Quantitative Finance Collector

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Published: 2010 Categories(s): Non-Fiction, Business & economics, Finance Tag(s): "quantitative finance" "financial engineering" "mathematical finance" quant "quantitative trading"

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Quantitative Finance Collector is simply a record of my financial engineering learning journey as a master in quantitative finance, a PhD candidate in finance and a Quantitative researcher. It is mainly about Quantitative finance codes, methods in mathematical finance focusing on derivative pricing, quantitative trading and quantitative risk management, with most of the entries written at university.

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www.feedbooks.com Food for the mind

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Quantitative Finance Collector

Updated: 8-10 Update this newspaper

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Quantitative Finance Collector
Handling Large CSV Files in R
A follow-up of my previous post Excellent Free CSV Splitter. I asked a question at LinkedIn about how to handle large CSV files in R / Matlab. Specifically, Quotation suppose I have a large CSV file with over 30 million number of rows, both Matlab / R lacks memory when importing the data. Could you share your way to handle this issue? what I am thinking is: a) split the file into several pieces (free, straightforward but hard to maintain); b) use MS SQL/MySQL (have to learn it, MS SQL isn't free, not straightforward).

A useful summary of suggested solution: 1, 1) import the large file via "scan" in R; 2) convert to a data.frame --> to keep data formats 3) use cast --> to group data in the most "square" format as possible, this step involves the Reshape package, a very good one. 2, use the bigmemory package to load the data, so in my case, using read.big.matrix() instead of read.table(). There are several other interesting functions in this package, such as mwhich() replacing which() for memory consideration, foreach() instead of for(), etc. How large can this package handle? I don't know, the authors successfully load a CSV with size as large as 11GB. 3, switch to a 64 bit version of R with enough memory and preferably on linux. I can't test this solution at my office due to administration constraint, although it is doable, as mentioned in R help document, Quotation 64-bit versions of Windows run 32-bit executables under the WOW (Windows on Windows) subsystem: they run in almost exactly the same way as on a 32-bit version of Windows, except that the address limit for the R process is 4GB (rather than 2GB or perhaps 3GB)....The

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disadvantages are that all the pointers are 8 rather than 4 bytes and so small objects are larger and more data has to be moved around, and that far less external software is available for 64-bit versions of the OS.

Search & trial. Tags - r , csv

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Excellent Free CSV Splitter
Share an excellent free CSV splitter I found recently, as my csv file is too large to be openned in Matlab & R, I have to split the csv into several smaller files. As far as I have tried, Matlab & R warn "short of memory" for reading csv file larger than 10,000,000 number of rows (it may be varied across computers), while my tick-by-tick corporate bond data has nearly 30,000,000 number of rows. This CSV splitter allows you to split your large file into several smaller files either by number of lines or by max pieces,

The amazing point of it is the smaller files keep the original header of the big csv file, very cool. Download the free csv splitter here. Tags - csv , tool

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Isin Cusip Conversion
Long time no blog. Just to let you know I am still alive, busy with my own PhD research, collecting & cleaning data, programming, making my hands dirty... Data massaging is not fun, what makes us more upset is different data providers have their own data format, name, code, etc., matching the data from several sources is not so easy, for example, WRDS includes CUSIP code while Datastream provides ISIN. I didn't understand why they do business like that but now I get it, similar as those cell phone manufacturers have distinct chargers and plug-in, not because it's hard to standardize, but a way to impose customers to use always their own products. Anyway, you can convert ISIN code to CUSIP easily once you understand the rule, ISIN is a 12-digit number while CUSIP is a 9-digit one (at least the case for US corporate bond), so what you need to do is to first strip off the first 2 characters representing country code and then remove the last digit which is a check digit for catching error. Suppose your ISIN code is in cell A1, ISIN CUSIP conversion can be done easily in Excel as "=left(right(A1, 10), 9)", for instance, ISIN US885797AB65 equals CUSIP 885797AB6. As always, I have been looking for guest writers. Tags - isin , cusip

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Investment banks and the World Cup
This is a news tip that might be of interest sent by Anthony Goldbloom, thanks. In the lead-up to the world cup, Kaggle invited statisticians and data miners to take on the big investment banks in predicting the outcome of the World Cup. Now that the final has been decided, we can take a look at how Kagglers stacked up against the quants at JP Morgan, Goldman Sachs, UBS and Danske Bank in forecasting the World Cup. In total, 65 teams participated in the Take on the Quants challenge. JP Morgan finished 28th, Goldman Sachs 33rd, UBS 55th and Danske Bank 64th. The betting markets fared better, finishing 16th. The winner of the competition was Thomas Mahony, an Australian economist. His approach relied on Elo ratings with an adjustment for home country/continent advantage. His strategy correctly tipped Spain to win, the Netherlands to finish second and Germany to finish in the top four. The investment banks all had their top picks bow out early (UBS, Goldman Sachs and Danske Bank picked Brazil and JP Morgan picked England), hurting their overall performance. The next big question is whether Kagglers can also outperform the quants in forecasting financial markets (we won’t have to wait long to find out, as Kaggle is currently hosting a competition to predict stock price movements). Tags - quant , world-cup

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Send SMS in Matlab
Ros is a colleague of mine in the same office, his main research is empirical analysis of different option pricing models, and as a result, he often use several computers on different desks to run his matlab codes, which is time-consuming and not rare to last 2 or 3 days. So he has to come back office frequently to check which computer has finished the task. It sounds boring, why not write a small script to send SMS message to you automatically when your matlab stops running? Send Text Message to Cell Phone is such a great file I found recently, bascially what it does is to send email via sendmail function of Matlab from your gmail box to your cell phone carrier, and then your cell phone carrier forwards the email to you as a text message. Problem However, it works for US based cell phones only, I have tried on my UK T-mobile phone and it seems UK T-mobile doesn't support such a mail to SMS service (correct me if I am wrong). Solution Fortunately, I came across SMS service website which allows people to send up to 3 free email to SMS per day, it should be enough for our use in Matlab. Add the following line in the switch case after line 55 case 'uk'; emailto = strcat(number,'@x-onsms.com'); that's it, the email will be delivered as an SMS to your mobile. Do let me know if you are aware of a better alternative. So what you need to do is to put the function send_text_message at the end of your file, it will then send you a message automatically, for example send_text_message('079-123-456','UK', 'Desk 12 Calculation Done','Now you can shut down the computer') What else can it be used? stock price alert? profit threshold alarm? you name it. Possible error Depends on your Matlab version and firewall setting, you may notice the

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following errors: 1, ??? Error using ==> sendmail 530 5.7.0 Must issue a STARTTLS command first This could happen for MATLAB 7.1 (R14SP3) and before, you may have to upgrade your version. 2, Could not connect to SMTP host: smtp.gmail.com, port: 25; Connection timed out: connect This is due to your firewall or anti-virus software setting. you are not allowed to send email from port 25. What you shall do is too add an exception and let your computer know this action is safe. For instance, I have McAfee, to add an exception, open its control console -> double click access protection -> anti-virus standard protection -> prevent mass mailing worms from sending mails -> Edit

add Matlab.exe as a process to be excluded, save it, done.

Ros, you don't have to check computers one by one. Sounds useful? download the file at http://www.mathworks.com/matlabcentral/ fileexchange/16649, don't forget to change the email address and password at the beginning of the file. Tags - matlab , sms

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Excellent R Code Format Package
I have been looking for this type of package for several days, and luckily found it today. Unquestionable R is powerful, however, R programming is unfriendly as far as I concern, mainly due to the lack of format shortcut, which makes the R codes rather ugly. (It is an absolute advantage of Matlab, for example, ctrl+R for comment, ctrl+T for uncomment, ctrl+I for smart indent, etc.) FormatR is the package for tidying R source code, although it is less convenient to use than the straightforward shortcuts in Matlab, this package is good enough for me, what is it for? as the title suggest: Quotation formatR: format R code automatically, farewell to ugly R code

Below is a comparison before and after using FormatR. Before:

After:

Download the package at http://cran.r-project.org/web/packages/ formatR/index.html Tags - r

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Simple Dummy R GUI Generator
Imagine you finish a dirty coding project and want to present to your boss who is not in a good mood (may not be occasionally), how are you going to start? Show him your hundreads of lines code, point to the lines, explain what the arguments and outputs are? No, it is not a smart way since you are supposed to introduce in a few short sentences. Generating a GUI is probably the quickest / easiest way of understanding what this code does. As the old saying goes: a picture is worth a thousand words, so in a same logic, a GUI is worth n thousand words. However, generating GUI is by no means easy as I know the pain when creating the Matlab-GUI equity derivative calculator. It becomes even worse in R language, to be honest, I hate the graph plotting in R, terribly unflexible compared with in Matlab. Luckily I came across a good R GUI package named "fgui", it does as its description: Rapidly create a GUI interface for a function you created by automatically creating widgets for arguments of the function. Very nice indeed, after playing for half an hour, it is simple to use, especially when what you need is just a basic GUI demonstrating to others a rough idea. One line code is enough. For a simple example, I create a European option pricer with Black Scholes formula, EuropeanOption <- function (s, k, r, t, vol, CallOption) { d1 <- (log(s/k)+(r+0.5*vol^2)*t)/(vol*sqrt(t)) d2 <- d1-vol*sqrt(t) if (CallOption){ return (s*pnorm(d1)-k*exp(-r*t)*pnorm(d2)) } else { return (k*exp(-r*t)*pnorm(-d2)-s*pnorm(-d1)) } } then generating a GUI for this function is as simple as adding the following code res <gui(EuropeanOption, argOption=list(CallOption=c("TRUE","FALSE")))

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It returns a GUI looks like where you are able to set inputs and get outputs. Nice. More advanced GUI is possible by adding more lines. Interested readers shall download the package "fgui" at http://cran.rproject.org/web/packages/fgui/index.html Tags - r , gui

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Short Term Stock Price Movement Prediction Competition
Many thanks to Anthony who emailed me the link to this competition. So you are a quant-gambler? time to stand out! Traders, analysts, investors and hedge funds are always looking for techniques to better predict stock price movements. The 2010 INFORMS Data Mining Contest takes aim at this goal, requiring participants to build models that predict the movement of stock prices over the next 60 minutes. Knowing whether a stock will increase or decrease allows traders to make better investment decisions. Moreover, good predictive models allow traders to better understand what drives stock prices, supporting better risk management. The results of this contest could have a big impact on the finance industry. Quotation Competitors will be provided with intraday trading data showing stock price movements at five minute intervals, sectoral data, economic data, experts' predictions and indices. We have provided a training database to allow participants to build their predictive models. Participants will submit their predictions for the test database (which doesn't include the variable being predicted). The public leaderboard will be calculated based on 10 per cent of the test dataset.

