b) ...
1 vote
1 answer
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Loan level model to understand drivers of mortgage prepayments

I am following up from my question here. As described there, I'm trying to assess the drivers of CPRs for a type of MBS. However, I want to understand, how a loan-level model of such a relationship ...
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1 vote
1 answer
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How to set up data for understanding drivers of prepayments

I would like to understand the drivers of prepayment of a certain sector of MBS. I have some explanatory variables that I think would explain the actual CPR's and want to model the prepayments through ...
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Is there a framework to study quantitative model robustness/uncertainty?

Can you point me to any resources about a possible framework to analyse and possibly quantify model uncertainty and -robustness associated with quantitative investment models? As an example, there ...
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Linear programming optimization problems in finance

I'd like to know what are, if any, the applications of linear/non linear programming optimization techniques for financial markets. I'm a business major, and I want to find an argument for my thesis ...
1 vote
1 answer
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Interpretation of parameters in the CGMY model

I would like to understand role of parameters $C,G,M,Y$ in CGMY model, especially $G$ and $M$. The Lévy measure is $$\nu(x)=C\frac{e^{-Mx}}{x^{1+Y}}1_{x>0}+C\frac{e^{-G|x|}}{|x|^{1+Y}}1_{x<0} $$...
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Inter-temporal structural stability of stock markets

For my bachelor thesis I am trying to determine structural stability of some stock market in the following way: Identify an ARMA model for the whole sample Split the sample in two parts, and estimate ...
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4 votes
1 answer
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What does it mean that model can reflect the ”volatility smile”

I know that implied volatility is the value for which the Black Scholes model returns the correct option price. I also know that if we plot the volatility on the strike price chart, we will see "...
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I just got Matlab, what are some options that I should model in a jump diffusion

Don't worry I understand mathematics: ito's calc, martingales, etc. I am just curious what options I should test, and from what indices. Is there stuff I can test from the 2008 crash to measure their ...
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Is it always better to use the entire distribution of a financial returns series, not just $\mu$ and $\sigma$?

In finance models that use historical returns for inputs, including option pricing models, forecasting and portfolio optimization, only the statistical moments of the returns distribution, $\mu$ and $\...
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Market Making Formulation

I'm developing a deep reinforcement learning based approach to market-making. In order to implement this, I need to define the appropriate actions and define environmental steps. While doing some ...
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What's the industry standard/typical way to model contango or futures spreads?

If you want to include futures spread either as a response or predictor, I would imagine you also need to include time to expiration somewhere in your model. What is the industry standard way to ...
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Does anyone have codes that would solve the multi-period Kyle model?

Whenever I begin working on something new, I like to find existing examples of how things are done so that I can double check at least the basics before moving on to more complicated problems. I am ...
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1 vote
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Why are cashflows "modelled backwards in time"?

A am currently reading a manual on how to use some actuarial modelling software to project the expected liability payments made under an annuity contract. In this guide, the following statement is ...
1 vote
1 answer
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Overview of frequentist, likelihood and Bayesian approaches to finance problems

In quantitative finance tasks (asset pricing, portfolio optimization, option pricing, volatility forecasting, etc), there are frequentist, likelihoodist and Bayesian approaches or interpretations to ...
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Modelling considerations for a jump model

The Problem: Suppose I have a simple jump model for an asset price $$ dS = S(t-)[\mu dt + YdN(t)] $$ where $N(t)$ is a Poisson process and $Y_i$ are the jump sizes (assume independece of $N(t)$ and ...
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Anyone got references where we can find examples of codes for agent-based simulations of financial markets?

I'm looking for references with codes for trying out simple agent-based simulations for modeling financial markets. I mostly worked with MATLAB and R, but I know a bit of python and I am learning C++ ...
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2 votes
2 answers
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Closing prices are predicted very well but returns are predicted poorly

I'm learning some time series analysis and forecasting techniques, I've tried to predict stock prices for Netflix but I'm very confused. At first I've tried Auto ARIMA which gave me a straight line, ...
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Is it possible to build a computer model to simulate a market to prove whether efficient theory is true or not?

I know this may sound stupid. But I had this idea and wanted to try it out for a college project. Has this been done before? If and what's wrong with this idea?
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