All Questions
21,689
questions
0
votes
0
answers
6
views
FM regressions for Size groups when examing a cross section of expected stock returns
Dear Stack community,
When doing FM regressions for Size groups similar to
Lewellen, J. (2015). The cross-section of expected stock returns. Critical Finance Review, 4(1), 1–44. https://doi.org/10....
- 35
0
votes
1
answer
22
views
Difference in interpretation between credit ratings from different agencies
i got this question at work from a client and my answer was not satisfying so here I am.
if i have a portfolio of corporate bonds and govies, i collect all credit ratings from BBG terminal and by ...
0
votes
0
answers
21
views
Neural network time series prediction tool
What are some of the state of the art time series prediction tool with neural network?
- 2,736
0
votes
0
answers
51
views
Why do the Greeks not converge to the strike as the volatility tends to zero?
So, I was playing around with the Greeks in Python with some made up data for a European call option assuming the Black-Scholes model. I plotted the graphs to see what happens to the Greeks when ...
- 31
0
votes
0
answers
26
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Ito Process: How to calculate expected return?
On page 300 of Hull's Options, Futures and Other Derivatives
It is tempting to suggest that a stock price follows a generalized Wiener process; that is, that it has a constant expected drift rate and ...
- 103
1
vote
0
answers
21
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Testing one asset pricing model against another a la Cochrane via change in $\hat\alpha' \text{cov}(\hat\alpha,\hat\alpha')^{-1}\hat\alpha$
I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. ...
- 2,726
0
votes
0
answers
19
views
Scaling variables (Fraction vs % vs log) when regressing twelve month returns
Dear Stack community,
My question is the following;
If my dependent variable is twelve month returns.
And as independent variables I have fiscal year variables like ROA and log variables like the log ...
- 35
0
votes
0
answers
18
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Testing one asset pricing model against another a la Cochrane: why this works
I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. I ...
- 2,726
0
votes
0
answers
12
views
Price spread or ratio for mean reversion pair trading
I am slightly confused as to whether I should use price spread or ratio for mean reversion in pair trading. I have seen some work on testing stationarity for the price spread and then use the price ...
0
votes
0
answers
11
views
Fuzzy Logic - Smoothing of payoff function: Linear vs. Sigmoid
For some options such as digital and barriers it is common to use "Fuzzy Logic" to improve estimation of value and greeks. But how / when are different functions used for smoothing the ...
- 548
0
votes
1
answer
44
views
Pricing look-back option
I have the monthly price data of a stock starting from December 2020 and I am considering a EU style look-back option issued in December 2020. The payoff at maturity of the look-back option is given ...
1
vote
1
answer
13
views
Does including an additional pricing factor necessarily reduce the pricing errors?
I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another.
...
- 2,726
0
votes
0
answers
19
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Testing one asset pricing model against another a la Cochrane: a counterexample
I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. I ...
- 2,726
1
vote
1
answer
26
views
The relationship between no-arbitrage and the law of one price
If no-arbitrage exists, then the law of one price holds, but the existence of the law of one price does not always imply that no-arbitrage exists." To prove this, what is an example where the law ...
- 11
0
votes
0
answers
37
views
When is the Quantlib's C++ to python package faster than just coding natively in python?
Every package I have used of the QL's python package thus far have been slower than my own local python functions. From what I understand, it's running C++ underneath, but if you are running loops/...
1
vote
0
answers
79
views
Portfolio construction in the real world [closed]
Good day. I am looking to understand how the portfolio construction process is actually done in the industry. Now, I do not know if there are too many resources on how things are currently being done (...
- 11
0
votes
0
answers
30
views
How can we simulate daily return based on multi-factor model?
This is an interesting question for simulation. The question is a bit lengthy but I'm trying my best to make it super clear here.
Now I have some multi-factor model, say some US barra risk model from ...
0
votes
0
answers
37
views
Constraints in a Mean-Variance Optimization Case
Might be a repeat question, feel free to close if it is.
I am trying to perform a mean-variance optimization (maximizing the Sharpe ratio) for lets say 5 assets. Besides the weights of the assets ...
- 561
1
vote
1
answer
46
views
How does one calibrate lambda in a Avellaneda-Stoikov market making problem leading to Gueant-Lehalle-Tapia model?
The title is similar to that of the question I was referred to here which has been answered by Lehalle himself!
