# Tag Info

Accepted

### Do we use the Nelson-Siegel model to calculate the yield curve?

In the beginning, we had a plot of yields of individual bonds against time to maturity, the crudest form of "yield curve." Years later, people began hand-drawing a smoothed line through these yields ...
• 10.9k

### Is trading mean reversion of small principal components of prices profitable?

Within the fixed income space, there's a lot of literature on PCA trading. The first 2-3 principal component factors (PCs) can typically explain 90-99% of the total variances in yield curve movement....
• 10.9k
Accepted

### QuantLib: Black / BSM processes and pricing via volatility surface. Different results?

It's because of the settlement days you passed when you initialized the flat volatility curve. You're creating the spot, forward and flat volatilities as: ...
• 5,733
Accepted

### What is actually going on in Monte-Carlo simulation for Mortgage backed securities?

In my understanding, the mortgage prepayment option, at any point in time, is a function of the value of the mortgage from that point in time forward. This value, in turn, is a function of the future ...
• 5,913

### How to de-seasonalize natural gas term structure data?

As a starting point to this, determining seasonality for a given market is as follows: i) Take several years of historical spot price time series, e.g. TTF spot prices. For year $i$ work out a yearly ...
• 1,581
Accepted

### What is the reasoning to derive this financial model called the Vasicek Model?

The original Vasicek paper is "An equilibrium model of the term structure". If you google for it, you'll find it and you can read in his own words his motivation for developing it. In particular, what ...
• 794

### What is the state of the art govie bond term structure recently

I interpret your question to be asking about curve fitting techniques (for constructing fitted par/zero curves), since a term structure model (HW, LMM, etc.) can always be constructed to fit a given ...
• 10.9k
Accepted

### SVI model and Greeks calculation

The SVI is simply a function (empirically fit to the data) which given a maturity and a strike price K, computes a BS implied volatility $\sigma$. Once you have that implied volatility you can plug it ...
• 9,167

### Contango and backwardation in VIX futures

Since contracts on physical goods have associated costs, it makes sense that the term structure curve would be upward sloping. Since there is no cost associated with delivery for the VIX and contango ...
• 3,880
Accepted

### Fitting the Term structure of Discount Bonds with Ho-Lee

What they are referring to is a very simplified version of the Ho-Lee model, i.e. on that assumes $$r(t)=r(0)+{\sigma}W(t)$$ where ${\sigma}$ is a constant (annualized StDev). For the sake of ...
• 725
Accepted

### Deriving interest rate term structure in a short rate model

This is indeed a standard result. You can convince yourself by noticing The bank account grows from 1 at $t=\tau$ to $E\left[\exp(\int_\tau^T r(u)du)|\mathscr{F}_\tau\right]$ at time $T$ The price of ...
• 1,933
Accepted

### Valuing derivatives under stochastic interest rates

A few points can be noted. The CIR model is usually for a short, or instantaneous, spot rate $r_t$, which is the forward rate over an infinitesimal interval. That is, \begin{align*} r_t = \lim_{\...
• 20.5k

### VXV vs. VIX futures: arbitrage opportunities?

VXV is a 3-month volatility index, and is currently not tradable (there are no futures on it). And since you cannot trade it, you cannot arb it.
• 2,453

### What is "implied skew" and "spot/vol beta"?

Maybe you would like to take a look at Managing forward volatility and skew risk for a direct and robust relation between spot-volatility correlation/covariance and the implied vol skew in the context ...
• 5,097

### Why should future short rates tend towards the current term structure of interest rates?

It really depends for what purpose you are using the model. Let’s say you are using it for valuation of some instrument. If you want the fair market value, then a) is irrelevant and you would instead ...
• 14.3k
Accepted

### Applying interest rate models for volaility rate

Hans Buehler investigated this in some detail, including in his doctoral thesis. When I tried it out some years ago, back when volatility exotics were more liquid, I found the models nearly ...
• 14.5k