All Questions

Filter by
Sorted by
Tagged with
27
votes
2answers
24k views

Transformation from the Black-Scholes differential equation to the diffusion equation - and back

I know the derivation of the Black-Scholes differential equation and I understand (most of) the solution of the diffusion equation. What I am missing is the transformation from the Black-Scholes ...
27
votes
6answers
4k views

Most successful investors using academic-based framework?

What are the most famous/best performing absolute-return funds employing approaches based on mainstream finance theory (i.e., theory presented in Journal of Finance, AER, Econometrica, using typically ...
27
votes
6answers
12k views

Why is an inverted yield curve a problem?

Immediately preceding the worst of the financial crisis, my professors all pointed out to me that the yield curve had inverted -- short-term yields were more risky than 20-year or 30-year Treasury ...
27
votes
6answers
25k views

Applications of Fourier theory in trading

What are fashionable applications of Fourier analysis in trading? I have heard vague ideas of applications in High Frequency Trading but can somebody provide an example, maybe a reference? Just for ...
27
votes
4answers
10k views

Local Volatility vs. Stochastic Volatility

Are there any empirical observations or practices when to prefer Local Volatility Model for pricing over Stochastic Model or vice versa?
27
votes
6answers
3k views

Model Validation Criteria

Let's say I have a brand new fancy model on some asset class (calibration porcedure included over a set of vanilla options) in which I truly believe I made a step forward comparing to existing ...
27
votes
4answers
16k views

Performance of Open Source Time Series Database for Financial Market Data

We would like to store financial tick data in a database (potentially billions of rows) and then create aggregated (open-high-low-close) bar data from it (e.g. 1min or 5min bars). It was mentioned ...
26
votes
8answers
14k views

How are cryptography and speech recognition technology applied to forecasting financial markets?

One of the answers to my previous question regarding the strategy of Renaissance Technologies, there was a reference to The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly ...
26
votes
5answers
19k views

What are the advantages/disadvantages of these approaches to deal with volatility surface?

I would like to know if someone could provide a summarized view of the advantages and disadvantages of the approaches on the volatility surface issues, such as: Local vol Stochastic Vol (Heston/SVI) ...
26
votes
10answers
20k views

Should I use an arithmetic or a geometric calculation for the Sharpe Ratio?

What are the advantages/disadvantages of using the arithmetic Sharpe Ratio vs the geometric Sharpe Ratio? Is one more correct? Or is one better in certain circumstances?
26
votes
11answers
14k views

Probability of touching

For a vanilla option, I know that the probability of the option expiring in the money is simply the delta of the option... but how would I calculate the probability, without doing monte carlo, of the ...
26
votes
4answers
3k views

How are risk management practices applied to ML/AI-based automated trading systems

A potential issue with automated trading systems, that are based on Machine Learning (ML) and/or Artificial Intelligence (AI), is the difficulty of assessing the risk of a trade. An ML/AI algorithm ...
26
votes
4answers
4k views

QuantLib in industry

How much is QuantLib used in industry and how much street cred does it have?
26
votes
2answers
4k views

What are the quantitative finance papers that we should all have in our shelves?

Which quantitative finance papers should we all know about? What are the seminal references in various quantitative finance areas such as empirical asset pricing and theoretical asset pricing?
26
votes
4answers
4k views

Is there any theoretical basis for pattern-recognition strategies?

Mean-reversion and trend-following strategies have some kind of a theory behind them that explains why they might work, if implemented well. Pattern-recognition, on the other hand, seems like nothing ...
25
votes
6answers
52k views

how to derive yield curve from interest rate swap?

According to some textbooks, to derive the yield curve, quote overnight to 1 week: rates from interbank money market deposit, 1 month to 1 year: LIBOR; 1 year to 7 years: Interest Rate Swap; 7 ...
25
votes
3answers
8k views

How are limit orders selected from the order book?

