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4
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305 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-...
4
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0answers
154 views

Zero-rebate barrier option pricing under the Heston model

I'm trying to derive an approximation for the zero-rebate barrier option under the Heston model: $$dS_t=\mu S_tdt+\sqrt{v_t}S_tdW^S_t$$ $$dv_t=\kappa(\bar{v}-v_t)dt+\eta\sqrt{v_t}dW^v_t,\quad d\langle ...
4
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0answers
106 views

Alternative Method for Determining Option-Implied pdf

As I am refining a pricing model to incorporate skew, and not just ATM volatilities, I need to create random realizations of the underlying consistent with the skew-implied pdf. When searching, one ...
4
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0answers
65 views

What are the trade offs when choosing a long term bond future to trade?

It seems that when trading long term bonds *** and choosing between the two offerings on CME one is presented with a Scylla and Charybdis decision. 1. VOLATILITY CONSISTENCY: Ultra U.S. Treasury Bond ...
4
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0answers
47 views

Stochastic integral representation of $F(T-s,X_s)$-type equations

For $T\in R$ given and fixed consider: $$ {\rm d}F(T-t,X_t)=g(T-t,X_t)\,{\rm d}W_t. $$ where $g(t,x)$ is a given functions and $X_t$ is a given process driven by a brownian motion ($dX_t=(...)dt+(...)...
4
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0answers
99 views

Reference request for research on the maximum drawdown **ratio** (NOT value)

Let's suppose the asset price process follows a Geometric Brownian motion $S_t \sim GBM(\mu, \sigma),\,t\ge 0$, and define the two process: $$ \begin{align} \text{MSF}_t &:= \max_{\tau\in[0,t]} S_\...
4
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0answers
96 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 ...
4
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0answers
451 views

Estimating daily volatility of unevenly/irregularly spaced time series data

Say I have time-series data that is unevenly spaced, with anything between 4-50 hours of spacing in between. The data comes from a trading account history, which has captured the balance of the ...
4
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0answers
68 views

Price of a stochastic game between an agent and the market

In the article Pricing via utility maximization and entropy from Richard Rouge and Nicole El Karoui, they define the value function of the optimization problem as \begin{align} V(x,C) = \dfrac{1}{\...
4
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0answers
122 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 ...
4
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0answers
1k 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 ...
4
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0answers
121 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 ...
4
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0answers
127 views

What instrument to hedge derivatives' interest rate duration risk?

Our market making desk is back-to-back on FX notionals, but has a residual interest rate risk measured by DV01. Currently we are using EuroDollar futures to hedge, with each contract the DV01 is $25. ...
4
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0answers
195 views

The noise trader explanation of concave market impact

In "How markets slowly digest changes in supply and demand" by JP Bouchaud, JD Farmer and F Lilo the authors asserts: Noise trader models have been proposed to explain why market impact is a ...
4
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0answers
87 views

Structured Energy Option Pricing

Let's say I have an option with the following terms. This is for an energy product (ie natural gas) The contract will last for 6 months The payoff is the difference between the first of month index ...
4
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0answers
154 views

Reference Request: Control Theory Prerequisites for Quantitative Finance

Right now, even though I have a mathematical background, I did not take up control theory in college. I'm looking for an introductory text on (stochastic?) control theory as applicable to quantitative ...
4
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0answers
69 views

How can we compute copula functions by using Fast Fourier transformation?

Q1. If a copula is expressed in terms of its moment generating function then how can this copula can be computed by using Fast Fourier Transformation? Q2. Can we use copula to evaluate spread option ...
4
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0answers
365 views

Girsanov theorem and stopping time

Let $(\Omega,\mathcal{F},\mathbb{P})$ be a probability space, equipped with a filtration $(\mathcal{F})_{0 \leq t \leq T}$ which is a natural filtration of a standard Brownian motion $(W_{t})_{0 \leq ...
4
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0answers
286 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 ...
4
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0answers
2k 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 ...
4
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0answers
1k views

Black-Scholes PDE - Change of Variables

In the derivation below, I cannot figure out how to solve for "Step 3". Can anyone help me walk through the steps in detail? Derivation:
4
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0answers
81 views

Is non-stationarity an issue during copula estimation?

In this paper (1), on page 14 (section 4), the author presents an empirical experiment on the computation of a copula through the use of kernels. To do so, he uses the following stochastic process (...
4
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0answers
88 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 ...
4
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0answers
124 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 ...
4
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0answers
100 views

Backtesting: what happens to real-executed order if mine fills instead?