The submission deadline is October 10th 2010. Final results will be announced on October 12th. The winners of this contest will be honoured at a session of the INFORMS Annual Meeting in Austin-Texas (November 7-10). Check the detail of this competition at http://kaggle.com/informs2010 Tags - prediction , competition

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Debugging Your Thinking
Quotation Writing program code is a good way of debugging your thinking - Bill Venables

Believe it or not, on average programmers spend 70% of their working time in debugging (I don't know where this number is from but I do believe so). A good debug tool, command or even habit will definitely improve your work efficiency, shorten working hour, and enjoy more the world cup. When it comes to Matlab and R, I have to say the debugging in Matlab is straightforward but is more comprehensive in R. Here is an introductory video demonstrating how to debug and understand Matlab codes:

Also a very good PDF document for debugging in R with detailed examples at http://www.biostat.jhsph.edu/~rpeng/docs/R-debugtools.pdf. Enjoy. Tags - debug

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Forex Market Strategy Guide: Scalping 101
There are multiple ways of profiting in forex, including swing trading or trend following. However, scalping is the method with the shortest trading periods. With this method, traders usually open a trade for 1-2 minutes, or 5 minutes at the very most. The idea is to benefit from short fluctuations in the market. This series of articles will serve as a guide for scalping, but for the purpose of introduction, we can ask what makes this strategy popular and effective. Many of these considerations will then serve as the topics of further articles. The first major reason for scalping is perceived safety. Scalping has a far shorter time frame than the other forex methods, and many traders argue that this limits their exposure to the market. Of course, this limited exposure leads to a second major characteristic of scalping—a large number of trades. Some scalpers may open and close as many as several hundred trades within a single trading day. This points to one of the major challenges for this style of trading. Since the number of trades is extraordinarily high, scalpers must find forex brokers with low transaction costs and fees. Before considering this style, make sure that your broker’s commission structure allows for you to be profitable. A third characteristic is the fact that scalpers rely on some type of leverage. The profit from each trade is generally quite small, and even with a huge number of orders, the results would hardly be worthy of the effort. Depending on the amount of leverage you use, this can eliminate any real security. In spite of their arguments to the contrary, scalpers can lose a day’s work in a few bad transactions. A fourth characteristic of scalping is that it is generally a full-time endeavor. This is a significant limitation, since the majority of forex traders only do it in order to supplement their income. Scalping requires constant and undivided attention. If you decide to use this strategy, expect it to dominate your time and efforts for as long as you are trading. It is generally best to set aside an extended period of time and eliminate

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any other distractions. This is unworkable for many traders, though when a scalper finishes for the day, his exposure is finished as well. Some scalpers try to eliminate this problem by automating the process. In recent years, a vast number of robots and software automation kits have become available for scalpers. Unfortunately, most of these are unproven, and many make wild claims that stretch far beyond plausibility. Still, there is a real benefit in automating certain parts of the process. For instance, you might use software to execute redundant tasks like stop-loss, take profit and other orders, while doing the analytical tasks yourself. In this limited role, the automation can be a significant help by allowing you to execute more trades with less drudgery. Scalping is a workable strategy if you know what you are doing and are willing to dedicate your full time energy to forex trading. Unfortunately, too many beginners try scalping based on the assumption that they can avoid risk. As any experienced investor knows, risk accompanies any genuine financial opportunity. After several months of practice, and with plenty of education, scalping is a great way to enter the forex markets. This guide will tell you some of the main things you need to know when getting started. The first step in any guide on scalping is understanding how scalpers actually make money. What does a scalping strategy look like in daily practice? We already mentioned that scalping involves entering and exiting the market in short time spans. But what guides the choice to enter or exit? Actually, this strategy works on the basis of careful analysis and timing. What makes scalping different from other strategies is that it takes advantage of volatility rather than trending, ranging, or fundamental analysis. Recognizing that the market moves erratically in the short term, scalpers try to identify small patterns and exploit them. The strategy works when traders can find short-term disruptions in liquidity, or other temporary abnormalities. For instance, a news shock or some other factor might suddenly increase demand for the yen. During that time, there will be a need for liquidity as too many people demand the yen with insufficient supply. The spread between bid and asking price will temporarily widen. A scalper might recognize that the

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liquidity has to return eventually and the price will eventually settle back into normal levels. Based on this, he can go long or short, as appropriate, and collect on the difference. This means that scalpers actually benefit from volatility by trading on the assumption that prices will stabilize again. It’s not hard to see that after a major event, prices routinely zigzag for several minutes before settling again. Since this is an emotional over-reaction, a scalper maintains a realistic, stable viewpoint and profits from those who don’t. It’s also easy to see that if trading wisely, scalpers act as “brakes” on the micro-volatility of the market. They actually profit by dragging irrational price-spikes back to meaningful levels. One other implication is that the most important time for a scalper is just after a market shock. Scalpers pay careful attention to announcements of economic data or news shocks and the disruption that follows. But these observations lead to the other major topic of this article—leverage. The inherent limitation of trading on micro-volatility is that it will never be very significant. Therefore, scalpers use surprising amounts of leverage to make their trading more potent. Their leverage might range from 5:1, all the way up to 50:1. These kinds of leverage would be simply intolerable for other traders, but the important thing to remember is the short duration that scalpers use. During this time, there is little opportunity for wide swings in the market that would risk massive losses. It is also crucial to always use a good stop-loss mechanism and not adjust it for individual trades. If these measures are maintained and a trade turns out badly, it will be closed in a matter of minutes or even less when the stop-loss level is reached. There are still a few cases when scalpers might still suffer significant losses. Significant news shocks might cause very wide spreads in a short time. Even the best brokers may not be able to complete stop-loss orders quickly enough, and losses can multiply exponentially. Therefore, traders should always be conscious of whether new economic data or another type of event has the potential to cause significant disruptions. In such cases, it is always wise to use caution and trade with lower amounts of leverage. Scalping is an interesting strategy because it takes advantage of

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phenomena that might otherwise seem random. It is a simple testimony to the fact that on every level of the forex market, the same principle applies—profit belongs to the traders that use their heads and who are not carried away by short-term emotion. The scalpers that succeed are the ones that have mastered that art. The next logical question in our guide to scalping is how to do it. When it comes right down to the pragmatics of this strategy, what do you need to make it work, and where do you start? One of the most important foundational issues is choosing the right broker. In some cases, a brokerage may even have a stated policy against scalping. Without the right platform and broker, you simply have no chance of success. But what should you be looking for? The first issue is the broker’s spreads. If a swing trader opens and closes several positions every day, a spread of several pips is hardly an issue, but scalpers might open and close more than a hundred daily. If you work out the math, this is a significant loss. For instance, imagine that a trader makes 50 trades with a nice profit of 130 pips. If the spread is three pips, he would end up with a net loss of 20 pips. Since the cost of the spread applies to every trade whether it is profitable or not, this loss adds up very quickly. The conclusion is fairly obvious—if you want to make any profit with scalping, you’ll need to find a broker with the lowest spread possible. In addition to spreads, you should also check for any commissions or hidden trading fees. But this search is not always easy. Unfortunately, many brokers have a bad relationship with scalpers. The problem is that the number of trades scalpers make can sometimes overwhelm older systems. In addition, every broker has to countertrade the orders he processes to avoid being financially liable. Receiving large numbers of orders every day doesn’t make this easy. For those reasons, many brokers try to eliminate scalpers. Sometimes this is a stated policy, but very often a broker will simply terminate a scalpers account or slow down his processes so that scalping is impossible. Therefore, you must also find a broker with the most up-to-date technology and a toleration for large numbers of orders. Look for a fullyautomated broker with no-dealing desk (NDD).

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There are several other things that can make scalping impossible. If the trades take too long to process (slippage), the price difference will quickly make trading unprofitable. Therefore, you should always look for efficient execution of your orders. Similarly, price quotes must always be precise and updated dynamically. Even a small delay (latency) makes trading based on micro-volatility impossible. Finally, scalpers should look for platforms with a workable interface. For the most part, this should include the same financial tools that trader’s want with other strategies. Of course, you should look for an interface with a full range of execution tools. But in particular, the interface needs to be fast and easy to use. This is important because of the number of rapid orders that must be made. Customization is also a big advantage, as well as automation. You should also pay attention to the visual appearance of the interface. Scalping requires intense focus, and many traders report eye-strain after a long day of staring intensely at a screen. In short, you should consider every angle before committing yourself to a particular brokerage or a trading platform. Be upfront from the beginning with your broker. If you try to use this strategy through a system that can’t handle it, the brokerage will intentionally make trading impossible. Of course, you should also be confident that your broker isn’t fraudulent. Most of all, you should never try to use scalping through a broker with wide spreads or other excess costs. The net result will always be a loss. Done right, and done through the right avenues, however, scalping can be quite successful. Once you establish a broker, there are several other things you should know about scalping. First, you should wisely pick currency pairs that will work well with the strategy. The best thing is to start out with the basic pairs, and move to riskier pairs as you become more experienced. The most stable and liquid currency pair is certainly EUR/USD. Other majors have a similar stability, such as GBP/USD, USD/CHF and others currencies from the major world economies. All of these currencies change very slowly. Even major events will not produce significant jumps in these pairs, because of the volume that is regularly traded.

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But isn’t the goal of scalping to profit from volatility? So it seems as though more volatile currencies would be better. The advantage of the more stable currencies, is that directional changes are much easier to predict. Remember that even small fluctuations can be magnified through leverage. This means that a trader can generate very large returns from these pairs, if he is willing to accept the risk. Another group can be called carry pairs. These currencies are liquid, but much more volatile than the majors. A good example here is the Japanese Yen. Interest rates are very high on the Yen, and many investors also use the currency for risky assets. One of the results is that market shocks will have extreme results that might result in very wide spreads. Within a scalping strategy, this might result in extreme losses that a stop-loss order cannot protect from. Furthermore, excessive volatility can be quite unpredictable. Therefore, it is generally best for beginners to stay away from pairs that involve the Yen (JPY) or other carry pairs. Finally, exotic pairs involve small or developing nations with a low volume of trade. Examples might include the Norwegian Krone (NOK), the Turkish Lira (TRY), the Brazilian Real (BRL), or any of the developing currencies. These pairs are quite unpredictable, and often run into significant liquidity problems. Trading with one of these is a significant risk. Any experience trader also realizes that the markets change during the course of a day. So when is the best time to trade? From 7:00-8:00 (EST), markets are quite choppy, because worldwide traders anticipate the opening of the New York market. Late morning brings higher volatility, but also great liquidity. Many announcements also direct the market during this time. Early afternoon tends to be quite choppy, with higher risks but potentially greater profits. Late afternoon sees the closing of most large banks in developed countries, and the market becomes its quietest. Really, your preference for each of these times depends on your style. In choppy conditions, scalpers should look for shorter trades without concern for directionality. Of course, during the time that the markets are open, there should be more attention to larger trends, and the

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possibility of more extended trades. All of these factors are significantly influenced by your particular style and your experience. Risk may be just the thing if you know how to handle it, and experienced traders often had straight for more volatile times and currency pairs. If you’re only beginning, the key is to stay with major pairs and avoid times of wild fluctuations. Learn how to predict the market with low leverage and minimal risk. Once you’ve seen and handled various market conditions, you can consider taking bigger risks, and pursuing larger profits. This guide has sought to introduce scalping and discuss the pros and cons of the strategy. After a brief introduction into the characteristics of scalping, we discussed how scalpers profit and how they use leverage. We also pointed out the major necessary things to make scalping successful, including a good broker and an efficient platform. Finally, we discussed the best currency pairs and times of day when scalping works best. But this guide runs the risk of being overly simplistic if we fail to talk about the variations on scalping. Traders might use any one out of a number of techniques to make their strategy successful. Trend scalpers follow the direction of the market and try to profit from where it is headed. Think of this as following the macro-direction of a currency, but on a much smaller scale. Other scalpers prefer to take advantage of news events and other shocks to the market. These traders stay away from the period closest to the news event, but profit in the time just afterward. The more important point to recognize is that scalping varies drastically according to conditions. At times the distinction between scalping and other strategies is quite unclear. For instance, if a scalper opens a position and then observes a longer profitable trend, it only makes sense to take full advantage of it. Depending on what is happening, a trader might switch back and forth between all of the strategies, or form his own hybrid. However, this points to a very important issue that applies to all forex trading. There is a deeply psychological aspect of dealing with risk and loss that every trader should be conscious of. Here are a few qualities to aim for.

