Richard Herron
  • Member for 10 years, 11 months
  • Last seen more than a week ago
Why are GARCH models used to forecast volatility if residuals are often correlated?
Accepted answer
15 votes

One of the reasons the ARCH family of models is used is that you only need price data to generate the model. These data exist back to the 1800s, so ARCH is great for looking at volatility over very ...

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Is there a technique for using xts or zoo objects with options data (i.e., many entries per date) in R?
5 votes

FWIW, here's the approach I used. I keep the dates as an integer in YYYYMMDD form and merge the calls and puts in to a data frame both. Then I use ddply to operate on each matched call and put to find ...

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How would you test the hypothesis "There are no idiosyncratic returns available in the market"?
5 votes

Take the CAPM regression (it's not exactly correct, but it's instructional) $$(R_i - R_f) = \alpha_i + \beta_i (R_{mkt} - R_f) + \epsilon_i$$ The author is saying that these days the $(R_{mkt} - R_f)$ ...

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Why is there no "meta-model"?
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14 votes

There are plenty of market models -- capital asset pricing model (CAPM), conditional CAPM (CCAPM), intertemporal CAPM (ICAPM), and arbitrage pricing theory (APT). But any model, finance or otherwise, ...

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Deterministic interpretation of stochastic differential equation
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10 votes

(1) You analytically solve a stochastic differential equation (SDE) using Ito's lemma. Your second equation (the discretized one) is how you could model one path over one step. To find the solution, ...

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Is it possible to use a series of option prices to predict the most likely path of an asset?
3 votes

If you're asking "can I get a prediction of a future price from an option chain", then, no, I don't think so. The value of an option does not depend on the underlying stock's drift, or price ...

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How does the "risk-neutral pricing framework" work?
34 votes

We bet on a fair coin toss -- heads you get $\$100$, tails you get $\$0$. So the expected value is $\$50$. But it is unlikely that you'll pay $\$50$ to play this game because most people are risk ...

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What concepts are the most dangerous ones in quantitative finance work?
7 votes

That value stocks are necessarily riskier than growth; that there has to be a hidden risk factor that we haven't yet found. The Lakonishok, Shleifer, and Vishny abstract says it better than I can: ...

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What are the popular methodologies to minimize data snooping?
7 votes

The output of your model will be a realization of your assumptions. Shane's given you a great answer. Besides doing out of sample testing (i.e., calibrating on period X then testing in period Y only ...

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Who has introduced the term 'vega' and why?
6 votes

I have no reference, but it's largely phonetic. Must variables in econ/finance are Greek versions English letter you'd want to use. $\omega$ for weight, $\rho$ for rate, $\epsilon$ for error, and so. ...

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Why does the VIX index have *any* correlation to the market?
7 votes

VIX is mechanically determined from the price of S&P500 call and put options. So if the demands for S&P500 calls/puts rise, then the prices rise, then the implied vol from these options rises. ...

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Approximately what proportion of a stock’s volatility is explained by market movement?
5 votes

So my first answer was off base. For some reason I was thinking first moment (idiosyncratic returns), but he's looking for second moment (idiosyncratic volatility). There is a line of research on the ...

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Is there any theoretical basis for pattern-recognition strategies?
13 votes

Weak form market efficiency says that you can't predict prices based on past prices. Or that technical analysis doesn't work. I think that the tests of weak form market efficiency are pretty ...

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What type of analysis is appropriate for assessing the performance time-series forecasts?
Accepted answer
14 votes

I think you're looking for some way to test for autocorrelation in your residuals. If your model is good -- let's say you have an ARMA(1, 1) model for your forecast -- then the residuals from this ...

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What is the "delta" option quoting convention about?
Accepted answer
14 votes

Delta is the partial derivative of the value of the option with respect to the value of the underlying asset. An option with a delta of 0.5 (here listed as +50 points) goes up \$0.50 if the underlying ...

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