# All Questions

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1answer
45 views

### Are total return indices adjusted for tax?

Just curious about the total return index for stock such as S&P 500 TR, is the index typically adjusted for tax on dividend when accounting for calculation on the total return index?
1answer
45 views

### stochastic interest rate in binomial pricing model and in continuous models

Is the interest rate allowed to be truly stochastic in the binomial pricing model and in continuous models so that we are still able to switch to the risk-neutral measure? Shreve mentions multiple ...
0answers
78 views

### Is it possible to compute implied returns from volatility?

If we assume that, broadly speaking: Assets in liquid markets are fairly priced to its value Volatility is predictable (volatility clustering, GARCH, etc) Investors are rewarded and earn a return for ...
1answer
47 views

### Barra model: why standardize the fundamental risk factors?

The two main types of risk factors included in the famous Barra model are called the "fundamental factors", and "industry factors," and the thing that I do not understand is why are only the former ...
1answer
55 views

### Yearly ytm calculation on stock using binomial model

So I have been given this problem in class, and although I have no issues doing the binomial model on options, I cannot seem to get my head around the problem when its calculating ytm on just a stock. ...
1answer
53 views

### Dendrogram/cluster analysis of correlation matrix

First post, hope I'm explaining things sufficiently clearly. I want to take a universe of potential, trade-able instruments and allocate them to portfolio managers. Traditionally, this is done using a ...
1answer
26 views

### How to calculate a weighted payback rate and period?

I have a client who borrows and repays money at different times. Assume the following example What is the correct way to calculate the repayment rate and more importantly, the time until repayment (i....
0answers
7 views

### Data source for Google Perspective Comment Analyzer [migrated]

I am looking at Google's Perspective Comment Analyzer. On Github they have posted sample data here. This has only 2k rows, is there any location where I can find a more comprehensive labelled data ...
1answer
52 views

### Measuring liquiduity of a portoflio of bonds

I'm currently looking into applying bond liquidity out of curiousity. The Method i'm currently using is the Barclays LCS score (live.barcap.com/publiccp/RSR/nyfipubs/barcap-email-mkting/qps/LCS_In-...
1answer
112 views

### Stochastic process for interest rates allowing negative values

The Cox-Ingersoll-Ross process for the short term interest rate r(t) does not allow r(t) to become negative, but short-term rates are negative in much of the developed world. To account for this, do ...
2answers
91 views

### Option quotes or trades: Which one is more informative?

Suppose I have quote data as well as real transaction of option contracts? I was wondering if the informational content is the same. On the first hand, quotes show the intention of seller/buyers on ...
1answer
53 views

### How can I forecast the Exponential Moving Average of the next day?

I am trying to forecast prices with exponential moving average method. The equation for EMA = [(Closing * k) + (EMA(y) * (1-k)] where: Closing is closing price of today, k is the weighted multiplier, ...
0answers
39 views

### Switching to forward measure

I am trying to follow the wiki article on forward measure (https://en.wikipedia.org/wiki/Forward_measure), and can not understand how the change of measure was performed here: As I understand the ...
1answer
120 views

### How to quantify the Variance Risk Premium (VRP) with probability density functions?

The VRP is usually displayed by charts like this one: It's easy to see that, for most of the time, options are priced by using volatility which will reveal itself larger than the realized one. So VRP ...
0answers
36 views

### How to normalize stock exchange indexes

I am doing an academic research in behavioral finance and I need to calculate my abnormal return based on the normalized returns of the stock exchange index being the S&P 500. In other words, I ...
1answer
48 views

### Can someone explain to me the intuition behind the discount factor for this simple payoff? [closed]

Let's say you enter into a contract today in which in time t, you receive the difference between the underlying stock price and 100. Denote the stock price as S. Why is today's value of such a ...
2answers
99 views

### Why do we need event-driven backtesters?

I am reading this article at quantstart regarding event-driven backtesters. It seems to me that the main advantage of using an event-driven backtesters is that it avoids look-ahead bias. Usually I ...
0answers
21 views