I'm sure there is a simple answer to this but I haven't had any luck with searches. I'm just wondering when someone places a market order which order(s) from the limit order book are selected to fill ...
25
votes
5answers
9k views

Should Sharpe ratio be computed using log returns or relative returns?

I am trying to reconcile some research with some published values of 'Sharpe ratio', and would like to know the 'standard' method for computing the same: Based on daily returns? Monthly? Weekly? ...
25
votes
2answers
53k views

What is the Swap Curve?

What is the so-called Swap Curve, and how does it relate to the Zero Curve (or spot yield curve)? Does it only refer to a curve of swap rates versus maturities found in the market? Or is it a swap ...
25
votes
3answers
7k views

What are the best sources for equity quantitative research?

What are the best sources of quantitative finance research in equities? I will list a couple and note an asterisk if the research is available by request (i.e. non-clients) or online: BAC-Merrill ...
25
votes
4answers
1k views

Who has introduced the term 'vega' and why?

The sensitivity of the option value $V$ to volatility $\sigma$ (a.k.a. vega) is different from the other greeks. It is a derivative with respect to a parameter and not a variable. To quote from Paul ...
25
votes
5answers
7k views

Why hold options when you can dynamically replicate their payoff?

When holding vanilla options, you can cancel out, theoretically, all risk with dynamic (delta) hedging. Then you earn the "risk free rate of return". Why would you make such a portfolio when you can ...
25
votes
1answer
13k views

How to interpret the eigenmatrix from a Johansen cointegration test?

I ran a Johansen cointegration test on 3 instruments, A B and C. The results that I got are: ...
25
votes
3answers
4k views

Main backtesting & trading solutions: QuantFactory, Deltix, etc.

What are the most used/mature/promising commercial solutions today which handle backtesting/ automated trading needs? I'm talking about vertical product suites like QuantFactory or Deltix which ...
25
votes
3answers
4k views

How to forecast volatility using high-frequency data?

There is a large literature covering volatility forecasts with high-frequency tick data. Much of this has surrounded the concept of "realized volatility", such as: "Realized Volatility and ...
25
votes
1answer
3k views

How do different methods and techniques used in pairs trading compare?

I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score. I am wondering if anyone has ...
24
votes
10answers
54k views

Strategy of Renaissance Technologies Medallion fund: Holy Grail or next Madoff?

Renaissance Technologies Medallion fund is one of the most successful hedge funds - ever! Yet it is very secretive. Do you have information on the strategy used that is not yet mentioned in the ...
24
votes
11answers
54k views

Exercising an American call option early

I have seen the rationale behind why it is never optimal to exercise an American call option early, but have a question about it. If the option strike price is $E=\$20$ and it expires at $T=1yr$, if ...
24
votes
6answers
2k views

Setting the r in put-call parity?

Put-call parity is given by $C + Ke^{-r(T-t)} = P + S$. The variables $C$, $P$ and $S$ are directly observable in the market place. $T-t$ follows by the contract specification. The variable $r$ is ...
24
votes
7answers
14k views

Why is volatility mean-reverting?

We all know it does mean revert. The question is why. What's making volatility mean-revert? Is it some sort of cyclical behaviour of option traders? The way it's calculated? Why?
24
votes
4answers
3k views

How do I adjust a correlation matrix whose elements are generated from different market regimes?

Say I want to calculate a correlation matrix for 50 stocks using 3-year historical daily data. And there are some stocks that were recently listed for one year. This is not technically challenging ...
24
votes
5answers
7k views

Proof that you cannot beat a random walk

There is much speculation to what degree financial series are random (and what kind of randomness prevails). I want to turn the question on its head and ask: Is there a mathematical proof that ...
24
votes
5answers
11k views

Is there a standard model for market impact?

Is there a standard model for market impact? I am interested in the case of high-volume equities sold in the US, during market hours, but would be interested in any pointers.
24
votes
5answers
12k views

Is the stock price process a martingale or a Markov process?

