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78 views

Feynman-Kac to derive stochastic representation

$u_t + \frac{1}{2}\sigma^2x^2u_{xx} - \alpha + \lambda((K_d - x)^+ - u) = 0$ with terminal condition $u(T, X) = (K_m - X(T))^+$ $dX = \sigma X(t)dW_t$ $\alpha$ and $\lambda$ are constants Ok so ...
65 views

Stochastic Long-Run Mean Instantaneous Variance in Heston Model (and extensions)?

I'm working on my dissertation in Financial Economics, focusing on the topic of Stochastic Volatility Jump Diffusion models; and I'm playing around with some ideas for model extensions. In particular, ...
58 views

Why does risk-neutral price processes do not, in general, compose all arbitrage-free price processes?

I was reading reviewing my mathematical finance notes and I came across a remark I cant understand fully Remark :Contrary to discrete time models, the risk-neutral price processes do not, in general, ...
480 views

Optimal Portfolio from Efficient Frontier

I found this code on plotly site, using CVXOPT to find the efficient frontier, and then, the optimal Portfolio. The optimal function is ...
121 views

Are Fama-Macbeth R-Squared (R2) just assymptotically correct?

I have been doing a research on comparing Fama-MacBeth and panel regression procedures. Think of it as an emerging market case for Petersen (2009) link. My research consists of a route based on full-...
114 views

76 views

Pricing a Double Knock In Option

I have been looking at pricing a barrier option that has payoff of your usual European Call option, $\max(S_T - K, 0)$ if the stock price exceeds a horizon $A$ and then afterwards drop under some ...
122 views

Which securities have expirations more often than monthly?

I'd like to explore buying low-cost calls close to the money, so I'm looking for low time values in options premiums. This happens near options expiration. Unfortunately, most options expire on the ...
164 views

Should factor signals decay?

If the factors have information content, I expected factor portfolios constructed using recent financial statements should outperform portfolios using stale data. To test this, I used the Professor ...
90 views

Comparison of normalization methods on market returns

I am looking to use a multi-factor model to make target-return predictions. Since the factor-returns come from different scales I need to normalize first. There are different ways to normalize ...
668 views

Newey-West standard errors in Fama-MacBeth regressions

I noticed that during the recent decade most of papers, which use Fama-MacBeth regressions compute Newey-West standard errors. I tried to find detailed description of this procedure in the books on ...
170 views

Finite Difference with SVI Vol Model

I am attempting to implement a local vol pricing model in finite difference for equity index options. I have followed Gatheral's Lectures and fitted an SVI Model bringing me to the following local ...
98 views

difference between Meucci fully flexible probability and markov regime swtiching models?

What is the difference between A. Meucci's Fully Flexible Probability (FFP) and Markov Regime Switching Models ? They seem very similar to me, FFP based on state variables that define regimes will ...
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Why is market cap used to value equity instead of a self consistent solution?

My claim is that if we use the cost of equity of a levered firm via the DCF method then we make errors. Specifically if we find the firm is under-valued then in truth its more under-valued than we ...
227 views

Higher Order Greeks

In studying options pricing a while back, I had learned of the higher order sensitivities of of Speed and Color. Speed was the rate at which the gamma changes with the underlying. Color is a ...
1k views

Creating Factor mimicking portfolio returns

I have some trouble understanding how to create factor mimicking portfolio returns. As pointed out in this question, Tsay provides a small description, but I am unsure if my procedure is correct. In ...
320 views

Exposure calculation of a re-coupon swap

How to calculate the exposure of a recoupon swap (when the MTM of an i.r. swap is settled and the fixed rate is reset to the prevailing swap rate for the residual maturity). It's used to reduce the ...
76 views

Spread in Option Quotes

Let's take a look at market-maker's option quote in vol terms: 8.5 / 9.5. In that example bid-ask spread equals 1.0 point of vol. Can anybody clarifying how market-maker choose amount of spread in ...
119 views

How to find a probability of VIX moving from one price to another

I asked a similar question on here with a bounty. I decided to modify the question to simplify what I am trying to do. Is there a package on MATLAB or some other tool where I can find the probability ...
396 views

Retrieval of MSCI factor index performance data from the web

I hope this question is on-topic. What is a convenient way to get MSCI index performance data from the web? I would be interested in daily performance data of the factor indices momentum, minvol, ...
461 views

How to estimate option implied skewness and kurtosis in R

Suppose that i have data that for each day i have more than one option, either put or call. I.E. I have more than 20 put options and 20 call options for each specific day. What is the way to estimate ...
2k views

Fitting GARCH(1,1) in Python for moderately large data sets

I am using the arch package in python to fit a GARCH(1,1) to fit daily S&P 500 returns from 1990 to 2017 (about 6800 data points). The code I am using is as follows: ...
1k views

Meaning of cross sectional rank

This paper mentions the concept of rank which is defined as cross sectional rank. For e.g. one of the alphas (#3) is (-1 * correlation(rank(open), rank(volume), 10)) 10 is just the number of days ...
344 views

binomial trees and finite differences

I was reading Tavella Randall book and their explanation why binomial trees are a particular example of finite differences. I started having additional questions. So, they way they do that is saying ...
153 views

VAR FPCA analysis paper replication

I've been trying to replicate the following publication: CONSISTENT FUNCTIONAL PCA FOR FINANCIAL TIME-SERIES, Sebastian Jaimungal, Eddie K. H. Ng, 2007 but I havent been able to get the same results ...
728 views

Variance of a portfolio based on log-returns

Modern Portfolio Theory Optimization Problem is based on expected linear returns and covariances of linear returns. That's said, variance and expected return of a portfolio based on linear returns r ...
116 views

Volatility Parametrization Libor Market Model - Underspecified Model?

Does the volatility parametrization that I have chosen give an underspecified model? Which volatility parametrization in the Libor Market Model would suit the best for the particular case described ...
919 views

How to backtest strategy in portfolio of stocks using SIT R?

I am creating and testing strategies in R code and using systemic investor toolbox(SIT) package as the backtesting tool. I copied a SIT backtesting code from a website and made small changes to make ...
193 views

Trading signal strength: [-1 to 1] or [predicted return]?

In the context of a backtesting engine, is it better to have strategy generate trade signals in the range from -1 to 1 or as exact predicted returns (e.g. -12% or 26%). The difference lies in how to ...
1k views

Calibration of Merton's jump diffusion model

Setting In my financial engineering project I'm working on a new calibration formalism for jump-diffusion models and in particular Merton's jump diffusion model. A jump diffusion process \$\{X(t), t \...
1k views

How to trade the Ornstein-Uhlenbeck process?

My question comes from this paper, which is a short version of Avellaneda's paper The picture bellow provides a summary of the equations. Do I understand correctly that in order to trade OU process ...
155 views

Interplay of statistical factors (PCA) and market factors (value, momentum, low vol, …)

Is there any research done on the interplay between statistical factors (as a result of principle component analysis PCA) and the market factors (especially value, size, low vol, momentum, quality)? ...
977 views

Stress Testing for VaR

I am trying to perform stress testing for VaR and have taken into consideration two methods:- 1. Sensitivity analysis 2. Historical scenario analysis. According to the Derivatives Policy group we ...
115 views

How do I calculate the present value of a credit default swap?

I am paid 20 million every time a bond drops to a new low over a 120 month period. I need to know how to find the present value of such an arrangement if there is a continuously compound interest of 5 ...