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[Community wiki]
I'm interested to know what are the critical reference texts you rely on for portfolio or risk management? I mean those texts that you come back to because they are chock full of insight and know-how. For example:
Bernd Scherer - Portfolio Construction and Risk Budgeting (2005)
Grinold and Kah... |
I think that one is also pretty well-known:
[NcNeil, Frei, Embrechts - Quantitative Risk Management][1]
[1]: http://www.amazon.com/dp/0691122555/?tag=stackoverfl08-20 |
I think that one is also pretty well-known:
NcNeil, Frei, Embrechts - [Quantitative Risk Management][1]
Paul Wilmott - [Frequently Asked Questions in Quantitative Finance][2]
[1]: http://www.amazon.com/dp/0691122555/?tag=stackoverfl08-20
[2]: http://www.amazon.com/Frequently-Asked-Questions-Quantita... |
I'm interested to know what are the critical reference texts you rely on for portfolio or risk management? I mean those texts that you come back to because they are chock full of insight and know-how. For example:
Bernd Scherer - Portfolio Construction and Risk Budgeting (2005)
Grinold and Kahn - Active Portfolio... |
How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money?
I'm thinking for 1 point spreads this would be very small / neutral for ITM, ATM, and OTM, but I'm not sure. [if you have thoughts on this, perhaps please confirm in comment or answe... |
[EDITED by Ray/Author]
How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money?
I'm thinking for 1 point spreads this would be very small / neutral for ITM, ATM, and OTM, but I'm not sure. [if you have thoughts on this, perhaps please c... |
How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money?
I'm thinking for 1 point spreads this would be very small / neutral for ITM, ATM, and OTM, but I'm not sure. [if you have thoughts on this, perhaps please confirm in comment or answe... |
I have a simple question.
Is the Black-Scholes Formula convex with respect to Implied volatility parameter $\sigma$ (for calls or put) ?
When I say Black-Scholes I mean for a call the following one (on Forward price $F_t$):
$$Call (F_T, K, \sigma^2) = F_t.N(d_1) - K.e^{-r.(T-t)}.N(d_2)$$
$$d_1=\frac{Ln(F_t... |
I have a simple question.
Is the Black-Scholes Formula convex with respect to Implied volatility parameter $\sigma$ (for calls or put) ?
When I say Black-Scholes I mean for a call the following one (on Forward price $F_t$):
$$Call (F_T, K, \sigma^2) = F_t.N(d_1) - K.e^{-r.(T-t)}.N(d_2)$$
$$d_1=\frac{Ln(F_t... |
I have a simple question.
Is the Black-Scholes Formula convex with respect to Implied volatility parameter $\sigma$ (for calls or put) ?
When I say Black-Scholes I mean for a call the following one (on Forward price $F_t$):
$$Call (F_t,T-t, K, \sigma^2) = F_t.N(d_1) - K.e^{-r.(T-t)}.N(d_2)$$
$$d_1=\frac{Ln... |
I have a simple question.
Is the Black-Scholes Formula convex with respect to Implied volatility parameter $\sigma$ (for calls or put) ?
When I say Black-Scholes I mean for a call the following one (on Forward price $F_t$):
$$Call (F_t,T-t, K, \sigma^2) = F_t.N(d_1) - K.e^{-r.(T-t)}.N(d_2)$$
$$d_1=\frac{Ln... |
As OracleOfNJ said, there is never any advantage to early exercise of an American style *call* option unless the underlying asset offers some advantage, usually dividends, which does not apply to interest rate futures.
American *put* options were among the biggest open problems in finance until people learned how to... |
If a thinly traded stock has not traded for the last few days (volume=0), is it better to use the last known trade price (i.e. roll over last non-missing trade price) or use last known bid/ask/valuation price?
This is for stock chart application. |
What close price to assume for thinly traded stocks? |
How do you replicate the payoff of a constant maturity swap rate?
That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using swaptions? |
I haven't completely followed your question. Are you asking about the optimal rebalance frequency in the presence of t-costs and a changing alpha signal?
Usually you would include the t-cost estimate as another term in your optimization (to constrain the weights). This acts to limit the trading "aggressiveness".... |
I haven't completely followed your question. Are you asking about the optimal rebalance frequency in the presence of t-costs and a changing alpha signal?
Usually you would include the t-cost estimate as another term in your optimization (to constrain the weights). This acts to limit the trading "aggressiveness".... |
I'm familiar with supervised learning algorithms like regression and neural networks which look at a bunch of input points and learn a function which outputs a value (the value varying depending on whether the algo is a classifier, logistic regression, or standard regression)..but I am facing a problem now where each o... |
How can one compute the alpha decay of a systematic trading strategy? |
How to compute the alpha decay of a strategy? |
**Like most software projects, your decision should be based on what your researchers intend to use the data for.** Do they need mark-to-market for real-time or end-of-day reports or is it just for statistical analysis? Do they need bid-ask data? Tick data or minute bars? Is the data periodic or aperiodic?