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First, scalpers and all forex traders for that matter, must exercise discipline in their trading. This is the only problem with moving between various strategies—it becomes too easy to make emotional decisions and take foolish risks. Let your strategy control your decisions. In particular, don’t make the mistake of varying the size of your trades too much—especially when you have a string of successes. One bad trade can erase a lot of progress. A second, related point is cool-headed thinking. When markets become chaotic, it is easy to be controlled by the volatility and make foolish mistakes. At those times, remember your strategy and follow it assiduously. Third, you must be patient for the long-term. Scalping works when lots of small but profitable trades add up to a large sum. Be willing to wait for that, even if it requires persistence and temporary loss. Finally, it is imperative to know yourself. Know what style works well for you. Observe what market conditions tend to reap the best profits for your trading. At certain times, it may be best not to trade at all. When you recognize that conditions mirror what has worked well for your strategy in the past, you should jump into the market fully. Beginning traders sometimes assume that scalping is the easiest way to earn a quick profit. However, scalping is actually one of the most challenging strategies. Some scalpers suffer losses at the beginning, but with a lot of practice, discipline, education, and the right tools, this method can be one of the most profitable forex strategies. Tags - forex , trading , strategy

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Excellent Yahoo Finance Data Downloader
Although I have shared several ways to download data from Yahoo Finance, for instance, Yahoo chinese historical stock data, download option price data from Yahoo, I have to admit the one I recommend today is the best and most comprehensive ever. It supports dozens of tags to download, besides what we normally need for closing price, volumn, daily high, and daily low, including (click the graph to see a clearer picture):

Massive, isn't it? download the csv file and also a file for option data at http://www.gummy-stuff.org/Yahoo-data.htm Tags - data , yahoo

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R Sapply Problem
Any expert in R please educates me. I have got a problem about the sapply (or lapply), it made me headache for over two hours. As "for loop" is very slow in R, we should try best to avoid using it, and to use vectorization instead. sapply is designed for this, for example, instead of: for (i in 1:10) { z[i] <- mean(x[1:i]) } we could use z <- sapply(1:10, function(i, x) {mean(x[1:i])}, x)

It went well, but what if besides computing z, I need to update another variable, for example, with loop, it is temp <- 3 for (i in 1:10) { x[i] <- x[i]-temp z[i] <- mean(x[1:i]) temp <- x[i]-z[i] }

in this case, temp is changing every step (it doesn't have to be a function of z[i]). How to vectorize that and use sapply then? since sapply can't return two variables z and temp. I tried to define a matrix and store z in the first column and temp in the second column and return the matrix, however, failed. Many thanks.

PS, NO, still not correct, working on it... ah, I worked it out, it can be done by passing z itself to sapply, that's good.

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the following is a sapply example returning the same result for "for loop" and "sapply". sapply.example <- function(nsim = 10){ x <- rnorm(nsim) y <- list() z.for <- array(0, nsim) temp <- 3 for (i in 1:nsim) { x[i] <- x[i]-temp z.for[i] <- mean(x[1:i]) temp <- x[i]-z.for[i] } y$z.for <- z.for z.sapply <- array(0,2*nsim) z.sapply[1] <- 3 z.sapply <- sapply(seq(1,2*nsim,by=2), function(i,x,z.sapply) { temp <- z.sapply[i] z.temp <- mean(x[1:((i+1)/2)]) temp <- x[((i+1)/2)]-z.temp z.sapply[i] <- temp z.sapply[i+1] <- z.temp z.sapply[i:(i+1)] }, x, z.sapply, simplify =TRUE) y$z.sapply <- z.sapply[seq(2,2*nsim, by=2)] y } Tags - r

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R for Matlab Users
My favorite software is Matlab, but partly because R is free, more and more people & companies choose to use R as a major working language. Nothing wrong with that, I am at the moment changing some of my Kalman Filter Matlab codes to R. One bothering issue is each software has its own coding rules, for example, in Matlab we use a(1,1) but in R we use a[1,1]; in Matlab we have ones(3,2) but in R we dont have such a command but matrix(1,3,2), etc. (I am always wondering why they can't be designed in a similar way). It does bring me trouble sometimes, luckily I came across a web page similar as cheat-sheets, it lists those widely used commands in R and corresponding commands in Matlab, very convenient indeed. Search before trial & error: http://mathesaurus.sourceforge.net/octaver.html PS: Walking Randomly suggests another excellent PDF manual consisting of 47 pages, fantastic! http://www.math.umaine.edu/~hiebeler/comp/ matlabR.pdf Tags - r , matlab

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South African World Cup
Today is the first day of South African world cup. Disappointing French team, although JP Morgan's Quant group members use their model to predict England will win this world cup Championship, I still go for Netherlands. GO GO GO, Holland. A funny graph showing the characteristic of each team, enjoy football everyone.

Tags - football

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Exclusive Offer: Download $79-value Vertical Spreads options trading ebook for free
A guest post from our Elliott. Dear reader, We have a very special offer for traders today. Our friends at Elliott Wave International have just released their $79-value, 42-page ebook for options traders for free download. The new ebook, How to Use the Elliott Wave Principle to Improve Your Options Trading Strategies -- Vertical Spreads, which sells in EWI's online store for $79, is available for free, exclusively to you, for a limited time. The ebook is designed to help you exploit sharp price movement with powerful vertical spread trading strategies, including: Bull Call Spread, Bear Put Spread, Bear Call Ladder, Bull Put Ladder and more. This valuable ebook belongs in any serious trader's library. You can download it now for free here. Tags - option , trading , elliott

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An Interest Rate R Package Plan
I recently have done some empirical studies on zero-coupon bond modelling and pricing, and plan to create an interest rate R package in order to make it re-usable, as I find there are only two R package on it, one is http://cran.r-project.org/web/packages/termstrc/index.html, the other one is http://cran.r-project.org/web/packages/YieldCurve/ index.html, both of them don't cover short interest rate model, unfortunately. Below is a short plan, help me add it by leaving a comment, thanks. Tags - r , package , rate

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How to Create an R Package in Windows
There are many reasons to create an R package, such as codes protection, convenient usage, etc. However, creating an R package in Unix is not hard, it IS in Windows, as R is designed in a Unix environment which includes a set of compilers, programming utilities, and text-formatting routines while Windows lacks those. I used to build an R library in Unix and thought it was relatively as the same convenient as in Windows, but it turned out I had to spend several hours on it. Silly me.

Below are the selected steps to create an R package in Windows I summarize: 1, you have to download Rtools at http://www.murdochsutherland.com/Rtools/. 2, depending on your needs, you may download and install LaTex, Microsoft HTML Help Workshop and the Inno Setup installer, available at http://www.miktex.org, http://msdn.microsoft.com/en-us/library/ ms669985.aspx, and http://www.jrsoftware.org/, respectively. For example, Microsoft HTML Help Workshop is for making HTML Help documents, LaTex is for a nicer outlook, especially when your documents have math equations. 3, double click Rtools.exe to install it and its accompanying tools: minGW, perl. Rtools automatically recognizes the paths of those relevant softwares and add them to the environment variables of your computer.

4, check and change your PATH “environment variables” of your computer if incorrect. To set the path, right click on the “My Computer” icon on your desktop, choose properties and click on the “advanced” tab, click the environmental variables button, click on the path variable and select the edit button. Check carefully whether all the paths are correct, special attention needs to be given to the path of R software. 5, double check whether all tools are installed correctly by opening a “command prompt” window and typing the following commands: R; gcc –help; perl –help; Tex –help, respectively. You should see a list of options, otherwise re-install or check the path if you see “… is not a

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recognized as an internal or external command …” 6, start R and run the command package.skeleton( ) with suitable arguments, read the help http://stat.ethz.ch/R-manual/R-patched/ library/utils/html/package.skeleton.html for detail. For instance, I write a sample code MonteCarloPi.R to estimate PI by Monte Carlo simulation, we use package.skeleton(name = "MonteCarloPi", code_files = “MonteCarloPi.R”), where MonteCarloPi.R includes function we want to add to the package MonteCarloPi. This function creates the directory tree for the package containing: DESCRIPTION << man <<< for documentation R <<< for R function definitions src <<< for low-level source code (this is optional for other programming files, such as your c++ codes) data <<< for package datasets (this is optional)

7, remove the Read-and-delete-me file and modify other files in the above directory with notepad or other tool, for instance, to add the author information and Help explanation. 8, open a “command prompt” window, change the directory to where your package is, type the command “R CMD build MonteCarloPi” to build the package, this will generate a file called MonteCarloPi_1.0.tar.gz. You must run the command in a “command prompt” window instead of in R, otherwise you are expected to see “Error: unexpected symbol in "R CMD"”. 9, test the package by typing “R CMD check MonteCarloPi_1.0.tar.gz”, go back to step 8 if you see errors. 10, now you are able to install the package typing “R CMD INSTALL MonteCarloPi_1.0.tar.gz”. Congratulations if you see “…done…” and you will notice there is one more sub-folder “MonteCarloPi” in your R library folder. #MonteCarloPi.R -- PI estimation by Monte Carlo simulation MonteCarloPi <- function(nsim){

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x <- 2*runif(nsim)-1 y <- 2*runif(nsim)-1 inx <- which((x^2+y^2)<=1) return ((length(inx)/nsim)*4) }

Quotation Reference: http://cran.r-project.org/doc/manuals/R-exts.html Tags - r , package

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15 Incredibly Stupid Ways People Made Their Millions A selection of stories outlining the stupid ways people made their millions.
Inventions are important. They're the reason life has become so easy for us, and technology so accommodating. The market for inventions is enormous, and hundreds of new ones are patented every day. Since not everyone is a genius, many of them fall into obscurity immediately as inefficient or unimportant ideas. However, sometimes the silly ones we might be quick to dismiss are unexpectedly more profitable than the conventional method of doing whatever it is the newfangled thing does. Here are 15 weird and ridiculous ideas that made people rich.

1. Pet Rock

The Pet Rock is undeniable proof that people will buy just about anything. It's literally a rock with googly eyes glued to it, but the inanimate companion grossed a couple million dollars in 1975. The fad only lasted for that year before dying out, but the Pet Rock carriers, equipped with breathing holes and a straw as if for a real animal, proved irresistible for those wishing to give silly and ironic Christmas gifts.

2. SatLav

Really having to pee can be one of the most uncomfortable feelings ever. You can’t concentrate on anything else, you fidget, you frantically search for the bathroom. But what if you’re out in public and don’t know where to find one? Poppin’ a squat it picking a dark corner isn’t always an option, and many establishments have bathrooms restricted for employee or customer use only. Conveniently, anyone with a cell phone can now find the nearest public restroom just by texting a short number for a small fee.

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3. Doggles

Do dogs really need goggles? No. Do they want them? Probably not. Does anyone sell them? Of course -- and they've made more than a million dollars off the idea. Giving dogs goggles is about as useful as giving a goldfish a monocle and cane, but that didn’t stop the company Doggles from doing their very best. At $80 a pair, Doggles is a multi million dollar company. If you think about it, looking at the photo above (and ignoring the fact that this product shouldn’t exist in the first place), there’s no reason that goggle s for dogs should look the same as those for humans. The bridge of a dog’s nose isn’t directly between his eyes like a human, so this design is a little strange. They pretty much look like Seth Green’s character from Can’t Hardly Wait.

4. Million Dollar Homepage

How much is a solitary pixel floating around in cyberspace worth? Alex Tew thought $1 per pixel was a reasonable price. Tew was just about to begin studying business at the University of Nottingham, but the idea he came up with to fund his education proved that he already possessed the sensibility of a successful businessman. Tew bought a web domain, laid out an area of 1,000,000 pixels, and sold them in 100-dollar blocks. Ads ranged from online casinos, to Target and everything in between. This was The Million Dollar Homepage.Tew came up with the idea in August of 2005, and by New Year’s Eve, every pixel bar but one had been sold. Not only did Tew make a whopping $ 1,037,100 gross from his relatively simple idea, but he also managed to attract some big name clients, like Tenacious D.

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5. Mungo & Maud’s Petite Amande Dog Fragrance

Even more absurd than dog goggles is the concept of a dog perfume. It's true that wet, dirty dog smell is an awful one... But how about wet and dirty mixed with floral extracts? It's like spraying air freshener in the bathroom -- it doesn't cover up the poop smell, just sort of hangs on top of it like an additional layer of sense assault. Here's an idea: give your dog a bath. If the dog is clean, it won't smell so bad. Don’t just cover the smell up like some French hooker from the 1700s. The fact that this invention has earned over a million dollars is downright ridiculous. Another case against Petite Armande is that dogs have an exponentially stronger sense of smell than humans do. The animal most likely finds it unpleasant to be sprayed with irritating odor concentrates. If the smell is strong to us, it must be a billion times stronger for the dog. Suit yourselves, perfumed-pup-lovers, just don’t complain when Timmy’s stuck in a well an you bloodhound Biff can’t find him because his sense of smell is masked by the wafted aroma of Lassie Chanel No. 5.

6. Lucky Wishbone Co.

Amazingly, this might be the silliest product yet – which is definitely saying a lot, considering the cavalcade of weird stuff that’s preceded it. Wishbones are traditionally considered lucky, and are taken from an animal (which is typically being consumed) to break in half between two people. Holding each end of the tiny bone, the two parties pull until it snaps, and decide which player is the ‘lucky’ one according to who has the larger portion. However, Lucky Wishbone Co. doesn’t sell real wishbones. It sells fake little plastic ones, at around about a dollar each. This abortion of an idea also makes its creators the a ton of money.

