5 votes

FX smile extrapolation

This is a big industry, but here are some alternatives(as usual, the best choice depends on purpose and desired accuracy): Fit a quadratic in delta space: $\sigma_{\Delta}=a + b \left( \Delta - \...
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4 votes
Accepted

Taleb's Black-Swan: interpretation of the exponent

I finally got the idea behind the example. To illustrate it in a more general setting I will present a rigorous proof: Let $x_k$ denote the salary and $b_k$ the number of persons that earn $x_k$ or ...
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  • 183
2 votes
Accepted

Quick way to extrapolate call price as function of strike

The upper bound for the 80 call is C(90) + 10, or 30. At least assuming no arbitrage. Let's start by assuming the risk-free rate is 0 (this isn't a problem, but the math is clearer without it), so we ...
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  • 520
2 votes
Accepted

Interpolating probabilities of default

I believe that your problem can be formulated as: Find PD matrix that is as close as possible to a given PD matrix (result of some previous calibration, or the matrix computed using average hazard ...
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  • 346
2 votes

Taleb's Black-Swan: interpretation of the exponent

I don't know how to interpret the above example, but wealth distribution, of which inequality is one of the measures, is frequently described by the Pareto distribution. Also, the IRS publishes annual ...
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1 vote

How to create a local price index?

Isn't this an ML practice problem? https://towardsdatascience.com/machine-learning-project-predicting-boston-house-prices-with-regression-b4e47493633d
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  • 139
1 vote
Accepted

Raw interpolation when the desired term is out of the know originals

What you are interested in is called extrapolation. In other words, you want to "extend" your function $r$ for $t < t_0$ and $t > t_n$. What the author ...
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  • 1,209
1 vote

What's a reasonable way to extrapolate a bond curve?

You can use similar bonds with same risk profile and other similar features to extend the curve of your specific bond. something like a benchmark
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1 vote

Quantlib | Issue with extrapolation in BlackVarianceSurface

You can't, at least from Python. Currently, flat extrapolation in time it's hard-coded. To modify that, you'll have to change the underlying C++ code. (On the other hand, you can select whether ...
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1 vote

Interpolating probabilities of default

The typical approach is to try to fit a ratings migration matrix to available rating transition data. If default rates are all you have then that's going to be difficult. Instead, I might try to fit ...
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  • 14.4k
1 vote

Interpolating probabilities of default

I worked for a company where we had a similar problem with a volatility surface. I tried applying LOESS to it, but it didn't work. The final result has to conform to some obvious monotonicity ...
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  • 471

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