For s... |
I am working on an intraday strategy using 5/10 minute bars. I am getting a decent return and sharpe on the strategy. But on close examination I see that I am making about 0.01 cent per trade (I haven't taken transaction cost into account).
How do you guys go about choosing a good intraday strategy ? I have always ... |
I've only recently begun working in the quantitative finance field, and I've noticed that some time series I'm given are labeled "seasonally adjusted", and some labeled with "seasonally adjusted annual rate". What's the difference between these two data transforms? |
What's the difference between SA and SAAR? |
I am working on an intraday strategy using 5/10 minute bars. I am getting a decent return and sharpe on the strategy. But on close examination I see that I am making about 0.01 cent per trade (I haven't taken transaction cost into account).
How do you guys go about choosing a good intraday strategy ? I have always ... |
I am working on an intraday strategy using 5/10 minute bars. I am getting a decent return and sharpe on the strategy. But on close examination I see that I am making about 1 cent per trade (I haven't taken transaction cost into account).
How do you guys go about choosing a good intraday strategy ? I have always use... |
How sensitive are vertical spreads to changes in volatility / implied volatility in the money, at the money, and out of the money?
I'm thinking for 1 point spreads this would be very small / neutral for ITM, ATM, and OTM, but I'm not sure. If you have thoughts on this, perhaps please confirm in a comment or answer.... |
How sensitive are vertical spreads to changes in implied volatility? |
How do you replicate the payoff of a constant maturity swap rate?
That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using swaptions? |
What is the replicating portfolio of swaptions for a constant maturity swap (CMS)? |
I am writing a paper with a case study in financial maths. I need to model an interest rate $(I_n)_{n\geq 0}$ as a sequence of non-negative i.i.d. random variables. Which distribution would you advise me to use? Currently I am considering the exponential distribution, but I am not sure that it is the right choice, thou... |
What distribution to assume for interest rates? |
I have a correlation matrix $A$ for an equity market that is not positive definite. Higham (2002) proposes the Alternating Projections Method, minimising the weighted Frobenius norm $||A-X||_W$ where $X$ is the resulting positive definite matrix.
How should one choose the weight matrix $W$?
The easy alternative i... |
What weights should be used when adjusting a correlation matrix to be positive definite? |
If you're hedging with a back month / leap option, what are good underlying / market conditions to move this option out even further in time?
For simplicity, let's say you own a call with 6 months expiration. What conditions provide the best "prices", for selling this option, and then buying another further out in... |
What are good conditions to roll a leap further out in time? |
If you're hedging with a back month / leap option, what are good underlying / market conditions to move this option out even further in time?
For simplicity, let's say you own a call with 6 months expiration. What conditions provide the best "prices", for selling this option, and then buying another further out in... |
are there comprehensive analysis of how much theta a weekly options loses in a day, per day.
I know what the shape of theta decay looks like, in theory, where the approaching of zero happens more rapidly the closer you get to expiration
but with weeklies, an example question would be: do they lose 20% by first fr... |
I'm working through different books about financial mathematics and solving some problems I get stuck.
Suppose you define an arbitrary stochastic process, for example
$ X_t := W_t^8-8t $ where $ W_t $ is a Brownian motion.
The question is, how could I deduce that this stochastic process is a martingale or not... |
I'm trying to understand option pricing better.
Let's say security ABC is \$40, and a 38 PUT option with 40% implied volatility (and 90 days till expiration) is priced at X. If security ABC then drops to \$30, should the price of a $28 PUT option with 40% implied volatility (and 90 days till expiration), now have... |
Does an option's price "ratio" with the underlying security price? |
If you're hedging with a back month / leap option, what are good underlying / market conditions to move this option out even further in time?
For simplicity, let's say you own a call with 6 months expiration. What conditions provide the best "prices", for selling this option, and then buying another further out in... |
In all the classic texts on equities derivatives, there is an assumption of the risk-free rate <i>r</i>. We can immediately dismiss the concept of a fixed rate; all interest rates are variable (and martingale?) in reality.
But also, as is more apparent in the current crisis, currency has a cost of carry, and no coun... |
I'm trying to understand option pricing better.
Let's say security ABC is \$40, and a 38 PUT option with 40% implied volatility (and 90 days till expiration) is priced at X. If security ABC then drops to \$30, should the price of a $28 PUT option with 40% implied volatility (and 90 days till expiration), now have... |
I'm wondering if there is some measurement or name to this notion, i.e.:
Markets typically fall fast, but rise slowly.
It seems like this is the case -- get some bad news out of Europe on the debt crisis there, and things drop fast. Then, in the absence of daily bad news, things tend to rise ... slowly. Is t... |
I'm wondering if there is some measurement or name to this notion, i.e.:
Markets typically fall fast, but rise slowly.
