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The discussion explains how market makers provide liquidity and manage the risks created by their quotes being executed. Their strategies consider whether incoming orders may contain information about future price moves, and they adjust quotes to control an…
The document derives a conditional expectation of cumulative inflation when nominal and real short rates follow correlated mean-reverting Gaussian diffusions. It first writes each rate as its initial value, an integrated drift contribution, and a stochastic…
The discussion separates unit-root testing from the different meanings of stationarity. An augmented Dickey–Fuller test evaluates evidence for a unit root under its model assumptions; a conclusion about that test does not by itself establish that a series is…
The document considers an OTC swap intended to offset deviations of stochastic contract cashflows from their expected values. It frames the central pricing question as determining the premium for taking on that residual variability, which may arise from…
The document proposes a way to construct model inputs for year-on-year and zero-coupon inflation options when example quotes are unavailable. Comparing yields on Treasury Inflation-Protected Securities with yields on nominal Treasury securities of similar…
The document outlines a first-order and second-order method for assigning daily option profit and loss to delta and gamma. Delta contribution is estimated from delta times the underlying price change, while gamma contribution uses one half of gamma times the…
The document considers software options for building a dynamic financial charting tool centered on candlestick plots. The person asking prefers Python because their programming experience is limited and would like interaction features such as zooming and…
The document explains two common ways to estimate yields for a particular tenor when several bonds have different original maturities but similar time remaining. A market data provider may use a recently issued, liquid benchmark bond for each tenor,…
The document explains why ARMA coefficients estimated together with a GARCH variance model can differ from coefficients estimated in an ARMA model alone. The variance component accounts for changing volatility, which can affect the mean-equation estimates.…
The document asks how to find investment products whose systematic strategies and performance can be inspected and reproduced. It points to exchange-traded funds as a practical starting point, especially products built to track quantitative or…
The document asks whether investor selling can be measured as a function of losses from purchase price, and whether available data could reveal a loss threshold or disposition pattern. One response points to research by Barber and Odean on individual…
The document distinguishes daily log returns from the logarithm of a simple percentage return. For consecutive closing prices, the standard log-return definition takes the natural logarithm of the current price divided by the previous price. This expresses…
The document offers research guidance for studying whether neural networks can predict liquidity or bid-ask spreads from market depth data. It recommends preparing the data carefully, considering zero or negative spreads, and planning how limited…
The document asks how to build a non-USD discount curve for EUR/USD and GBP/USD mark-to-market basis swaps collateralized in USD. The proposed construction uses forward rates for the short end and cross-currency basis swaps at longer maturities. The central…
The document explains why factor returns should be evaluated against a benchmark suited to the portfolio’s construction. For a passive long-only asset allocation, the return above the risk-free rate measures compensation over cash. For a tradable factor, the…
The document clarifies how to identify the cheapest-to-deliver bond in a futures contract. The seller’s relevant comparison is each eligible bond’s market price relative to its futures invoice price, which incorporates the conversion factor. The CTD is the…
The document raises a practical issue in rolling indicators built from tick data across a market close. Ticks immediately before the prior close may have different statistical properties from ticks after the next open, yet a fixed lookback such as the…
The document discusses how to normalize stock data when comparing series, such as through correlation analysis. Its responses recommend working with returns rather than raw prices because price levels are generally nonstationary, and favor subtracting a…
The document asks whether European options can be priced in closed form when the variance gamma model’s drift, volatility, and variance rate are random. It explains that unrestricted random coefficients generally do not yield a closed-form price:…
The document shows how to replicate a payoff that is zero below a lower strike, rises linearly between two strikes, and is capped above the higher strike. The call construction is a bull call spread: buy a call at the lower strike and sell a call at the…
The document explains why a high correlation between a call option’s price and its underlying stock does not conflict with a much smaller option delta. Correlation describes how consistently the two prices move together, while delta estimates the option’s…
The document examines how to estimate a stock correlation matrix when securities have different history lengths and those histories may cover different market regimes. It outlines several approaches: truncate all series to a common period, use…
The document discusses what traders mean by spot volatility and how it can be expressed through traded instruments. It presents several interpretations: volatility swaps can provide exposure linked to realized volatility; options can express implied…
The document answers whether an R package is needed to estimate a conditional autoregressive range model. It describes the CARR approach as applying a GARCH-style specification to price ranges rather than to returns. The range is formed from the maximum and…