### How to Risk and Return using Carhart 4 factor model

I have to calculate firm risk and return for a group of firms. I have firm CUSIPs. I also have access to CRSP data from WRDS. Can someone explain to me how I can use CRSP and data from Ken French’s ...
0answers
49 views

### The error term of Hagan's approximation of Black's vol in SABR

Hagans approximation of Black's implied vol in SABR is very! difficult to understand fully. But I want to ask in here if anyone can tell me more about the error term. Consider the paper: http://web....
1answer
38 views

### Sensitivity Approximation - Crank Nicolson

I am looking into a new method of calculating sensitivities starting off with a proof of concept with Black Scholes PDE. Suppose I want to calculate Rho and take the derivative of the PDE (heresy!!) ...
1answer
56 views

### Convert volatility to yield

I have an elementary bond volatility math question - if 5y black vol is 38 and normal vol is 68, and the yield is 1.85%, how do I calculate 1 stdev in yield terms? As in how many basis points (or ...
1answer
68 views

### How do we calculate option payoff before expiration?

I am trying to simulate a bull spread option and I have used an online tutorial to calculate payoff at expiry but I am having difficulty simulating the payoff ...
0answers
37 views

### How to measure synchrony in financial time series

I have a multivariate time of series of monthly capital flows, the data is stationary and after plotting the all series together in one graph, the oscillatory was very clear in trends of the variables....
1answer
48 views

### What are the best relative value frameworks for Corporate Credit?

Fixed Income (Credit) fair value models in the literature tend to be variations on cross-sectional regressions. For a recent example in a factor-model setting, see here. My understanding is that this ...
1answer
33 views

### Mapping internal ratings to external ratings for a scorecard

I am building an internal rating model for commercial loans relying on expert-based scorecards. The ultimate goal of the exercise is to develop the model so that it maps with credit rating agencies' ...
1answer
50 views

### Binomial Option Pricing Model

This isn't homework. I'm going through sample questions for an exam. They include the answer, but no explanation. I've studied this model, but I don't know how to setup this tree to get any of the ...
1answer
79 views

### Trading 3 stocks X Y Z where X cointegrated to Y, Y to Z, but no other cointegration is available

Suppose you have 3 stocks, say X Y Z. You also know that X is cointegrated to Y using some test (say ADF) and Y is cointegrated to Z. However, no transitivity, and no threesome cointegration ...
2answers
98 views

### Converting 30day annualized vol to 2day annualized vol

I would like to convert 30-day annualized volatility $\sigma_{30d}^a$ to 2-day annualized volatility $\sigma_{2d}^a$. Am i right to say: $$\sigma_{2d}^a = \sqrt{\frac{2}{30}} \cdot \sigma_{30d}^a$$ ...
1answer
61 views

### Currency Hedged Excess Return

In the famous article "Global portfolio optimisation" of Black and Litterman, the authors defined the excess return on currency-hedged assets as the following :  E_t = 100 \frac{P_{t+1}X_t}{P_tX_{...
1answer
43 views

### Negative Libor Simulation

Can LIBOR rates be simulated using short rate models? If no, what is the reason behind it? What is a simple model to simulate LIBOR rates? Especially in a negative rate environment.
1answer
46 views

### Alpha estimation from factor models

This question makes reference to section 8.4 - Application to performance measure - of the 2007 publication "Performance Measurement for Traditional Investment" by Véronique Le Sourd. You can find the ...
0answers
45 views

### Which curve does the interest rate risk fall in?

For example, Australian government issues a bond denominated in USD currency? Which curve does the interest rate risk fall in? Australian Gov Curve or USD Gov Curve?
1answer
50 views

### How is CPR (re-)calculated for fixed fully amortizing agency mortgage pass-throughs given prior partial prepayments by mortgagors in the pool?