It seems like this is the case -- get some bad news out of Europe on the debt crisis there, and things drop fast. Then, in the absence of daily bad news, things tend to rise ... slowly. Is t... |
I'm wondering if there is some measurement or name to this notion, i.e.:
Markets typically fall fast, but rise slowly.
It seems like this is the case -- get some bad news out of Europe on the debt crisis there, and things drop fast. Then, in the absence of daily bad news, things tend to rise ... slowly. Is t... |
I'm working through different books about financial mathematics and solving some problems I get stuck.
Suppose you define an arbitrary stochastic process, for example
$ X_t := W_t^8-8t $ where $ W_t $ is a Brownian motion.
The question is, how could I deduce that this stochastic process is a martingale or not... |
Per a previous question on this [topic][1] -- markets generally fall fast and rise slowly: what options strategies or other strategies can one use to take advantage of this common occurrence?
[1]: http://quant.stackexchange.com/questions/2439/do-markets-typically-fall-fast-and-rise-slowly |
Given markets usually fall fast and rise slowly, are there trading mechanisms to take advantage of this? |
I'm looking for a method to automatically detect structural breaks, I tried Chow test, It
works good but it doens't work for breaks in variance.
Do you know a test to check strucutural break in variance/volatility for financial timeseries?
Thank you |
How to detect structural breaks in variance? |
I'm looking for a method to automatically detect structural breaks, I tried Chow test, It
works good but it doens't work for breaks in variance.
Do you know a test to check strucutural break in variance/volatility for financial timeseries?
|
Are you sure of what you advance ? Because I pay the same volatility for my 80% puts and my 80% calls. |
Are you sure of what you advance ? Because I pay the same volatility for my 90% puts and my 90% calls. |
Bill Sharpe [proves][1] that the average alpha from active management is zero (and after transaction costs the average active manager returns less than passive funds). One active manager's gain is offset by equal losses among some other active managers.
So I stumbled across this article "[Does Active Management Pay?... |
Bill Sharpe [proves][1] that the average alpha from active management is zero (and after transaction costs the average active manager returns less than passive funds). One active manager's gain is offset by equal losses among some other active managers.
So I stumbled across this paper "[Does Active Management Pay? N... |
Links to the risk model methodologies of the major providers? |
There is quite a bit of art in constructing an equity risk model. This [paper][1] summarizes some of the key decisions: choice of factors, horizon matching, cross-sectional vs. time-series method, and regression procedure to name a few.
The risk vendors make available their methodologies to their customers (and in m... |
[Wilmott Forums - "How can I simulate correlated random numbers?"][1]
[Generating correlated normal variates][2]
[Random Correlated Series Generator (using R)][3]
All found with a Google search for "how to generate random correlated series".
[1]: http://www.wilmott.com/messageview.cfm?catid=19&threadid=... |
Also, RiskMetrics' 'granular approach' may be of interest (I have no affiliation):
See:
I. [Developing an Equity Factor Model for Risk][2]
II. [The RiskMetrics 2006 Methodology, RM2006][1]
[1]: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1420185
[2]: https://frontoffice.riskmetrics.com/wiki/... |
Assuming I want to run an optimization over a short period, say 2 years, I would decide to take daily values in order to compute the efficient frontier of a portfolio. That works fine as long as I have classical assets with daily indices.
For other asset classes, these indices might not exists. How would you then pr... |
How do you handle short-term asset allocation with Hedge-Funds? |
Assuming I want to run an optimization over a short period, say 2 years, I would decide to take daily values in order to compute the efficient frontier of a portfolio. That works fine as long as I have classical assets with daily indices.
For other asset classes, these indices might not exists. How would you then pr... |
A recent personal finance question asks [when to hire an investment professional?][1] Given that many of us here are on the professional manager side of the business, how would you make the case? What quantitative evidence would you show a potential client? What research is there to guide one as to the right asset l... |
What is the case for active management? |
There's a strong theoretical argument that makes the case for active management. Check out Jonathan Berk's paper "Five Myths of Active Management". The paper is 5 pages long and reads more like a Gedankenexperiment.
This is a better approach then an empirical one because as Berk points out:
> One might suppose ... |
There's a strong theoretical argument that makes the case for active management. Check out Jonathan Berk's paper "[Five Myths of Active Management][1]". The paper reads like a clever Gedankenexperiment.
This is a better approach then an empirical one because as Berk points out:
> One might suppose that to measu... |
There's a strong theoretical argument that makes the case for active management that is supported by empirical research. First, check out Jonathan Berk's paper "[Five Myths of Active Management][1]". The paper reads like a clever Gedankenexperiment.