7. SantaMail

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Get a postal address in the North Pole, pretend you are Santa Claus and charge parents 10 bucks for every letter you send to their kids. Well, Byron Reese has sent over 200,000 letters since the start of that business in 2001, meaning he's made a multi-millionaire dollar fortune. One of the best ways to make money out of people has always been taking advantage of their naïveté and dreams, and who's more naïve than kids? Byron Reese, sprung for a postal address in the North Pole, a place he'd never been, so he could pretend to be Santa. Even worse than the mall Santa who lets kids sit on his lap and drinks malt liquor in the parking lot, in some intangible way. Reese writes back to the letters himself, but never reveals his true identity. At first, this sounds quite sweet, but consider this: What if little Susie (they are always called Susie) wants a little doll which Mommy and Daddy can't afford? Is Santa going to say ‘no’? What if little Jessica (she’s rich and has a last name like DuBois or something) wants a pony, and Santa’s all like ‘I think that’s a bit much to ask, little Jessica. Ho ho ho!’ but then Jessica’s parents buy her a really awesome pony with a Bose sound system and five LCD monitors? Then Santa all of a sudden seems nonexistent. Another million-dollar idea, this time one that depersonalizes one of the most beautiful mysteries of childhood by making it a capitalist business.

8. Excused Absence Network

Are you too lazy to show up to work or school on time, but don’t want to waste your creativity on coming up with your own excuse? The Excused Absence Network is a service which caters to all the lying employee’s needs; from a missed math test all the way to skipping out on your own wedding. The notes aren’t just those ‘little Johnny had a sore throat today’ notes from mom – these are excuse notes that look as though they come from a hospital or doctors office for just $25 per note.

9. Fetal Greetings

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What is the worst way of telling someone that you're pregnant? The guys at Fetal Greeting have certainly come very close to nailing it -- their website suggests that you should surprise friends, family, & even the expectant father with these one-of-a-kind cards. It sounds almost like a scenario for Maury Povich – ‘And the card says…Bob, you ARE the father.’ As is the case with most everything else on this list, there seems to be a positive correlation between the inanity of the product and it’s commercial viability. Fetal Greeting saw sales being reported in the million and climbing steadily.

10. www.MannequinMadness.com

Mannequin Madness is a website that sells second-hand mannequins at third-hand mannequin prices. They boast that that have ‘the perfect body for you to buy or rent’ and the second-hand mannequin business is booming. The website stresses that the mannequins aren’t only good for traditional uses, like showing off clothes and making you feel bad about your body type. The website also suggests they be used for practical jokes and Halloween displays (read: causing heart attacks).

11. Big Mouth Billy Bass

The Big Mouth Billy Bass was designed with the sole intention of driving people insane. It's a product for old people, who are the only ones to find its autonomous song incredibly novel. The singing fish is otherwise given as an unwanted box where it sits in the box to gather dust or is put out repeatedly at the same garage sale for two months. These two criteria make up millions of people, and the Big Mouth Billy Bass has made millions of dollars. With its success has come the delightful discovery that hacks could leave the Bass able to sing any song.

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12. www.ICanHasCheezburger.com

I Can Has Cheezburger? burst onto the web scene in early 2007 and elevated the already rampant LOLcat meme to new level of ubiquitousness. The site, now a conglomerate of several extended memes, is primarily concerned with evoking humor from photos of cats with added, sometimes nonsensical, subtitles. The site was acquired a short eight months after is creation by a group of investors for a whopping $2 million. Two million dollars for a website whose principle visitors are stoners and 13-year-old girls who have just learned how to use the internet. I Can Has Cheezburger? Revenue is solely advertising-based.

13. One Red Paperclip

Kyle McDonald may not be a household name, but he’s definitely internet-famous, and he definite has a household -- one that he traded his way to from a solitary red paperclip (which, to be honest, looks used). It only took Kyle exactly one year and fourteen trades to make his way from a twisted piece of metal to a home for his family. Along the way, he travelled to the far reaches of Canada, all across the US, met Alice Cooper and Corbin Bernsen, and basically had one hell of a good time. Finally, Kyle settled with a home at 503 Main Street, Kipling, Saskatchewan, Canada, and he still lives there to this day. His story stands as an example of how you can start with absolutely nothing, and then one day live in Canada.

14. Murder Clean Up

What is an ambitious real estate flipper to do with the abandoned house whose floors have been ravaged by the waste and habitation of a feral cat community? What about the family whose estranged hoarder aunt dies

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from eating herself into a corner surrounded by mountains of garbage and human waste? Advanced Bio-Treatment specializes in murder, suicide, drug lab, and (really nasty) waste clean-up. It sounds like a morbid idea for money making, but ABT raked in about a million dollars during 2009 alone. And if all else fails, at least grandpa has some interesting bedtime stories for the kids.

15. Eternal Reef

Another death-related business is Eternal Reefs, a service which provides underwater urns for individuals cremated after death. The cement globe contains holes to encourage plant growth and allow fish to swim in and out of your loved one’s ecologically friendly grave. Those purchasing the Eternal Reef are allowed to press their hands into the soft concrete, or attach a flag or sorts as a means of marking their reef. Eternal Reefs have a profit of about half a million per year. Tags - money

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Matlab File Style
Programming style, a set of rules or guidelines used when writing the source code for a computer program, is important for a programmer, it not only allows the reviewers to know the date and author of the file, but also helps the programmer himself to track the file version and improve work efficiency. Nevertheless, repetitive comments, especially for the header part are boring. Uncomment is even more boring, read Matlab comment stripping for a lazy way for that.

NEWFCN is a good function I always use when creating new files, basically it creates a M-File having the entered filename and a specific structure which helps for creating the main function structure. The actual working MATLAB Version will be also captured. For example, running newfcn('testnewfcn') generates a file named testnewfcn.m at a predefined style, the new file looks like function testnewfcn() % TESTNEWFCN ... % % ... %% AUTHOR : aBiao @ mathfinance.cn %% $DATE : 28-May-2010 18:55:27 $ %% $Revision : 1.00 $ %% DEVELOPED : 7.1.0.246 (R14) Service Pack 3 %% FILENAME : testnewfcn.m disp(' !!! You must enter code into this file < testnewfcn.m > !!!') % ===== EOF ====== [testnewfcn.m] ======

Did I mention you can customize the exact style by modifying newfcn.m to the appearance you like? just that simple! Download at fileexchange/6408 Tags - matlab http://www.mathworks.com/matlabcentral/

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Mathematica Home Edition
To be honest, I can't call myself a fan of Mathematica, as you can notice by the number of posts under Mathematica category of this blog. No specific or big reasons, but just because my first job required Matlab & C++, my second job required R & S+ & Matlab, my master & PhD universities don't have Mathematica installed, that's it. I personally came across this software a few times either due to the codes I could find on my interested topics having only Mathematica version, or the request by my friends & colleagues for analysis.

That's why I only got to know the existence of Mathematica Home Edition today despite the fact it has been in the market for over one year! What is Mathematica Home Edition? as the webpage shows: Quotation Mathematica Home Edition gives home users Mathematica's powerful technology, developed over 20 years and used by Nobel-winning scientists and leading corporations. It provides access to curated data, makes it easy to create and share interactive applications, and a whole lot more. It can be used for: Calculate mortgage, credit card, car, and student loan payments Evaluate currency exchange rates Monitor stock market returns and predict trends And much more...

In short words, Mathematica Home Edition contains the same functions that can be found in Wolfram's Mathematica 7. it is the full version of Mathematica but at reduced price for recreational or personal use. How much does it cost? $295, if you think $295 is a lot, please keep in mind the full non-student version is $2500!! Sounds a good business? Start to Import, visualize and calculate using built-in financial data with Mathematica Home Edition. PS: this post is by abiao, not by bo. Tags - mathematica

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FinMetrics
I came across a toolbox - FinMetrics this morning, it sounds good from the introduction of help document, plus highly relevant to our topic quantitative finance, so I am eager to share it here. However, I am unable to get access to Matlab and check it in detail at the moment, please help me test and leave a comment about your thoughts then.

Quotation FinMetrics is MATLAB based, open source quantitative portfolio management environment. Built on concepts of bottom-up approach to application design, it allows users to define most basic, low level building blocks, e.g. assets and transactions, to be further pieced together in a higher level objects, e.g. positions or portfolios. Data analysis and statistics function, implemented within the environment and native to MATLAB, enable users to conduct scenario analysis, stress testing, performance measurement and attribution, risk measurement and attribution, design hedge strategies, etc. Open architecture of the environment allows users to work with objects of any level, depending on their requirements and expertise. The object structure and data types are specifically designed to make integration with MATLAB and native FinMetrics functions as easy as possible. FinMetrics user interface application and MATLAB scripting may be utilized to facilitate or automate complex and repetitive tasks, as well as extend functionality of the environment.

Download it at http://www.mathworks.com/matlabcentral/ fileexchange/27778-finmetrics if interested. Tags - matlab

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Flash Order
The stock market is a mess of people one-upping other people constantly. Any chance to get an advantage is seized immediately and one of those opportunities lies in the so called “Flash” Orders. In a brief summary, a flash order is a brief glimpses (no more than milliseconds) of someone else’s exchanges. Of course, only high-speed computers can see these, but once they are seen, they can be used to get a leg up and buy or sell ahead of others. Some regard this as an unfair advantage as professional traders would gain advance knowledge on trends before individual buyers. Others say that it adds ‘liquidity’ to the stock market. This opinion comes, of course, from the big businesses who are using the flash order service to their advantage to gain a profit. The problem is in the shifts that this brings about. For example, the big business might buy all of a certain stock, and then sell it for a bit more than they bought it, but a penny less than what the next guy is offering it for. This advantage causes motion in a violent manner in ways that would not be present in normal conditions. While this can for a time be a benefit, it means it can also fall just as quickly. Another big gripe is that the High Frequency Trading can really mess people over. Those with a leg up can make an investment risk-free, and it is only risk-free for them because all of the risk falls on to the lower tier. So far, it has upset enough people to be at risk for banning. The stock market has become a beast to be weary of these days. If this unfair advantage doesn’t go, what’s to ensure equality in the future? Fortunately the flash order business will very likely be taken away as more than a few well-placed officials have been given varitable heebiejeebies from this mess. Hopefully order will soon come out of this chaos. Tags - trading

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How to Generate Report Automatically From Matlab
Often we have to generate reports to our boss, colleagues, and clients, etc. Generally those reports include Matlab source codes, maths equations, and possibly graphs. How do you generate your reports? writing down your equations in Word, running your matlab codes, copying and pasting the results?

It is all right to do like that, but the whole process becomes extremely simple with the cell mode in Matlab, it generates report automatically for us, any change you make regarding description, codes and results will be updated by clicking a simple button: Publish to HTML. The following steps outline the procedure, First, opening an editor in Matlab by choosing File -> New -> M-file; Second, selecting cell and enable cell mode in the editor; Third, inserting cell divider under cell window, it allows you to type a name for each section, similar with the title for chapters in Word; Fourth, depending on your reports, inserting Text Markup, where you are able to insert description text, bold text, etc. most importantly, it supports TeX equations; Finally, clicking "Publish to HTML", a nice-looking report is generated, and if necessary, changing the codes and re-running to update the report.

For a simple demonstration, I write the files as follows. %% Cell mode publish demonstration % abiao @ mathfinance.cn %% Using Black Scholes formula as an example % The value of a call and put options in terms of the Black–Scholes parameters % is: % % $$C(S,t) = SN(d_1) - Ke^{-r(T - t)}N(d_2) \,$$ % % $$P(S,t) = Ke^{-r(T-t)} - S (SN(d_1) - Ke^{-r(T - t)}N(d_2)) = Ke^{-r(Tt)} - S C(S,t)$$

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% % $$d_1 = \frac{\ln(\frac{S}{K}) t)}{\sigma\sqrt{T - t}}$$ % % $$d_2 = d_1 - \sigma\sqrt{T - t}$$

(r

\frac{\sigma^2}{2})(T

-

%% Sample code, for simplicity, I use the embedded command [call, put] = blsprice(10,9,0.02,2,0.3); fprintf('Call option value is %g. \n',call) fprintf('Put option value is %g. \n',put) call1 = []; put1 = []; for i = 1:10 call1(i) = blsprice(5 i,9,0.02,2,0.3); end %% Sample plot for demonstration only plot(5 (1:10), call1)

The final report is shown at http://www.mathfinance.cn/attachment/ CellPublishDemo.html, looks fantastic. Tags - matlab

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Matlab Comment Stripping
I have been doing an internship in London since last week and haven't got enough time to write new posts, sorry for that. So I plan to write a few posts to summarize the old Matlab functions I personally like a lot. The one for today is Matlab comment stripping.