I'm trying to implement the Gueant-Lehalle-Tapia model which is how I got to this answer ...
- 11
2
votes
1
answer
63
views
QuantLib: Pricing BRL zero coupon swap using relevant attributes in Quantlib
I am trying to price the BRL zero coupon swap. As we know that ZC swaps fixed payer pays a single payment at maturity and the float payer pays the interim payments till maturity. So in this case, ...
- 27
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votes
1
answer
79
views
Calculation of break-even correlation for diversification effect in N-assets case?
I'm thinking about a generalization of the following case: for 2 assets, there is a diversification effect as soon as i obtain a positive weight for the minimum-variance portfolio in the asset with ...
- 594
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votes
3
answers
95
views
Closed form / analytical solution for bespoke (but vanilla) Option
Question:
I want to derive closed form expression (similar to the Black Scholes formula for a call price) for the payoff below. I would like to do it from first principles starting with Expectations ...
- 121
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votes
1
answer
46
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Tick data-why the ask price and ask volume are 0, but the trade price exists and the trade price is still big? How to understand this?
How to understand the trade price and volume exists when ask price and volume are 0 but bid ones exist? I can't understand what happens under such condition? And also why sometimes bid price is higher ...
- 1
0
votes
0
answers
106
views
What is the correct procedure for discounting risky cash flows?
My apologies if this question is too basic/inappropriate for this venue. Please let me know if so.
I am currently reading Berk and Demarzo's Corporate Finance and am a bit confused about how risky ...
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-2
votes
0
answers
39
views
Calibration of Heston model In Python [closed]
Has anyone seen Python code for Levenberg algorithm (Full and fast calibration of the Heston stochastic volatility mode)? Thanks in advance.
0
votes
0
answers
48
views
Taking a set of normally distributed random variables as the sample space to fitting an exponential distribution
Disclaimer, this is my first question/interaction in this forum.
Let's assume I have random variables that are normally distributed. Then, say I take the observations that are greater than the mean, i....
- 1
0
votes
0
answers
21
views
Instantaneous forward rate function to use in HJM framework
HJM framework uses the instantaneous forward rate $f(t,T)$ in the resulting dynamics and pricing formulas (like in Hull-White or Ho-Lee model).
But clearly market does not have an $f(t,T)$ formula, so ...
0
votes
1
answer
55
views
Latency (market updates) and link to market efficiency
In the book by Lehalle and laruelle - "market microstructure in practice" -
"The trading activity of HFT updates limit orderbooks at a higher rate
than the round trip for any non-...
- 141
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votes
0
answers
58
views
Non-zero real-valued function continuous and piecewise $C^1$ that vanishes outside (0,1) with piecewise Lipschitz derivative
In this paper the authors to overcome the presence of microstructure noise which "contaminates" the ito-semimartingale in high-frequency data uses the idea of pre-averaging.
For an ...
- 37
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votes
1
answer
85
views
Senior Preferred vs Senior Unsecured Bonds
What's the difference between Senior Preferred bonds and Senior Unsecured bonds. I understand the difference Senior Preferred vs Senior Non-Preferred bonds. But Senior Preferred and Senior Secured are ...
- 21
1
vote
3
answers
231
views
Floor vs Receiver Swaption with Equal Strike
Let's say we have the following two instruments.
A 5x10 floor (5-year floor, five years forward) with a 4% strike on 1-year SOFR and
A 5 into 5 European receiver swaption (right to enter into a 5-...
- 13
0
votes
0
answers
55
views
volatility surface interpolation across expiry
In the usual adjusted Black Scholes world where BS vol varies with strike and with time to expiry as extracted from a market snapshot at moment 0, assuming a certain of interpolation method across ...
- 101
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votes
1
answer
87
views
Risk-neutral option pricing under distribution assumption
For simplicity assume zero interest rates in the following.
Given the price of a (European) put option with strike K and maturity T at time point t. $P_t(K, T)$ for a given underlying S with values $...
- 1
0
votes
0
answers
124
views
Kou model — solving PIDE for European and American options in Python
Toivanen proposed$^\color{magenta}{\star}$ a method to solve the partial integro-differential equation (PIDE) with a numerical scheme based on Crank-Nicolson. In particular, he proposed an algorithm ...