I'm writing a backtester and using an order-by-order Nasdaq ITCH feed whilst testing it. Let's say the bid-ask spread is 100 @ 9-11 @ 100 My strategy inserts an bid order for 100 @ 10 and this ...
4
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2answers
1k 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, ...
4
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0answers
153 views

Realized volatility vs Fundamental volatility

What is the difference between the realized volatility (also called historical volatility) and the fundamental volatility?
4
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0answers
2k views

Standard definition of multidimensional Brownian Motion with correlations

I was wondering was the standard definition of a multi-dimensional Brownian motion is. For one-dimension, I consider the following the standard definiton. Brownian motion (or a Wiener process) is a ...
4
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0answers
132 views

Heston (1997) paper

Does anyone know where I can find this paper ? A Simple New Formula for Options With Stochastic Volatility - (Heston,1997) Thanks
4
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0answers
623 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 ...
4
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0answers
81 views

ODE Solution in Carr's Randomized American Put

In Carr's 1998 paper Randomization and the American Put, he sets up the following ODE for the value of an American put with expiration given by the first jump time of a Poisson process with rate $\...
4
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0answers
3k 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: ...
4
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0answers
2k 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 ...
4
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0answers
394 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 ...
4
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0answers
170 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 ...
4
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0answers
989 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 ...
4
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0answers
138 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 ...
4
votes
1answer
721 views

Trader Workstation on Ubuntu cannot be connected to via the API

I am using ibPy to connect to TWS on a fairly fresh ubuntu machine. I have been successful in logging into the paper trading account and submitting buy and sell orders programatically via the ibPy ...
4
votes
0answers
219 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 ...
4
votes
0answers
124 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 ...
4
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0answers
83 views

European call option delta and maximum principle

From comments, the maximum principle for parabolic PDE can be used to show that the European call option delta cannot be greater than 1. I am looking forward to such derivations.
4
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0answers
185 views

Match different option high frequency databases

I downloaded the “E-mini S&P 500 (Dollar) Options for 1/10/11” Top-of-Book (BBO) data. If you are interested you may download the data from the following link (approx. 80MB zipped and 1GB unzipped)...
4
votes
0answers
522 views

How to compute the stochastic integral of log-normal process?

How do you compute the following integral: $$\int_0^t e^{\mu s + \sigma W_s} ds$$ or $$\int_0^t e^{\mu s + \sigma W_s} dW_s$$ ? Are those integrals stochastic processes of some well-know type (...
4
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0answers
319 views

Fourth moment of ARCH(2)

I am studying the ARCH(2) process given by $$X_t = \sqrt{h_t} \varepsilon_t$$ where $$h_t = \alpha_0 + \alpha_1 X_{t-1} ^2 + \alpha_2 X_{t-2} ^2$$ and $\varepsilon_t$ follows $N(0,1)$. ...
4
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0answers
763 views

What is the difference between gross and net enterprise wide risk?

Reading a Basel paper on recommendations on internal economic capital models. One of the recommendations says members of the bank's board should be able to demonstrate understanding of the difference ...
4
votes
0answers
723 views

Black-Scholes explicit Euler implementation python

I've written some code for the explicit finite difference method to solve the BS equation. For certain sets of parameters (time-steps and asset-steps) I get a stable but wrong solution. For others, ...
4
votes
0answers
222 views

Assets cointegration: optimal inventory for futures market

I'm interested in HFT cointegration stratagies, and recently found interesting article "Algorithmic Trading of Co-Integrated Assets" The article describes mean-reversion strategy for N-assets. ...
4
votes
0answers
94 views

Are there academic papers on the 'term structure' of adverse selection for futures and options?

By term structure I mean a non-stationarity in the pattern of intraday adverse selection as a given instruments approaches its expiry. Note that I am interested in the adverse selection on the ...
4
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0answers
9k views

credit risk - How to calculate the probability of default (private companies)?

Part of my master thesis I am working with a company. I have the project to use their financial database with all the financials data (7 years) of approximately 3’000 companies. They have their own ...
4
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0answers
73 views

Is there any index calculation methodology that is suitable when constituents change frequently?

Trying to create a custom stock sector index, however adding/dropping of the constituents will be frequent. Which kind of index calculation methodology (e.g. Price Weighted, Equal Weighted, Cap ...

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