Needless to say, comment is crucial for programming, it helps ourselves to debug our thoughts and other colleagues to understand the codes efficiently, which is especially indispensable as each programmer has his own coding style. However, under certain circumstances we may have to remove those comments, for instance, for the sake of confidential, etc. How do you do that then? delete the comments line by line? it is OK for a small file, but generally we may end up with a file with dozens, if not hundreds, lines of comments, what's worse is those comments intersect and we have to be carefully to find them out. Here is a clever way, MATLAB Comment Stripping Toolbox (it indeed has only 3 short files if you are afraid by "Toolbox" ). Basically it is a small collection of utilities for stripping MATLAB comments from MATLAB code. The code may be given in strings, cell arrays of strings, or read from a file or file identifier. There is full support for stripping comments from multi-line strings, that is strings with embedded newlines, which typically appear when an entire file is read in one go. For example, I wrote a simple test.m file and prefer to remove the comments and rename it as test-client.m: % test the comment strip command using mlstripcommentsfile(infile, outfile) % by abiao @ mathfinance.cn a = rnorm(10,1); % check if you can remove me % one more line b = rnorm(5,5); c = rnorm(3,3)... rnorm(3,3); %now i am here % test finished

after running the command mlstripcommentsfile('test.m', 'test-client.m'), I got the file test-client.m to send to others

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a = rnorm(10,1); b = rnorm(5,5); c = rnorm(3,3)... rnorm(3,3);

Nice, isn't it? you can download the toolbox at http://www.mathworks.com/matlabcentral/fileexchange/4645. PS: the original codes use old Matlab version so you will get the warning "Warning: The 'tokenize' option for regexprep is now the default behavior." You may choose to modify the codes by deleting 'tokenize'. Tags - matlab

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Financial Scams
A guest post of Bo. People have a great amount of concern for money, and finding means to get money quickly becomes almost a necessity. It is this need for quick cash and no work that leads people to be drawn into great, sometimes historical financial scams. One great example would be the use of historical Bonds. You see, back ‘in the day’, there were a number of gold bonds issued for a variety of reasons. A way for the government to obtain money with the promise to return it with interest. These bonds were payable in gold, and after a certain maturity point could be cashed in. The problem is that after a particular date they became useless. Nothing more than a piece of history waiting to be preserved in a museum. It is these relics or mock-ups of them that are sold to you by the conartists. Normally with very official looking documentation and after you’ve been hopped from bank to bank, you find out that it is in fact worth nothing except maybe some sentimental collector’s value. If your lucky, it may actually be an actual Bond, in which case you could get a small amount of money from a museum that hosts them. This is truly a great demonstration of one of the historical financial scams. Another great example is the Viactuals Frauds. The pretense is that you buy someone’s life insurance policy, making small investments. When they die you get the full death benefit from said policy. You also walk away happy knowing that your investments made a sick person’s life a little better… right? Well just like any child in school there are people out there who will fake sickness for the attention and the money. Your money could easily be pocketed and you are left all the poorer. Then of course there are scammers that will take your investments to buy their own wants and luxuries rather than using it on the policy you wanted. And the world goes ‘round. The best way to avoid these historical financial scams is to stay away from any offer that looks too good to be true unless you have the help of a real attorney or somebody who really knows what they are talking about. Scam artists are usually professionals at their trade, so will not likely be found.

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Tags - scam

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VarCalc Online Financial Calculator
A guest post of Kang Wang. The VarCalc Pty Ltd Australia is a specialist in financial modelling & their numerical methods, actuarial mathematics, web tool development and Adobe Flash media design. On the web site http://www.varcalc.com.au, it provides a series of innovative and comprehensive financial calculators for both Australian and international investors. These online tools cover many aspects of finance and investment like home loan & mortgage, savings, personal finance, bond and financial derivatives. The VarCalc will launch new calculators regularly.

Tags - calculator

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Log Normal Distribution
A guest post by Sidharth Mallik. The lognormal distribution is used extensively as an approxmiation to the price of a financial asset after time t given a known price at t=0. However there is very little known about the lognormal distribution and the resources are even more limited. I tried finding books about the lognormal distribution and came up with the following 2 (only 2) : 1. Aitchison J and Brown JAC, 1957. The lognormal distribution, Cambridge University Press, Cambridge UK. 2. Crow EL and Shimizu K Eds, 1988. Lognormal Distributions: Theory and Application, Dekker, New York. among all the books on statistics and millions of resources on normal distribution the exponential counterpart only has two genuine reference books. However my job is to give you some light in the matter. Lets start with the basic properties of the lognormal distribution : parameters: sigma^2 > 0 — squared scale (real), mu an element of R — location support: x =(0, +Inf) pdf: \frac{1}{x\sqrt{2\pi\sigma^2}}\, e^{-\frac{\left(\ln x-\mu\right)^2}{2\sigma^2}} cdf: \frac12 + \frac12\,\mathrm{erf}\Big[\frac{\ln x-\mu}{\sqrt{2\sigma^2}}\Big] mean: e^{\mu+\sigma^2/2} median: e^{\mu}\, mode: e^{\mu-\sigma^2} variance: (e^{\sigma^2}\!\!-1) e^{2\mu+\sigma^2} skewness: (e^{\sigma^2}\!\!+2) \sqrt{e^{\sigma^2}\!\!-1} kurtosis: e^{4\sigma^2}\!\! + 2e^{3\sigma^2}\!\! + 3e^{2\sigma^2}\!\! - 3 entropy: \frac12 + \frac12 \ln(2\pi\sigma^2) + \mu mgf: (defined only on the negative half-axis, see text) cf: representation

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\sum_{n=0}^{\infty}\frac{(it)^n}{n!}e^{n\mu+n^2\sigma^2/2} is asymptotically divergent but sufficient for numerical purposes Fisher information: \begin{pmatrix}1/\sigma^2&0\\0&1/ (2\sigma^4)\end{pmatrix} As you may guess the same information is available at wikipedia at http://en.wikipedia.org/wiki/Log-normal_distribution. now for the estimation properties. well conviniently you would want to estimate the mean and the variance of the corresponding logarithmic distribution which happens to be normal and then may be use the above formulas to find the lognormal's parameters. but there is error associated with this. An example of the error is : say you decide on a parameter m as the mean of the corresponding normal distribution and sigma^2 as the variance. the you may say that the corresponding mean of the lognormal distribution is simply mean of lognormal distribution = exp(m+sigma^2/2) However using some math i will show you that this is not an unbiased estimator. Let E[.] denote the expectation of the quantity within the brackets and let M denote the mean of the lognormal distribution.Then if the above estimator was unbiased, we should have E[M] = E[exp(m+sigma^2/2)] But, E[exp(m+sigma^2/2)] => exp(E[m+sigma^2/2]) according to the Jensen inequality. for those of you who don't know what this is refer to the http://en.wikipedia.org/wiki/ Jensen_inequality. Hence there are problems with this form of the estimation. So i would redirect you to this page check out some other ways how this can be done

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1285465 Now having resolved the univariate case we turn our attention to the bivariate case. The parameters in this case are the two means, the two standard deviations and the correlation coefficients. Now the natural question is how to calculate the correlation coefficient. The expression for the covariance is cov(x1,x2) exp((sigma1*sigma2)-1)*exp(m1+m2+(sigma1^2+sigma2^2)/2) The expression for the correlation coefficient is rho = [exp(sigma1*sigma2)-1]/sqrt(exp(sigma1^2-1)*exp(sigma2^2-1)) For more such references and also to get a table for actual values check the following out http://www.stuart.iit.edu/shared/shared_stuartfaculty/ whitepapers/thomopoulos_some.pdf I will want to finish off with some intuition as to where can you apply the lognormal distribution. Now first identify if the variable under study is throughout positive or not like a stock price. Next identify the fact that the variable contains kind of multiplicative factors in the sense that say there are levels to the quantity in multiplicative terms. What I mean to say is that the variable has let us say a level r on normal days.Then when you expect the variable to go up it goes upto 1.5 times r then even higher means that it goes to say 5 times r. Similarly for the lower side. If your variable is indicative of this then it suggests a lognormal distribution. Tags - distribution =

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Black Litterman Model (II)
This is the second part of Black Litterman Model, check the first part at Black Litterman Model (I). I skip the technical section, which can be found in the original paper Beyond Black-Litterman in Practice: A Five-Step Recipe to Input Views on Non-Normal Markets, and the Matlab codes can be downloaded at http://www.mathworks.com/matlabcentral/fileexchange/9061, in the Extra->COP folder. Suppose we would like to invest in the US treasury market at a weekly investment horizon, and we are interested into the following six key interest rates: 6 month, 2 year, 5 year, 10 year, 20 year and 30 year. For illustration, we use Monte Carlo simulation to generate 100,000 scenarios based on a t Copula with skew t marginal distribution, the sample mean, standard deviation, skewness and kurtosis of the six key rates are shown in table 1. (table 1) We can easily see from the table 1 that all of the key rates, in particular the short period rates, are non-normally distributed as the kurtosis is significantly larger than 3, which corresponds to normal distribution. Case 1: Based on the simulated data, we consider a practitioner who has a 10 bp steepening view on the 2-20 spread and a 5 bp bullish view on the 2-5-10 butterfly, Further, we assume that those views are uniform distributed, and the confidence level is 25% in both views. The results are: Compared with table 1, we notice the means of 2y and 10y are decreased significantly, and the means of 5y and 20y are increased, which are consistent with our assumed views, since we are bearish on 2y and 10y, and bullish on 5y and 20y. Case 2: Contrary to case 1, we express a 10 bp bullish view on the 2-20 spread and a 5 bp bearish view on the 2-5-10 butterfly, other things being equal. We expect that the means of 2y, 5y, 10y and 20y change another way around. as expected, the means of 2y and 10y are increased significantly, the means of 5y and 20y are increased, and the means of 6m and 30y are

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again the same as those of prior market. Case 3: The views are the same as for case 1, but we increase the confidence for both view from 25% to 75%. We expect the distribution of posterior market alters more significantly. identical with what we expected, when compared with the results of case 1, the means of 2y and 10y are decreased more significantly, and the means of 5y and 20y are increased more pronounced. For all views, the even moments are only marginally affected. Our robust analysis demonstrates the strong consistence of the COP approach. Based on the posterior market values we are able to do return mapping and portfolio optimization. These two posts are a short summary of the original paper and Matlab implementation, please read the source for detail. Tags - black-litterman

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Black Litterman Model (I)
Black-Litterman model is widely used for asset allocation, however, most of its applications are based on the assumption of normally distributed markets and views. In this paper Beyond Black-Litterman in Practice: A Five-Step Recipe to Input Views on Non-Normal Markets, the author Attilio Meucci extent the Black-Litterman model to allow non-normal distribution assumption, specifically, skew t distribution is used for markets and uniform distribution is for investors views as examples. The author also present general steps to implement the approach in practice. As a fan of this model, I plan to write two posts on the paper, the pros and cons of Black litterman will be discussed, and a robust analysis will be shown to demonstrate its consistence. Markowitz mean-variance model is the foundation of modern portfolio theory, it tries to maximize return and minimize risk by carefully choosing different assets. Although Markowitz model is widely used in practice in the financial industry, it has at least the following shortcomings. First, in principle the Markowitz model offers a solution once the expected returns and covariance of the assets are known. Although the covariance of a few assets can be adequately estimated, it is difficult to come up with reasonable estimates of expected returns. Initial estimates often lead to extreme portfolio solutions and have to be adjusted many times before they can be considered acceptable by the decision makers. Second, Markowitz model assumes the future distribution of assets returns will be exactly the same as that of historical returns, therefore it does not allow an investor to have views on the direction of assets growth. Black-Litterman model bypasses these problems by not requiring the user to input estimates of expected return; instead it assumes that the initial expected returns are whatever is required so that the equilibrium asset allocation is equal to what we observe in the markets. The user is only required to state how his assumptions about expected returns differ from the market's and to state his degree of confidence in the alternative assumptions. From this, the Black-Litterman model computes the desired mean-variance efficient asset allocation. It is right because of this character that makes Black-Litterman model be popular both in industry and academia since it was initially developed in 1990.

