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by gjbiren
July 13th, 2012, 1:46 pm
Forum: Technical Forum
Topic: Hedging Dynamic Correlation
Replies: 8
Views: 15602

Hedging Dynamic Correlation

<t>Phaedo-Sorry for the long response time. What I am actually working on are variance swaps. If I recall correctly from Carr et al., following a Taylor expansion, the third term, which should be negative and approximate the variance risk premium, is a function of the correlation/covariance. I am ul...
by gjbiren
May 8th, 2012, 5:14 pm
Forum: Technical Forum
Topic: Hedging Dynamic Correlation
Replies: 8
Views: 15602

Hedging Dynamic Correlation

<r>Carr and Madan is a Risk article: <URL url="http://www.math.nyu.edu/research/carrp/papers/pdf/covswappaper.pdfBossu"><LINK_TEXT text="http://www.math.nyu.edu/research/carrp/ ... r.pdfBossu">http://www.math.nyu.edu/research/carrp/papers/pdf/covswappaper.pdfBossu</LINK_TEXT></URL> has quite a few: ...
by gjbiren
April 30th, 2012, 11:43 pm
Forum: Technical Forum
Topic: Hedging Dynamic Correlation
Replies: 8
Views: 15602

Hedging Dynamic Correlation

<t>Thanks for the link.I have looked at things from Carr-Madan, Bossu, etc. and everyone seems to use average correlation or covariance. I am trying to do this for the commodity space so my hope is that there may be some way to construct it using spread options or some other rainbow variant. I suppo...
by gjbiren
April 24th, 2012, 10:43 pm
Forum: Technical Forum
Topic: Hedging Dynamic Correlation
Replies: 8
Views: 15602

Hedging Dynamic Correlation

<t>There has been a lot of literature recently regarding dynamic correlation (Engle 2002, etc. ) Is there any way to get a closed form solution to a hedge on it? I am guessing that using DCC would imply probabilistic measures that would preclude the construction of an equivalent martingale measure, ...
by gjbiren
April 24th, 2012, 10:32 pm
Forum: Technical Forum
Topic: Implied vs Realized volatility
Replies: 11
Views: 16941

Implied vs Realized volatility

<t>I think you need to take into account the variance risk premium via the skew. Heuristically I believe that most variance swaps are priced off the the 90% put, not the ATM which implies that the expectations of realized variance/vol are not reflected in the ATM. I believe a variance swap is a pure...
by gjbiren
November 16th, 2011, 6:14 pm
Forum: Student Forum
Topic: Weather derivatives historical data
Replies: 9
Views: 75884

Weather derivatives historical data

<t>With the caveat that I have done some low level academic research on weather derivatives and correlation analysis of weather and electricity demand but am far from an expert: When you say "model prices", could you be more specific? Are you talking about the underlying distribution function of tem...
by gjbiren
November 9th, 2011, 2:30 am
Forum: Technical Forum
Topic: Deriving pdf of underlying from option prices
Replies: 16
Views: 20045

Deriving pdf of underlying from option prices

<t>I wanted to clarify that I am actually a PhD student and that this is a project that I have been assigned at an internship. With those caveats in place, I again want to thank all of you for your input and ask for some further elaboration:Regarding splines, esp. @ Alan and pimpel, couldn't I just ...
by gjbiren
November 8th, 2011, 1:16 am
Forum: Technical Forum
Topic: Deriving pdf of underlying from option prices
Replies: 16
Views: 20045

Deriving pdf of underlying from option prices

Gatheral in The Volatility Surface says that he uses splines with SVI. I am assuming that was because he was looking at the SPX which is obviously very liquid. You correctly assumed that my market is not. I am not nearly at that point yet, but will I be able to use SVI without using splines?
by gjbiren
November 6th, 2011, 8:52 pm
Forum: Technical Forum
Topic: Deriving pdf of underlying from option prices
Replies: 16
Views: 20045

Deriving pdf of underlying from option prices

<t>Thanks for the response.I actually have an old paper from Risk magazine in 1993 by David Shimko that uses the Breeden and Litzenberger methodology. It uses the second derivative of the option price wrt strike price but that is a rough analog of butterfly pricing. Due to the age of the paper I was...
by gjbiren
November 6th, 2011, 5:07 pm
Forum: Technical Forum
Topic: Deriving pdf of underlying from option prices
Replies: 16
Views: 20045

Deriving pdf of underlying from option prices

<t>I am an Econ PhD doing an internship and a project I have been given is to derive the underlying pdf of a futures contract based upon option prices. For the sake of simplicity, we are ignoring time considerations, insomuch as we are only looking at one contract with one expiration, i.e. I do not ...