Some people claim that the data-generating process for stocks is a "martingale" and that is has the "Markov property". Are they unrelated? Is it that the Markov property implies some sort of ...
24
votes
2answers
3k views

How to quickly estimate a lower bound on correlation for a large number of stocks?

I would like to find stock pairs that exhibit low correlation. If the correlation between A and B is 0.9 and the correlation between A and C is 0.9 is there a minimum possible correlation for B and C? ...
24
votes
3answers
4k views

Tools in R for estimating time-varying copulas?

Are there libraries in R for estimating time-varying joint distributions via copulas? Hedibert Lopes has an excellent paper on the topic here. I know there is an existing packaged called copula but ...
24
votes
1answer
7k views

Algorithm to fit AR(1)/GARCH(1,1) model of log-returns

I am fitting numerically an AR(1)/GARCH(1,1) process to index and stock log-returns, $r_t=\log(P_t/P_{t-1})$, where $P_t$ is the price at time $t$, and thus far am not clear on where the observed log ...
23
votes
6answers
16k views

What is a martingale?

What is a martingale and how it compares with a random walk in the context of the Efficient Market Hypothesis?
23
votes
8answers
5k views

What are some good technical and non-technical books for a math lover to get in to quantitative analysis? [closed]

To get the ball rolling... I will answer this question this evening For people aware & unaware I think it would be a great way to introduce the group, resources for fundamental knowledge & ...
23
votes
3answers
5k views

What is the necessary level of Econometrics-Know-How for a quant

It seems quants increasingly use econometric models at work. As someone who has sold his soul to probability theory and stochastical analysis I would like to catch up. What are the econometric tools ...
23
votes
3answers
7k views

Papers about backtesting option trading strategies

I am looking for all kinds of research concerning option trading strategies. With that I mean papers that publish results on different option trading strategies properly backtested with real-world ...
23
votes
4answers
6k views

Can the concept of entropy be applied to financial time series?

I am not familiar with the concept of entropy for time series. I am looking for good reference papers and examples of use.
23
votes
5answers
12k views

Why is the VIX futures market usually in a state of contango?

I'm a VIX newbie and I'm trying to understand why the VIX futures market is usually in a state of contango. All I can figure is that the sellers of VIX futures contracts demand high "prices" (because ...
23
votes
5answers
8k views

Implementing data-structures in a Limit order book

I'm working on implementing a 'LOB' and I'm being very careful about choosing my data-structures so as to maximize performance. Using F# as an example, I need to consider a List versus Array for ...
23
votes
7answers
9k views

When does delta hedging result in more risk?

A question from an interview book: When can hedging an options position make you take on more risk? The answer provided is the following: Hedging can increase your risk if you are forced to ...
23
votes
4answers
6k views

The application of quantitative finance in sports betting

I notice that, on the surface, there are some similarities between quantitative sports betting and quantitative finance. Both have the concept of arbitraging, etc. What are the applications of ...
23
votes
3answers
11k views

What is a “coherent” risk measure?

What is a coherent risk measure, and why do we care? Can you give a simple example of a coherent risk measure as opposed to a non-coherent one, and the problems that a coherent measure addresses in ...
23
votes
2answers
13k views

Cross Currency Swap Pricing in nowadays environment

Multicurve setting has now become the new paradigm for vanilla swap valuation. For the record I give here (without getting into too much details) the methodoloy for pricing Euribor3M swaps in this ...
23
votes
4answers
9k views

Techniques to optimize the placement of orders in market making strategy?

Market making often requires placing and canceling a lot of orders. You have to buy and sell nearly simultaneously, so you need to move orders pretty often to beat other traders. But I would like to ...
23
votes
3answers
3k views

When do Finite Element method provide considerable advantage over Finite Differences for option pricing?

I'm looking for concrete examples where a Finite Element method (FEM) provides a considerable advantages (e.g. in convergence rate, accuracy, stability, etc.) over the Finite Difference method (FDM) ...

15 30 50 per page