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However, the original Black-Litterman model helps portfolio managers to compute the distribution of the posterior market that incorporates their subjective views with respect to the prior distribution. All these assumptions are being made considering the entire scenario is normally distributed. In fact, it is frequently observed that returns in equity and other markets are not normally distributed. At the same time, you would expect a practitioner to input his views in a less informative manner. For instance, instead of a view like ‘I am 90% sure that stock A will have a 2% expected return’, he may have a more accurate view such as ‘I am 90% sure that the return of stock A will stay between -1% and 1% with equal chance’, or for an Asian option Trader, his views may be a set of prices at several specific monitoring times, when the option is supposed to be exercised. Meucci (2006) solves the above-mentioned issues of the original BlackLitterman model by developing an approach called Copula-Opinion Pooling (COP), the author relaxes the normal distribution assumption and in principle allows any distribution. However, the proposed implementation in the paper has a distinct distribution under certain assumptions. Indeed, the market has been assumed to be skew-t distributed, this strong assumption makes the application of the approach less evident, although the implementation is pretty straightforward for any distribution by Monte Carlo simulation, because Monte Carlo simulation can be applied for almost any distribution and is suitable for any dimension (at least in theory), COP approach can handle a portfolio with any number of risk factors. The second part will be about the Matlab implementation and results analysis. Tags - black-litterman , allocation

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What Do These 8 Technical Indicators Mean for the Markets?
A guest post by Robert Prechter, CMT. It is rare to have technical indicators all lined up on one side of the ledger. They were lined up this way—on the bullish side—in late February-early March of 2009. Today they are just as aligned but on the bearish side. Consider this short list:

1, The latest report shows only 3.5% cash on average in mutual funds. This figure matches the all-time low, which occurred in July 2007, the month when the Dow Industrials-plus-Transports combination made its all-time high. But wait. The latest report pertains only through February. In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than in 2007! We will know for sure when the next report comes out in early May. Regardless, the confidence that mutual fund managers and investors express today for a continuation of the uptrend rivals their optimism of 2000 and 2007, times of the two most extreme expressions of stock-market optimism ever. 2, The 10-day moving average of the CBOE Equity Put/Call Ratio has fallen to 0.45, which means that the volume of trading in calls has been more than twice that in puts. So, investors are interested primarily in betting on further rising prices, not falling prices, and that’s bearish. The current reading is less than half the level it was thirteen months ago and its lowest level since the all-time peak of stock market optimism from January 1999 to September 2000, the month that the NYSE Composite Index made its orthodox top. The 30-day average stands at 0.50, the lowest reading since October 2000. It took years of relentless rise following the 1987 crash for investors to get that bullish. This time, it’s taken only 13 months. 3,The VIX, a measure of volatility based on options premiums, has been sitting at its lowest level since May 2008, when wave (2) of ((1)) peaked out and led to a Dow loss of 50% over the next ten months. Low premiums indicate complacency among options writers. The quants who designed the trading systems that blew up in 2008 generally assumed

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that low volatility meant that the market was safe, so at such times they would advise hedge funds to raise their leverage multiples. But low volatility is actually the opposite, a warning that things are about to change. The fact that the options market gets things backward is a boon to speculators. Whenever options writers are selling options cheap, the market is likely to move in a big way. Combined with the readings on the Equity Put/Call Ratio, puts right now are a bargain. 4,In October 2008 at the bottom of wave 3 of (3) of ((1)), the Investors Intelligence poll of advisors (which has categories of bullish, bearish and neutral), reported that more than half of advisors were bearish. In December 2009, it reported only 15.6% bears. This reading was the lowest percentage since April 1987, 23 years ago! As happens going into every market top, the ratio has moderated a bit, to 18.9% bears. In 1987, the market also rallied four months past the extreme in advisor sentiment. Then it crashed. The bull/bear ratio in October 2008 was 0.4. In the past five months, it has been as high as 3.4. 5,The Daily Sentiment Index, a poll conducted by Trade-Futures.com, reports the percentage of traders who are bullish on the S&P. The reading has been registering highs in the 86-92% range ever since last September. Prior to recent months, the last time the DSI saw even a single day’s reading at 90% was June 2007. At the March 2009 bottom, only 2% of traders were bullish, so today’s readings make quite a contrast in a short period of time. 6,The Dow’s dividend yield is 2.5%. The only market tops of the past century at which this figure was lower are those of 2000 and 2007, when it was 1.4% and 2.1%, respectively. At the 1929 high, it was 2.9%. 7,The price/earnings ratio, using four-quarter trailing real earnings, has improved tremendously, from 122 to 23. But 23 is in the area of the peak levels of P/E throughout the 20th century. Ratios of 6 or 7 occurred at major stock market bottoms during that time. P/E was infinite during the final quarter of 2008, when E was negative. We will see quite a few quarters of infinite P/E from 2010 to 2017. 8,The Trading Index (TRIN) is a measure of how much volume it takes to move rising stocks vs. falling stocks on the NYSE. The 30-day moving average of daily closing TRIN readings has been sitting at 0.90, the

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lowest level since June 2007. This means that it has taken a lot of volume to make rising stocks go up vs. making falling stocks go down over the past 30-plus trading days. It means that buyers of rising stocks are expending more money to get the same result that sellers of declining stocks are getting. Usually long periods of low TRIN exhaust buying power. For more market analysis and forecasts from Robert Prechter, download the rest of this 10-page issue of the Elliott Wave Theorist free from Elliott Wave International. Learn more here. Tags - trading

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Dealing with Excel Date in Matlab
I was drived crazy yesterday by dealing with the date in Matlab. I have to download data from different sources, some from datastream, and the others from Wharton Research Data Services, unfortunately, the date is in different format, either in a double format as 20081125, or in a cell format as '25/11/2008' (or something similar) after I import the data with xlsread() command in Matlab.

those different formats really bring a problem, as I need to match the dates and compare the prices, it is easy to convert a cell format date to what matlab recognizes using cell2mat() and then datenum(), for instance, matlab returns a number 733737 for '25/11/2008', however, how can I compare that with 20081125 then? what I am thinking is: first, convert the cell format to string using cell2mat(), it becomes a string 25/11/2008; second, reformat the string using datestr(,26), it becomes a string 2008/ 11/25; third, remove '/' by using find(b~='/'), it becomes a string 20081125; finally, convert the string to number using str2num(), it is eventually a double number I need 20081125, then I am able to use and match the date from different sources. It sounds lengthy, do you have a better idea? please share with us by leaving a comment, cheers. Stanley suggests to use the following code: datenum(datevec(num2str(dates),'yyyymmdd')), here dates is double number, perfect, it is much better than my method as it allows us not only for date comparison but also for calculation, what's more, it is more efficient. many thanks, stanley. Tags - matlab , excel

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Kalman Filter Finance Revisited
Inspired by @MichaelRW at Twitter, I decide to continue the topic on Kalman Filter following posts Kalman Filter Example and Kalman Filter Finance. Specifically, Kalman Filter is applied to estimate the parameters of a Cox Ingersoll Ross (CIR) one factor interest rate model, (Vasicek model is simplier than CIR, so the latter is chosen as an example), it is a widely used mean-reverting process with SDE A three-factor CIR model has a measurement equation and a transition equation source from the paper "affine term structure models: theory and implementation" downloaded at www.bankofcanada.ca/en/res/wp/ 2001/wp01-15a.pdf I skip the derivation part and recommend the following two papers: "estimating and testing exponential-affine term structure models by kalman filter " and "affine term structure models: theory and implementation" to understand the transition and measurement equations. Below are the sample Matlab implementation: function [para, sumll] = TreasuryYieldKF() % author: biao from www.mathfinance.cn %%CIR parameter estimation using Kalman Filter for given treasury bonds yields % check paper ""estimating and testing exponential-affine term structure % models by kalman filter " and "affine term structure models: theory and % implementation" for detail % S(t 1) = mu F S(t) noise(Q) % Y(t) = A H S(t) noise(R) % read data Y Y = xlsread('ir.xls'); [nrow, ncol] = size(Y); tau = [1/4 1/2 1 5]; % stand for 3M, 6M, 1Y, 5Y yield

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para0 = [0.05, 0.1, 0.1, -0.1, 0.01*rand(1,ncol).*ones(1,ncol)]; [x, fval] = fmincon(@loglik, para0,[],[],[],[],[0.0001,0.0001,0.0001, -1, 0.00001*ones(1,ncol)],[ones(1,length(para0))],[],[],Y, tau, nrow, ncol); para = x; sumll = fval; end flip over to next page... function sumll = loglik(para,Y, tau, nrow, ncol) �lculate log likelihood % initialize the parameter for CIR model theta = para(1); kappa = para(2); sigma = para(3); lambda = para(4); %volatility of measurement error sigmai = para(5:end); R = eye(ncol); for i = 1:ncol R(i,i) = sigmai(i)^2; end dt = 1/12; %monthly data initx = theta; initV = sigma^2*theta/(2*kappa); % parameter setting for transition equation mu = theta*(1-exp(-kappa*dt)); F = exp(-kappa*dt); % parameter setting for measurement equation A = zeros(1, ncol); H = A; for i = 1:ncol AffineGamma = sqrt((kappa lambda)^2 2*sigma^2); AffineBeta = 2*(exp(AffineGamma*tau(i))-1)/((AffineGamma kappa lambda)*(exp(AffineGamma*tau(i))-1) 2*AffineGamma); AffineAlpha = 2*kappa*theta/ (sigma^2)*log(2*AffineGamma*exp((AffineGamma kappa lambda)*tau(i)/2)/((AffineGamma kappa lambda)*... (exp(AffineGamma*tau(i))-1) 2*AffineGamma)); A(i) = -AffineAlpha/tau(i); H(i) = AffineBeta/tau(i);

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end %now recursive steps AdjS = initx; VarS = initV; ll = zeros(nrow,1); %log-likelihood for i = 1:nrow PredS = mu F*AdjS; %predict values for S and Y Q = theta*sigma*sigma*(1-exp(-kappa*dt))^2/(2*kappa) sigma*sigma/ kappa*(exp(-kappa*dt)-exp(-2*kappa*dt))*AdjS; VarS = F*VarS*F' Q; PredY = A H*PredS; PredError = Y(i,:)-PredY; VarY = H'*VarS*H R; InvVarY = inv(VarY); DetY = det(VarY); %updating KalmanGain = VarS*H*InvVarY; AdjS = PredS KalmanGain*PredError'; VarS = VarS*(1-KalmanGain*H'); ll(i) = -(ncol/ 2)*log(2*pi)-0.5*log(DetY)-0.5*PredError*InvVarY*PredError'; end sumll = -sum(ll); end

I also attach the ir.xls file to test the codes, you should get the parameters values as: theta: 0.0613 kappa: 0.2249 sigma: 0.0700 lambda: -0.1110 Click to download Tags - filter

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Down and Out Call Barrier Option
This post is writen by Jovan, one of our contributors currently studying MFE, thanks, Jovan. A couple of weeks ago one of my friends had an interview at a local hedge fund and he had to prepare Greeks of exotics, so we decided to plot them. In Uwe Wystup’s book, Options in FX markets there is a nice and very clear analytical solution, and mathematica 7 is good in symbolic so the code just takes the derivatives and plots them. Also to check the solution of down and out call we plotted the down and in call and their payoff combines into a regular call so that there wasn’t a mistake. If you do not have mathematica there is a mathematica free file viewer form Wolfram. Together with the codes there is a mini manipulate idea where you can see the interaction of the Greeks with other input parameters such as a Barrier where you see that the delta explodes when you are close to expiry and to the barriers. Uwe Wystup suggests that then one should do a barrier shift to prevent this so that one should rehedge your portfolio based on that shifted barrier. If you are interested to see this please download the attached Mathematica files and check it out. Click to download Tags - barrier , option

