# Tag Info

Accepted

### Risk Model Validation

You should read this regulatory guidance: U.S.: SR 11-7: https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf (it is identical to FHFA AB 2013-07 Model Risk Management Guidance, OCC ...
• 12.6k

### What are the significant implications of the long-run average variance rate and why Engle won the Nobel Prize for ARCH model development?

The best answer to your question is probably given by the Nobel prize committee itself in "The Prize in Economic Sciences 2003 - Advanced Information" document. You should read it in full. Below is an ...
• 1,704

### Confusion with volatility smiles implied by different models

In the context of option pricing, "implied volatility" always refers to the equivalent diffusion coefficient in the geometric Brownian motion (GBM) dynamics that is necessary to match an observed ...
• 6,064
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### what does the cover page of Guyon and Labordere's Nonlinear Option Pricing represent?

Julien Guyon was so kind as to explain the story behind the cover and gave me permission to share it with the rest of the community: There's no direct link between the contents of the book and the ...
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### Bermudan Swaptions - Payer vs. Receiver (LGM)

I’m guessing you are finding that your model overvalues Bermudan receiver options and probably undervalues Bermudan payer options. The rationale for this has more to do with supply and demand than ...
• 17.4k

### What's the logic behind binomial model ups and downs?

one of the most fundamental results states that the binomial model converges towards the Black Scholes model if the step size $\Delta t$ converges to zero. The Black Scholes model is an option ...
• 1,466
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### Is it always better to use the entire distribution of a financial returns series, not just $\mu$ and $\sigma$?

It depends. For example, if you're doing option pricing in the log normal world returns are completely described by the mean and standard deviation. If you add jumps, you would also need to ...
• 8,581
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### What does it mean that model can reflect the ”volatility smile”

A model that reflects the volatility smile is one with dynamics that approximate pricing that yields an implied volatility smile. However, your question makes me suspect you are fuzzy on some of these ...
• 2,942
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### Interpretation of parameters in the CGMY model

Have a look at page 311 in the original paper from Carr, Geman, Madan and Yor (2002). The paramters are for the names of the authors. They explain the role of each parameter there. Note that $C>0$, ...
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### Risk Model Validation

Model Validation process usually consists of: 1. Conceptual Soundness Review (model assumptions, mathematical representation, limitations) Here you should try to re-derive the model from scratch and ...
• 6,273

### Why change numeraire for the LIBOR Market Model

the point of the LMM is to evolve several different rates simultaneously. If you have rates $f_i$ from $t_i$ to $t_{i+1}$ and take a bond expiring at $t_j$ as numeraire then only the rate $f_{j-1}$ is ...
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### Confusion with volatility smiles implied by different models

Just wanted to point out a few small issues in your statement and maybe help with the conceptual model of these formulas. implied volatility is defined as the value of the parameter σ we need to ...
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### Model Validation Criteria

If the model you're talking about is something that prices and risk manages an exotic (since you mentioned you calibrated to vanillas), I'd like to see: How does the evolution of the volatility ...
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• 8,159

### Closing prices are predicted very well but returns are predicted poorly

The previous day price is an excellent predictor of the next day price, however the previous day return doesn't tell you much about the next day return.
• 2,908
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### Scaling (Data prep) & Feature selection for the financial Data for LSTM Models

If I was to use scaling, I would constantly come across new values. Additionally, if tomorrow brings a new all time high, I will need to rescale the data and re-train the model. You're actually ...
• 5,240
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### What is model-free finance?

Carefully searching Mark Davis' webpage I found this article Model-Free Methods in Valuation and Hedging of Derivative Securities which seems to be a survey on this topic. I quote from the abstract: ...
• 13.8k
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### rationale for maturity adjustment formula in basel IRB formula

The maturity adjustment is there to take into account the risk of changing default probabilities in future years. Parameters are according to Basel calibrated from "observed... capital market data". ...
• 1,422

### Negatively Correlated Assets with similar medium-term trends

It is very rare to find stocks that are reliably negatively correlated with each other. At least in absolute (as opposed to relative outperformance) terms. It can happen from time to time, but the ...
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### Are Lévy processes absolutely continuous?

The simple answer is ''no''. Lévy processes do not necessarily have a density. An accessible (and excellent) book on the topic was written by Cont and Tankov (2004). The introduction to chapter 11.1....
• 16.1k

### Is it possible to build a computer model to simulate a market to prove whether efficient theory is true or not?

Let's begin from the start. At its core, market efficiency is a statement about the compensation for risk embedded in asset prices. So, you can think of this issue as involving 3 quantities: (1) the ...
• 2,506
Accepted

### Stochastic volatility Levy models

VGSV, NIGSV and CGMYSV Let $X_t$ be a variance gamma process (or NIG or CGMY) and let $Y_t=\int_0^t y_s\mathrm{d}s$ where $y_s$ is a CIR (Heston) square-root process. We then set $$Z_t=X_{Y_t},$$ ...
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### Given a statistical model which predicts price, how to determine trading strategy?

I am going to somewhat answer your question but also give commentary as to why your question is difficult to answer. In the basic sense, you long when your model "says" the stock is ...
The square root law is a quite simple and popular model for price impact estimation: $$\Delta p = Y\sigma\sqrt{\frac{Q}{V}}$$ where: $\Delta p$ is the price impact, $Y$ is a constant (needs to be ...