There is definitely more activity in modeling equity options than rates in recent years.  The presence of more substitutes in the rates world (simple examples - a bond can be viewed as a whole instrument or a collection of strip coupons plus the residual, and similar decompositions for caps/caplets ...

"This is depressing".

Using a hammer to swat a fly that was killed long ago.

As unintuitive as it sounds, one does not calibrate to the entire vol surface. That likely explains a good part of your fitting errors. Instead, one chooses the parts of the vol surface that logically span the particular deal you are pricing. And as unintuitive as it also sounds, this means one reca...

Not meaning to put words in bearish's mouth, but the fitting errors you are showing are simply way too large to be useful in pricing. You would get your face ripped off if you tried trading and hedging with such poor fitting. There are a number of possibilities as to why your fit is so poor: 1) as b...

Almost everyone in the industry who is not a price taker will use some kind of stochastic volatility model. As for limit structures, the most useful ones are limits on the Greeks, but due to regulatory fixation with VaR, that kind of limit has become fairly binding. Other useful limits are on strike...

At the risk of sounding a bit trite, I am reminded of a quote attributed to Keynes that goes something like... the market may remain irrational longer than you may remain solvent.

Good point, Alan, any company should issue when its shares are plainly overbought. 

"... you are holding the land with a right to build property on the land or to abandon the land.  " By abandon, do you mean sell it? No residual value? Years ago I spent a fascinating afternoon visiting Goldman Sachs in Calgary, Canada. Goldman is deeply engaged in the integrated energy bu...

The HPEs are used to, among other things, inform regulators about marked inconsistencies in the treatment of RWAs across firms. As a practical matter, the major impediments to publishing the details of HPEs are the restrictions the data vendors have placed on the use of such data. Redistribution is ...

Yes, that is the procedure, for those who might want to know

I have an applied question for any swap traders out there. Scientists are please encouraged to not hijack the thread.    Say you have a bespoke single currency interest rate swap that pays X BPS on the fixed side semi-annual 30/360, against 3M LIBOR plus a Y BPS spread act/360 on the floating side. ...

I would imagine the money is less. And you'd have to work among people who have dated and even incorrect ideas about pricing (I am thinking specifically of insurance here). Trying to change that mindset is a steep hill to climb. Good luck. 

Might this be useful? http://www.sfu.ca/~kkasa/HarrisonKreps_79.pdf

I brought a more formal approach to modeling options when I joined a trading desk in the early 90’s, but the old school guys I sat with were fond of using analogies to explain certain facets of option trading. The analogy they used for the sigma root T term was as follows. To compute bond accrued in...

https://quant.stackexchange.com/questio ... ot-of-time

They characterize the square root of time rule as a property of geometric Brownian motion. How well it applies to the real world is another story.

People have also wondered about the propriety of a similar time scaling technique in the VaR world, namely, scaling VaR calculations made with daily data to longer time intervals (sometimes 10 days is used). This is a very similar problem to the one you posed, and it has been discussed a fair bit in...