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Top Ten Sites in Quant and Quantitative Finance
Xmarks is a hot web2.0 site offering bookmark synchronization, search enhancement and web discovery based on sites bookmarked by users, therefore to some extent it shows the popularity of a site. Personally I use it frequently as it gives me a convenient way to bookmark my favourite wherever I am, no matter using a private laptop at home, or a shared computer at a coffee bar, I am always able to find and read my interested sites. I was surprised to find mathfinance.cn is listed as one of the Top Ten Sites in 'Quant' and 'Quantitative Finance' several minutes ago when I happened to search a keyword in Xmarks, I have no idea when it was listed. Although it may not be treated seriously by others, the rank does make me happy and will continuously encourage our contributors and me to write down what we believe useful. It is our great pleasure to have a blog among those giant sites such as wilmott.com, quantlib.org, quantnet.com, defaultrisk.com, etc., as always, many thanks for your bookmarking, your 10 seconds action means a lot to us. Quantitative Finance Collector is a Top Site in Quantitative Finance Review This Site Quantitative Finance Collector is a Top Site in Quant Review This Site

We have been looking for paid contributors and guest writers, please consider to join us by reading our policy http://www.mathfinance.cn/ looking-for-paid-contributors/ and http://www.mathfinance.cn/postyour-article-on-this-blog/, your support is much appreciated. Have a nice weekends. Tags - quant , blog

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Kalman Filter Finance
A general example of Kalman filter algorithm was briefly discussed at the blog post Kalman filter example, where a Matlab toolbox link was shared as well. When it comes to an application of Kalman filter in finance, one of the best and ealiest paper is Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter (a simple search at Google Scholor tells you this paper has been cited by over 180 times), in the paper the authors do an empirical analysis of Kalman filter to two special cases of interest rate models, namely the Gaussian case (Vasicek 1977) and the non-Gaussian case (Cox Ingersoll and Ross1985 and Chen and Scott 1992), besides a detailed description of how to apply this algorithm step by step. Download the programming files of Estimating exponential affine term structure models at the author's home page http://www.rotman.utoronto.ca/~jcduan/, however, they are in GAUSS language I am unfamiliar with (I used to use it when I studied in Germany seven years ago), so check yourself then. Tags - filter

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48 Hours Left For How to Spot Trading Opportunities
Just let you know there are only 48 Hours Left to Get Your Free 47-Page eBook: How to Spot Trading Opportunities. The How to Spot Trading Opportunities eBook features 47-pages of easy-to-understand trading techniques that help you identify highconfidence trade setups. Senior EWI Analyst Jeffrey Kennedy will show you how some of the simplest rules and guidelines have some of the most powerful applications for trading. Created from the $129 two-volume set of the same name, this valuable eBook is offered free until April 23, 2010. Don’t miss out on this rare opportunity to change the way you trade forever. Download it NOW. Tags - trading , ebook

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Free Data Directory
Data access is a prerequisite to quant finance study, unfortunately, data is not cheap, I once list the sites where we can download free data at financial data download, here is a good free data directory site I came across a few days ago: wikiposit - A searchable directory of numerical data on the internet. Basically Wikiposit spiders those web sites with data and collects data source information, users can therefore look for their wanted data on one site only. Currently it has about 110,000 data sets, mostly economic and financial. For example, a click on finance section you will notice the following subcategories:

or you can search directly by typing a keyword, take a look if you feel useful, http://wikiposit.org/w Tags - data

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Kalman Filter Example
The kalman filter is a time series estimation algorithm that is mainly used combined with maximum likelihood approach to estimate parameters for given data. Compared with pure maximum likelihood, which typically assumes that the data series is observed without errors, and obtains the state variables by inversion, Kalman filter assumes that all data is observed with measurement errors, which is one of the big reasons why it becomes more and more popular in economics and finance, as many models in these fields depend on data that are either non-observable, for example, bond prices are observable but interest rates are not; energy future prices are easily observed but underlying assets are not, etc.; or subject to noise, such as due to bid-ask spreads. There are two basic equations of a Kalman filter: the measurement equation and the transition equation, as the names suggest, the measurement equation relates an unobserved variable (such as interest rates) to an observable variable (such as bond prices), and the transition equation allows the unobserved variable to change over time, for example, interest rates follow a Cox Ingersoll Ross (CIR) process. Essentially Kalman filter is a recursive algorithm, it starts with initial values for the state variables and a measure of the certainty of the guess, and then use these initial values to predict the value of the measurement equation, since the variables in the measurement equation are observed, we can calculate the prediction error, together with a kalman gain factor, to update the values in the transition equation, repeat the process for the next time period and finally we are able to estimate the parameters values by maximum likelihood. The following steps outline the specific procedures of a kalman filter example: Step 1: writing down the measurement equation and transition equation, initializing the state vector; Step 2: forecasting the measurement equation given the initial values; Step 3: updating the inference about the state vector incorporating kalman gain matrix and the prediction error; Step 4: forecasting the state vector of the next time period conditioning on the updated values of the previous period; Step 5: calculating the log-likelihood function under a certain distribution assumption and maximize the log-likelihood, usually a Gaussian distribution is applied.

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For a detailed Kalman filter example in excel, please read the paper "A simplified approach to understanding the kalman filter technique" for detail, I also wrote a sample tutorial file trying to mimic the results but failed, possible reasons are poor performance of solver in excel and the small simulated sample periods. Interested readers can choose to download a Kalman filter toolbox for Matlab. Click to download Tags - filter

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What You Need to Know About Option as A Beginner Part II
A follow up of yesterday's introductory article What You Need to Know About Option as A Beginner Part I (last one on this topic). a) Call option It is the option to buy shares of stock at a specified time in the future. Often it is simply labeled a "Call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). Whereas the seller is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right. For example, let's look at a call option contract at a strike price of $100 for a given stock. Let's use the current month for this example. Let your requirement be to buy 100 shares of the stock which is currently trading at $110/share. And you are buying those stocks, not by the way of options, then you would be paying $11000 for the 100 shares. This means that you will be losing around $1000 for buying the stocks. But if you were to use this option contract and if it were to expire at the same stock price of 110/share then you would have the option to buy 100 shares of that stock at $100/share. Thus you can have a profit of $1000; which is nothing but the cost to buy the option. Here in this, lets hope that the stock at the time of expiration will be, say, $115/share and so you would end up making $500 over what your option costs were. But of course, if the stock price drops to $105/share then you will end up losing $500 on the deal, which will be the bad part of it. The option value, and therefore price, varies with the underlying price and with time. The call price must reflect the "likelihood" or chance of the option "finishing in-the-money". The price should thus be higher with more time to expire and with a more volatile underlying instrument. The science of determining this value is the central tenet of financial mathematics. The most common method is to use the BlackScholes formula (which discussed before). Whatever the formula used, the buyer and seller must agree on the initial value (the premium), otherwise the exchange (buy/sell) of the option will not take place.

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b) Put option A contract between two parties, the writer (seller) and the buyer of the option. The buyer acquires a short position by purchasing the right to sell the underlying instrument to the seller of the option for specified price (the strike price) during a specified period of time. Let’s look at the same example discussed for ‘Call option’, like you want to buy an put option contract at a strike price of $100 for a given stock. If the current value for the stock is $90/share and you wanted to buy the $100 put option contract you would probably be looking at a price of $10 or $11 in the option price listing. If the stock value doesn’t get increased in the period of your put option contract, then you would get a profit of $10/share. But in the other case, where the share value increases beyond $100, say by $10, then you would face a lose of $10/share. And for this put option, it is always advisable to exercise the contract if the current stock value is greater than your contract value. So that you can have a profit, else if you let it expire then you would end up paying the premium to the writer unnecessarily. Future Value From the above example for both the “call” & “put” option contracts, you would have got an idea that calculating the future value of the option. Thus in order to understand option pricing, this future value additive must be accounted for in your investment plan. Remember the longer you hold onto an option (call or put), the less valuable is that future value portion. Again, Check Varieties of programming codes on option valuation for implementation. Tags - option

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What You Need to Know About Option as A Beginner Part I
My third introductory article. Knowledge about Option pricing is essential prior investing in those. If you are a novice, then you are in the right spot. Here in this article, you could get a basic knowledge about the Option, its type & pricing etc. Basic definition of Option In order to understand about Option pricing, you need know about the option first. Option is nothing but an official contract, between a buyer and a seller, that gives the buyer of the option the right, but not the obligation, to buy or sell a specified asset on or before the option’s expiration date, at an agreed price (the strike price). Types (Call and Put) A “Call option” gives the buyer of the option the right to buy the underlying asset at the strike price whereas the “Put option” gives the option to sell the underlying asset at the strike price. If the buyer chooses to exercise this right, the seller is obliged to sell or buy the asset at the agreed price. The buyer may choose not to exercise the right and let it expire. The underlying asset can be a piece of property, a security (stock or bond), or a derivative instrument, such as a futures contract. Valuation models The value of an option can be estimated using a variety of quantitative techniques based on the concept of risk neutral pricing and using stochastic calculus. The most basic model is the Black-Scholes model. These models are implemented using a variety of numerical techniques. In general, standard option valuation models depend on the following factors: • The current market price of the underlying security, • the strike price of the option, particularly in relation to the current market price of the underlying asset (in the money vs. out of the money), • the time to expiration together with any restrictions on when exercise may occur, and • an estimate of the future volatility of the underlying security's price over the life of the option. Check Varieties of programming codes on option valuation for

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implementation. To be continued... Tags - option

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Value at Risk Estimation with Copula
Value at Risk is widely used to measure the downside risk, and Copula is a generalized dependence structure instead of linear correlation to model dependence, especially for lower tail dependence, therefore the combination of VaR with Copula is fantastic in terms of accurately capturing the true risk embedded. I read roughly a working paper Value at Risk – MATLAB Application of Copulas on US and Indian Markets, where the authors calculate the Value at Risk (VaR) using the bivariate Gaussian Copula distribution implemented in MATLAB for the Dow-Jones index and the National Stock Exchange index. It is good to use Gaussian Copula together with some rank correlation (like Spearman's rho or Kendall tau) to model the dependence, however, we must be very careful as basically Gaussian Copula assumes the joint dependence structure normally distributed and as a result, no matter which marginal distribution you choose, the upper and lower tail dependence approach to zero when the significant level limits to one and zero, in other words, in a bivariate case, the probability that X2 exceeds its q-quantile, given that X1 exceeds its q-quantile (upper tail dependence) when q->1, and the probability that X2 is below its qquantile, given that X1 is below its q-quantile (lower tail dependence) when q->0 are zero. For example, below are two simulated return series, one is under Gaussian copula and the other one is under Student t copula, as you can easily see, although both have the same marginal distribution, Gaussian copula has much smaller upper and lower tail dependence than Student t copula, which eventually underestimates the Value at Risk and other risk measures.