Background: in the US, mortgagors are allowed to prepay any amount and in any arbitrary time during the lifetime of the mortgage, which leads to prepayment risk if this deviation differs from the ...
1answer
51 views

### Modifying Basic Black Scholes Equation For Time Dependent Variables - Per Wilmott?

I am reading Wilmott's book and don't understand why he makes the following step to re-write the PDE. I get equation 8.4, that's just the typical PDE for a dividend yielding stock where r(t), D(t) ...
1answer
38 views

### OTC Derivatives Moneyness Conventions

When looking at the OTC Derivatives market, is there a standard moneyness convention that is applied? And if so, what is that bucketed approach? For example: 90%-110% for ATM, 70%-90%, 110%-130%, etc.....
1answer
44 views

### Intrinsic value vs Time value of an option: what's the purpose/motivation for their definitions? [closed]

I am an actuarial student and our text has the following definitions: Intrinsic value: This is the payoff assuming the expiry of the contract immediately rather than at some future time. ...
1answer
90 views

### Rationale of Fama Macbeth procedure

I am confused about the rationale behind the Fama Macbeth regression methodology. I understand how to practically perform the two steps but not why one should do so. For instance, considering the ...
2answers
126 views

### Bootstrapping zero coupon rates

How do we obtain discount rates to obtain zero coupon rates given only swap rates? what is the procedure? Also what exactly is curve calibration?
0answers
24 views

### How does the implied correlation change when the spot price of the Basket Call/ Put option goes up?

Given a basket Call/Put: $BasketCall_{payoff} = max[0, \Sigma^n_{i=1} w_iS_i(T) - K]$ If the spot price of the basket goes up/down, how would the implied correlation change? I guess what I am not ...
1answer
65 views

### SABR Implied Vol: Normal Approximation vs Log-Normal Approximation

I am having trouble understanding the difference between the normal and log-normal implied volatilities from Hagans SABR model: http://web.math.ku.dk/~rolf/SABR.pdf. As far as i understand the main ...
3answers
76 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 ...
1answer
218 views

### Rolling seasonal and seasonal reversal patterns factor investing

I am trying to create a pattern variable that takes the mean of the same month (lag 12, 24... 240) for the last 20 years and the mean of the other months lag (1-11, 13-23, 25-35... 229-239). (...
0answers
52 views

### Beginner FFT (Fourier) transforms on closing prices for Apple

I don't know math very well, but I have been programming for many years. I would like to use FFT as a parameter to a ML model. The FFT is diving down sharply. I tried many stocks and its the same. ...
1answer
163 views

### Exotic Trading Basic Questions - Banking

I just joined a support team for an equity exotic trading desk in a bank, I am looking for a high level overview of how exotic trading works in a bank. For my questions let's take a common product: ...
0answers
18 views

### Nasdaq price index, dividend yields and dividend

In a paper that I'm reading it says: We collect monthly observations on the Nasdaq composite price index (without dividends) and the Nasdaq composite dividend yields, and compute the Nasdaq ...
2answers
90 views

### How to handle Holidays in Time-Series Datasets?

Im currently analyzing a Dataset of the German Stock market. While Holidays like Christmas or New Year aren't a problem for Return Calculation or Portfolio Performance, im testing some regressions and ...
1answer
72 views

### What does A(B) mean in time series

So I have been reading some papers regarding time series, mainly from Granger and Engle. I am a bachelor econometrics student, but I have never seen such notation before. For example, A(B)(1-B)x(t) = -...
1answer
71 views

### Why use the risk-free rate for discounting in a risk neutral world?

I am reading Options, Futures, and other derivatives by John C. Hull. In the chapter on Binomial trees, he remarks: A risk-neutral world has two features that simplify the pricing of derivatives: ...
1answer
42 views

### Jensen alpha estimation

I am a bit confused about how to calculate Jensen's alpha, having encountered a variety of methodologies. Based on his 1967 paper, Jensen's equation for the estimation of alpha is: \$\tilde{R_{jt}} - ...
1answer
60 views

### Market Maker ETF Hedging Strategy

Some thoughts about ETF hedging; feel free to leave comments! Scenario 1: An investor sells 1M ETF shares to a Market Maker(MM) at bid price. MM has a long position and will need to offload the ...

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