Starting with a theoretical approach is better than starting with ... |
There's a strong theoretical argument that makes the case for active management that is also supported by empirical research. First, check out Jonathan Berk's paper "[Five Myths of Active Management][1]". The paper reads like a clever Gedankenexperiment.
Starting with a theoretical approach is better than starting ... |
There's a strong theoretical argument that makes the case for active management that is also supported by empirical research. First, check out Jonathan Berk's paper "[Five Myths of Active Management][1]". The paper reads like a clever Gedankenexperiment.
Starting with a theoretical approach is better than starting ... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its alpha (i.e. idiosyncratic component not explained by the factor model... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
I have a trading strategy that I use on single tickers. I'd like to start using it with pairs as well. However, I'm somewhat math challenged and not sure how to best calculate the stops of the individual tickers. Could someone point me in the right direction?
If I have a pair, ABC and DEF, that I'd like to go lo... |
How would I calculate a stop on a pair trade? |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
There's a strong theoretical argument that makes the case for active management that is also supported by empirical research. First, check out Jonathan Berk's paper "[Five Myths of Active Management][1]". The paper reads like a clever Gedankenexperiment.
Starting with a theoretical approach is better than starting ... |
Is there such a thing? Or is there a project around that aims to realize Quantlib in JS? I'm a JS coder and I'd like to get involved if so.
Maybe it seems futile or silly today, but who can doubt that's merely a calendrical issue?
I find no JS R but there's a JStat package that advertises itself as "like R:" <a h... |
Quantlib in JavaScript? |
Is there such a thing? Or is there a project around that aims to realize Quantlib in JS? I'm a JS coder and I'd like to get involved if so.
Maybe it seems futile or silly today, but who can doubt that's merely a calendrical issue?
I find no JS R but there's a JStat package that's advertised as "like R:" <a href="... |
I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it:
1. Receive Cash payment amount of $X
2. Subsequent pay out $Y per calendar month into perpetuity
3. Have the option to ... |
How would I value this debt instrument? |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
I just reviewed the paper [Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis][1] by Dick-Nielsen, Feldhütter and Lando. They define a liquidity measure $\lambda$ as a conglomerate of
- price impact (Amihud) and its variability
- spread covariance (Roll) and its variability
- turnover
... |
Is there such a thing? Or is there a project around that aims to realize Quantlib in JS? I'm a JS coder and I'd like to get involved if so.
Maybe it seems futile or silly today, but who can doubt that's merely a calendrical issue?
I find no JS R but there's a JStat package that's advertised as "like R:" <a href="... |
Let's say I have a factor model which I am using for Performance Attribution. I'd like to separate returns from alpha vs. returns from exposure to various risk factors.
For each date, the factor model decomposes the returns of a security into its daily alpha (i.e. idiosyncratic component not explained by the factor... |
I am exploring de-noising and cleansing of covariance matrices via [Random Matrix Theory][1]. RMT is a competitor to shrinkage methods of covariance estimation. There are various methods expressed usually by the names of the authors: [LPCB][2], [PG+][3], and so on.
For each method, one can start by filtering the co... |
Are there comprehensive analyses of how much theta a weekly options loses in a day, per day?
I know what the shape of theta decay looks like, in theory, where the approaching of zero happens more rapidly the closer you get to expiration.
But with weeklies, an example question would be: do they lose 20% by first F... |
Is there such a thing? Or is there a project around that aims to realize Quantlib in JS? I'm a JS coder and I'd like to get involved if so.
Maybe it seems futile or silly today, but who can doubt that's merely a calendrical issue?
I find no JS R but there's a JStat package that's advertised as "like R:" <a href="... |
Is there such a thing? Or is there a project around that aims to realize Quantlib in JS? I'm a JS coder and I'd like to get involved if so.
Maybe it seems futile or insane today, but who can doubt that's merely a calendrical issue?
I find no JS R but there's a JStat package that's advertised as "like R:" <a href=... |
I see the [Generalized Method of Moments](http://www.kevinsheppard.com/images/5/56/Chapter5.pdf) suggested in numerous academic papers as a way to [calibrate](http://cims.nyu.edu/~almgren/timeseries/Vol_Forecast2.pdf) stochastic volatility models. However, any decent trading shop is going to calibrate to observable op... |
Are there "live" uses of the Generalized Method of Moments or are they all academic? |
There's a relatively new product in the market / on the Nasdaq called [Alpha Indexes][1]. It lets one own a company -- e.g. Apple, GE, Google, etc -- as the difference between how that company does (the "target"), and a benchmark (e.g. SPY). That seems like a "stock analyst's dream", being able to say they believe co... |
There's a relatively new product in the market / on the Nasdaq called [Alpha Indexes][1]. It lets one own a company -- e.g. Apple, GE, Google, etc -- as the difference between how that company does (the "target"), and a benchmark (e.g. SPY). That seems like a "stock analyst's dream", being able to say they believe co... |
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