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by EdisonCruise
January 5th, 2015, 7:51 am
Forum: General Forum
Topic: How to forecast volatility based on fundamental analysis?
Replies: 1
Views: 3138

How to forecast volatility based on fundamental analysis?

<t>I know there are lots of papers and books cover forecasting volatility by quantitative model. However, is there any practical guide on forecast volatility based on fundamental analysis, like the analysis on government policy, economic conditions of foreign/domestic countries, customers' demand an...
by EdisonCruise
December 31st, 2014, 8:10 am
Forum: Student Forum
Topic: 2D martingale problem
Replies: 5
Views: 3426

2D martingale problem

Thank you Alan. I have sth to pick up.
by EdisonCruise
December 29th, 2014, 1:32 am
Forum: Student Forum
Topic: 2D martingale problem
Replies: 5
Views: 3426

2D martingale problem

Is there anything unclear on this question? The interviewer suggested a martingale be constructed in 2D to solve this problem, but I really cannot figure it out. Any further suggestions from you guys?
by EdisonCruise
December 27th, 2014, 9:30 am
Forum: Student Forum
Topic: 2D martingale problem
Replies: 5
Views: 3426

2D martingale problem

<t>This is an interview question. Circle A with radius a is inside Circle B with radius b. a 2D independent Brownian motion start from point M with distance r to center of circle A. point M locates between circle A and cirlce B. What's the probability of reaching circle A before reaching circle B? <...
by EdisonCruise
December 24th, 2014, 12:11 am
Forum: Numerical Methods Forum
Topic: Why pricing American option by free-boundary method and MC?
Replies: 5
Views: 4510

Why pricing American option by free-boundary method and MC?

<t>Thank you, Cuchulainn.The finite difference scheme I use is Crank?Nicolson, which is second order accuracy. Do you mean assigning payoff to option price directly would make the accuracy order to 1? If so, can a classical 4th order Runge-Kutta can cure this disadvantage, where I can assign payoff ...
by EdisonCruise
December 23rd, 2014, 3:10 pm
Forum: General Forum
Topic: Expectation of volatility or sqrt(expectation of variance)?
Replies: 6
Views: 3635

Expectation of volatility or sqrt(expectation of variance)?

Thank you for your suggestions Alan.
by EdisonCruise
December 23rd, 2014, 3:07 pm
Forum: Numerical Methods Forum
Topic: Why pricing American option by free-boundary method and MC?
Replies: 5
Views: 4510

Why pricing American option by free-boundary method and MC?

<t>As I know, American-type option can be solved by PDE method. When the PDE is integrated backward, the option price can be simply assigned by option payoff at this time step if the payoff is bigger. This method seems work well for me, but is there any disadvantage of this method? Otherwise why do ...
by EdisonCruise
December 23rd, 2014, 11:22 am
Forum: Trading Forum
Topic: How to allocate asset in pairs trading after getting cointegration?
Replies: 0
Views: 3454

How to allocate asset in pairs trading after getting cointegration?

<t>In Carol Alexander?s book, Market Models, page 370, it says, "Suppose a benchmark and log price y is to be tracked with a number of assets with log prices x1,x2,..,xn. The Engle-Granger cointegration method is to regress y on a constant and x1,x2,..,xn, and then to test the residuals for stationa...
by EdisonCruise
December 23rd, 2014, 3:22 am
Forum: General Forum
Topic: Expectation of volatility or sqrt(expectation of variance)?
Replies: 6
Views: 3635

Expectation of volatility or sqrt(expectation of variance)?

<t>Thank you, Alan. MC is a powerful way to resolve this problem.I have tried MC to simulate discrete hedging PnL, where underlying price is generated in the following way:d(Var)=kappa*(theta-Var)*dt+gamma*Var*dZsigma=sqrt(Var)dS=r*S*dt+sigma*S*dWHere Var is the variance and sigma is the volatility....
by EdisonCruise
December 22nd, 2014, 2:28 pm
Forum: General Forum
Topic: Expectation of volatility or sqrt(expectation of variance)?
Replies: 6
Views: 3635

Expectation of volatility or sqrt(expectation of variance)?

<t>Thank you for your suggestion, Alan.I haven't tried this. However, I guess the "mean loss" should depend on the strike, expiration, etc.. In practice, we may also need to consider the "standard deviation of loss". It may also depend on case by case, I guess. I am interested to know if there is an...
by EdisonCruise
December 22nd, 2014, 1:12 am
Forum: General Forum
Topic: Expectation of volatility or sqrt(expectation of variance)?
Replies: 6
Views: 3635

Expectation of volatility or sqrt(expectation of variance)?

<t>We are going to price option with volatility forecasted by Garch(1,1). Based on Javaheri and Wilmott's paper "Garch and Volatility Swaps", one can calculate expectation of volatility or sqrt(expectation of variance) after calibration of Garch(1,1). The difference of two is a convexity adjustment ...
by EdisonCruise
December 18th, 2014, 3:42 pm
Forum: Trading Forum
Topic: OTM option in pairs trading
Replies: 1
Views: 3539

OTM option in pairs trading

<t>Suppose I find two future contracts A and B, which is cointegrated. A' price should go up and B' price should go down based on their cointegration relationship by Engle-Granger's method. If I am not confident on A, I prefer to long A's OTM call option rather than A's future. I still want to short...
by EdisonCruise
November 30th, 2014, 3:02 pm
Forum: Student Forum
Topic: How to calculate the expectation of Brownian bridge?
Replies: 0
Views: 3030

How to calculate the expectation of Brownian bridge?

<t>Suppose a Brownian bridge Bt in a period [0,T],starting from 0 and back to 0. 0<s<t<T, how to calculate expectation E[Bs|Bt]?My understanding is:(1) since the definition Bt=Wt-(t/T)*Wt, then Wt=T*Bt/(T-t). Is condition on Bt equivalent to condition on Wt, so E[Bs|Bt]=E[Bs|Wt]?(2) then:E[Bs|Bt]= E...
by EdisonCruise
October 29th, 2014, 1:18 am
Forum: General Forum
Topic: How to use Black Scholes framework practically for option sell side?
Replies: 1
Views: 3556

How to use Black Scholes framework practically for option sell side?

<t>Black Scholes framework is imperfect in fact. In practice, we need to consider the volatility risk and jump risk. And we hope to incorporate these risks into the option price. So what is the advisable and practical way to price option in BS framework considering these risks? I also wonder what th...
by EdisonCruise
October 24th, 2014, 12:10 am
Forum: Technical Forum
Topic: What can we do during in delta-hedging when volatility increases?
Replies: 7
Views: 4018

What can we do during in delta-hedging when volatility increases?

<t>The optimal sigma_h to hedge is the expected realized volatility over your hedging period. Could you please explain further why "The optimal sigma_h to hedge is the expected realized volatility over your hedging period"? The "expected realized volatility" changes as time passes, so we need to kee...
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