- 21
0
votes
0
answers
48
views
Adjusting the p-value of a strategy for number of parameters
Let's say I have some metric and I'm trying to evaluate whether it's predictive with respect to returns. I plan to only take trades where the value of the metric is above a certain threshold, such ...
- 243
0
votes
0
answers
35
views
Problem with BDH function in Excel/Bloomberg [closed]
I have a simple BDH function drawing time series into Excel. Whenever i change a field, it twitches, as if accepting the change and then reverts back to the old inputs. Eg if i use start date 31/12/...
0
votes
1
answer
41
views
Fama-French Regression Output Interpretation (Intercept/Alpha)
I am currently doing a report regarding Fama and French 3 and 5 factors model. I was provided 3 companies with each of its daily stock return from 2015-2020, and the values of all 5 factors during ...
0
votes
0
answers
53
views
DV01 of 10-Year vs 1-Year Zero-Coupon Bond at 0% Flat Interest Rate Curve
As the title suggests, what are the DV01s of a 1 million principal zero-coupon bond with 10-year and 1-year TTM with an assumed 0% flat interest rate curve. I understand that the duration for both ...
- 561
0
votes
0
answers
21
views
High/Low range under GBM - Analytic solution?
Does anybody know of an analytical solution to the expected high / low range for an asset that follows a GBM process over sampling frequency dt? I have ran numerical simulations and find that the ...
- 749
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votes
0
answers
43
views
Monte Carlo simulation with SABR model
I have to price European Options using only the classical Monte Carlo method.
The models I have to select are Lévy models and SABR. Consider for instance the simplest Lévy model: a Geometric Brownian ...
-1
votes
0
answers
33
views
how to use ratio spread?
If I sell more options, then my gamma risk will be more difficult to control, but if I sell too few options, then when I judge the wrong direction, I will leave the market with a loss. I try to ...
2
votes
0
answers
50
views
Calibration of Levy models and Stochastic Volatility Models - Data used
I'd like to ask a question regarding something I often come across in research papers.
It's about how authors calibrate Levy Models and Stochastic Volatility Models to compare models' performance, and ...
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votes
0
answers
50
views
Does arbitrage theory actually help in practice? If so, how?
Am wondering if arbitrage theory (the ones defined "classically" with stochastic processes, martingales, etc.) is actually helpful in practice for an actual trader beyond simply having an ...
- 1
0
votes
0
answers
45
views
Derive the convexity adjustment for inflation YoY swap with unconventional payoff
I'm trying to solve for the convexity adjustment for an inflation YoY swap with unconventional payoff, where $I_i$ is CPI at time i:
$Notional * ([I_i/I_{i-1}]^{Day Count Fraction} - 1)$
In the normal ...
- 1
0
votes
0
answers
49
views
Brownian Motion for USD/EUR Exchange Rate [closed]
I'm writing in order to have a clear overview of the Brownian Motion applied to an Exchange Rate.
Which elements would you take into account to calculate the Drift for an exchange rate? I re-mark the ...
- 19
0
votes
0
answers
9
views
Power-utility function for calculating Certainty equivalent
I have a question regarding how i should calculate 3.2-3.4, currently studying for an exam. What i don't get is how to acctually derive the certainty equivalent from the expected utility of gross ...
- 1
0
votes
1
answer
43
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Is sorting stocks into portfolio mandatory in Fama-French model?
I am currently doing a report regarding Fama and French 3 and 5 factors model. I was provided 3 companies with each of its daily stock return from 2015-2020, and the values of all 5 factors during ...
1
vote
1
answer
32
views
What is the meaning of Leverage ratio consuming business
Leverage ratio (LR) is defined by the ratio between Tier-1 capital and total exposure (off and on balance-sheet exposure), which does not consider credit-worthiness.
It is said that:
[loans to] ...
- 373
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votes
1
answer
44
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Put-Call Parity; Time Value of Money
The intrinsic value of a call option is found by subtracting the discounted strike price from the current share price:
$IV = S - X/e^{rT}$
Put-Call parity:
$S + p = c + X/e^{rT}$
$c = p + (S - X/e^{rT}...
- 1
0
votes
0
answers
21
views
+50
IFRS 9 PiT-PD model when the lagged dependency exceeds one year
It is a common approach to model the point-in-time PD (PiT PD; meaning that the PD depends on the current or lagged economy) by regressing default rates on current or past macro variables (such as GDP ...
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