I would stay away Gaussian Copula if I were a risk manager, and you? Download Copula toolbox and other code files at Copula if interested. Tags - var , copula

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Looking for Paid Contributors
As the old saying goes: Many heads are better than one. After joined by Bo, we are still looking for contributors who are able to write quality posts to our blog readers. Different from guest post writers who are allowed to promote their sites or products, paid contributors can receive a little sum of cash for their contributions to this blog. Of course we can't make you rich but it is a show of our gratitude and bottles of beer we'd like to invite you. You will get paid $5 ~ $15 per post directly to your PayPal or bank account. Here are the simple rules: 1, you write a post about math finance, ideally with a sample code file (like, how to calculate ***). For example, a paper you read and its implementation you wrote, the problem doesnot need to be sophiscated at all: here are a few examples: http://www.mathfinance.cn/value-at-risk/ http://www.mathfinance.cn/sudoku-spreadsheet-example-matlabexcel-link/ http://www.mathfinance.cn/valuation-of-stock-option-with-discretedividend/; 2, the post is original, not copied from somewhere else; 3, the post should be above 250 words; 4, the post is only published on mathfinance.cn. After we receive your post, we'll let you know how much we are going to pay (currently between $5 and $15) depending on the quality, and if you agree, we'll publish your post under your name ASAP. At your choice, we can also leave your simple profile at About us section. Payment will be sent without minimum amount limit soon after we publish your articles. Please support us by sending your articles and files to abiao @ mathfinance.cn (remove the spaces), or write a guest post if you prefer that way. Cheers. Tags - blog

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Advertise with us
Thank you for your interest in advertising on MathFinance.cn. We have approximately 13,000 unique visitors that view 40,000 pages per month. Engage our valuable demographic of highly educated quantitative research readers through multiple placement options including premium display, buttons and links, email and newsletters, co-registration and lead generation, sponsorships, home page takeovers and other creative advertising solutions. InvestingChannel is one of the fastest growing financial media companies and is our exclusive advertising partner. With InvestingChannel’s seasoned team of professionals, you can optimize your campaigns to maximize return on investment with the highest level of service. Available ad sizes include 728x90, 300x250, 160x600, 88x31 and many more. To learn more about InvestingChannel at: advertising on MathFinance.cn contact

advertiser@investingchannel.com (p) 646.467.7824 (f) 646.290.8452 www.investingchannel.com Tags - ad

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Monte Carlo Methods for Beginners
Biao has writen several posts on Monte Carlo simulation method for option pricing and risk analysis, so what is indeed a Monte Carlo method? as this post is just a general introduction for beginners like me, please skip if you are familiar with it. Monte Carlo methods or Monte Carlo Experiments, as they are commonly referred to as are a class of computational algorithms that use repeated random sampling to obtain the desired results. They find their use in simulating mathematical and physical systems. Since these rely heavily on repeated computation of pseudo-random or random or numbers therefore, they are better suited for calculation by a computer. Systems having large number of coupled degrees of freedom like fluids, strongly coupled solids, cellular structures and disordered materials can be easily solved using these methods. These are also effective in solving complicated boundary conditions and multidimensional integral problems. Today, these methods are being widely used in oil as well as space explorations. Monte Carlo is not a single method of problem solving. Instead, it is a class of approaches that helps in solving complicated problems. These approaches follow a defined pattern which includes defining the domain of possible inputs, generating input randomly from the domain, performing a deterministic computation and aggregating individual result to the final results. If you are familiar with the term “what if” scenario, then you should note that Monte Carlo methods are totally opposite of “what if” scenarios. These simulations or methods consider random sampling of the probability distribution functions as inputs to produce thousands of results. Monet Carlo method was introduced in 1940’s by physicists working in Los Alamos National Laboratory. After its introduction many new methods came, but still Monte Carlo method is one of the most popular methods used for problem solving. The basis of this method is the probability theory, which also gave birth to a large number of methods. The popularity and use of Monte Carlo methods increased considerably after the introduction of computers in 1950’s. USAF and The Rand Corporation were among the major organizations which started use of

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these methods in their day to day operations. For more technical posts, please search "Monte Carlo" in this blog. For instance, Variance reduction by antithetic variable. Tags - monte carlo

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Barrier Option Probabilities

Pricing

Using

Adjusted

Transition

One big issue of pricing barrier option with Binomial tree or other lattice method is its slow convergence rate, the barrier option value converges very slowly as the number of tree or lattice levels increase, often requiring unattainably large computing times for even a modest accuracy. A typical plot of barrier option binomial tree results against its analytic value looks like source from paper Enhanced Numerical Methods for Options with Barriers where the pricing performance is in a sawtooth fashion, with severe periodic spikes that move away from the correct result, which is a nightmare for a researcher because adding more steps doesn't necessarily mean to yield a more accurate answer. The reason for this is that the barrier being used by the tree is generally different from the true barrier value, for example, as demonstrated below, no matter inner barrier or outer barrier is chosen in practice, calculated value will always be smaller or bigger than correct value, where true barrier shall be used.

John Hull presents three approaches for overcoming this problem, namely, positioning nodes on the barriers, adjusting for nodes not lying on barriers, and the adaptive mesh model. Interested readers please refer to chapter 20, from page 467 to 472, the 5th version, Options, futures and other derivatives. Or read another paper in detail "Enhanced Numerical Methods for Options with Barriers" by Emanuel Derman, etc downloadable at http://www.ederman.com/new/docs/gsnumerical_methods.pdf. The way shared today is distinct from the three approaches, unlike traditional methods to ensure convergence through placing the barrier in close proximity to, or directly onto, the nodes of the tree lattice, this method applies a suitable transition probability adjustment, thereafter called Barrier Option Pricing Using Adjusted Transition Probabilities, which exhibits increased convergence to the analytical option price, source from paper Barrier Option Pricing Using Adjusted Transition Probabilities

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Please read the paper for detail at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=964623 and check the accompanying C++ codes at http://www.codeproject.com/KB/recipes/ Zeppelin_Barrier_Options1.aspx Tags - barrier , option , binomial

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Stock Trader Report
Every stock trader is well aware of the fact that anything and everything is possible in the stock market. Unlike traditional stock investors who used to be uneducated, reactive, risk avoiders etc. Today, majority of the stock traders are risk takers, pro active and knows and analyze the market very well. A stock trader is a person who buys or sells share of companies at various stock exchanges. Every trader trades for the shares for the purpose of capital appreciation. A stock trader has a profit motive in mind and thus, he tries to maximize the worth of his shares by trading them. A stock trader is least interested in keeping shares with him. He buys share only to sell them and not to keep them. A good stock trader is one who knows how to balance the capital appreciation of shares with the dividend and bonus that he will get on those shares. Portfolio plays a very important role in the world of stock market and dividend or bonus helps to increase the portfolio considerably. Even though stock trading requires huge risk, still you will find many people seriously indulging into it. No rocket science is involved in stock trading, a person who is knowledgeable, good decision maker and observer can excel and do well in this field. Before entering into stock trading, it is important for you to develop the skill set and the mindset needed to be a good stock trader. This field offers ample opportunities and if you are willing to devote time and effort, than you will surely come out with flying colors. Stock trader reports will give you a brief idea of what stock trading is all about and what factors you should keep in mind when you are dealing in stocks. Download the most recent free reports at the free report section. Tags - trading

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Binomial Tree
This post is by Bo, a guest author of the math finance blog, unlike biao's technical posts, I will be mainly writing introductory articles, which aims to help beginners have a rough idea, and I will try to link to other technical posts for a better understanding if possible. Binomial options pricing model or BOPM, as it is popularly known is a generalized numerical method that is used for the valuation of options. This method was proposed by Rubinstein, Cox and Ross. This method is popular in the sense that it can be used for variety of conditions, while the other numerical methods have limited use. The main reason why it can be used in varied situations is that it is based on the underlying instrument spread over a period of time rather than a single point of time. It is slower, but much more accurate than any other method. This method traces the evolution of options underlying variable spread over a period of time. This is done by using a binomial tree or binomial lattice. Each node in the binomial tree or lattice represents price of the underlying at a single point of time. The valuation is performed iteratively, i.e., it starts from the final node and goes backwards till it reaches the first node. The value that you will calculate in each node of the binomial tree is the value of the option at that point of time. BOPM follows a three step process. In the first step, which is binomial tree generation, a tree comprised of prices is produced by working forward the date of valuation to expiration. It is assumed that at each step the value of underlying instrument is either moving down or up by a specific factor. The down and up factors are calculated using underlying volatility. The next step is to find the value of option at each final node. The option value which is obtained is called the exercise or intrinsic value. The third step is to find the value of options at earlier nodes, by moving backwards from the final nodes. Check Nine Ways to Implement Binomial Tree Option Pricing for binomial tree implementation.

Tags - binomial

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How much do you know about the Greeks?
Option Greeks measure the sensitivity of option's value to a change in underlying parameters on which the value of an instrument or portfolio of financial instruments is dependent. Commonly used Greeks include Delta, Gamma, Vega, Rho, and Theta, which represents partial derivative to underlying asset price, delta, volatility, interest rate and time to maturity, respectively. Obviously a good risk control depends largely on how accurate the way a trader or risk manager compute Greeks, see old post Option Greeks analysis for nice Matlab files plotting Greeks for vanilla options. No matter what the investment, an investor needs to know and fully understand the potential risks of the investment prior to committing capital to that investment. In the options market, the Greeks define and quantify the risks of your position before you commit to the investment. Understanding the Greeks is a must for proper risk management. Further, the Greeks can also help you identify and select not only the proper strategy to fit the opportunity you selected, but also which specific options to use to create that specific strategy. Without a full understanding of the risks of an investment, an investor should never commit hard earned money. If you do not know your Greeks, you have no business being in the options market! Watch this complimentary seminar covering the Greeks… Option Greeks seminar. Tags - greeks

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Mathematics is everywhere
Share a few interesting pics taken by Nikki Graziano, a photographer and a mathematician. Mathematics is everywhere in a mathematician's eyes. Source from http://www.thejunction.de/impulse/2010/03/24/ mathematische-funktionen-fur-jeden-geschmack-0017020

Tags - math

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High Dimensional Sobol Sequences
Quasi-Monte Carlo methods are very efficient in solving low dimensional integration problems, for example, pricing a pathdependent exotic option, among those low discrepancy sequences, Sobol is undoubtedly one of the best and most widely used due to its high convergence speed, how to generate Sobol Sequences was shared at posts Sobol sequence generator, Primitive polynomials for Sobol sequences, halton and sobol sequences and Sobol and Generalised Faure sequences. However, empirical research have shown Quasi-Monte Carlo Sobol sequences perform poorly for high dimensional integration problems, it can never be more efficient than the ordinary Monte Carlo simulation, some researchers suggest to use Sobol sequences with Brownian bridge for a better result. A recent working paper shared at Articles uses a small trick - randomized Sobol sequences to avoid the poor performance high dimensional problem, indeed it is straightforward to add this trick into your codes. Below is a comparison graph demonstrating the performance, very impressive.

(Source from A note on multidimensional sobol sequences) read the paper for detail if interested, http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1558186 Tags - sobol

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Upcoming Webinars by MathWorks
Attending a free webinar is a good way to learn efficiently. Here is a list of upcoming one-hour live online webinars about MathWorks products which I think useful to math finance studying. Date Title 24 Mar Data Acquisition with MATLAB 2010 6 Apr Global Optimization 2010 Products with MATLAB Session Time 10:00 a.m. (Central european Time)

9:00 a.m. (U.S. EDT)2:00 p.m. (U.S. EDT) 9:00 a.m. (U.S. 8 Apr Digital Signal Processing Using MATLAB EDT)2:00 p.m. (U.S. 2010 EDT) 13 Apr Best Practices for Verification, Validation, 9:00 a.m. (U.S. EDT) 2010 and Test in Model-Based Design 2:00 p.m. (U.S. EDT) 15 Apr MATLAB for Excel Users in 10:00 a.m. (United Kingdom-GMT) 2010 Computational Finance

Enjoy. Tags - webinar

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Binomial Tree Option Pricing with Discrete Dividends
How to value a stock option with discrete dividend was briefly introduced at http://www.mathfinance.cn/valuation-of-stock-optionwith-discrete-dividend/, where the main goal is to compare the performance of different methods, namely, Escrowed dividend model, Chriss volatility adjustment model, Haug & Haug volatility adjustment model, Bos volatility adjustment model, and Haug, Haug and Lewis method. I didn't include lattice method for comparison because nonrecombining binomial tree is computer intensive, especially when the number of dividends is large. In the book Options, futures and other derivatives by John Hull, how to deal with discrete dividend with a binomial tree is explained in detail, see page 402, fifth version, where future discrete dividend is divided into two types: 1, known dividend yield. For instance, there will be a 3% dividend 3 months later (3% of the stock price), it is straightforward to handle it as the binomial tree is recombined when the nodes are multiplied by a percentage, so basically what we need to do is to construct a tree like usual before ex-dividend date, and then shift all the left tree nodes down by (1-dividend yield), that's it, the number of nodes are the same as for non-dividend binomial tree; (source from Options, futures and other derivatives) 2, known dollar dividend. For instance, there will be a 2.5 dollar dividend 3 months later, so before ex-dividend date the binomial tree is constructed as usual but exactly at the date after ex-dividend, the whole nodes are shifted down by 2.5 dollar, and then a new binomial tree is constructed, because the nodes are shifted by an absolute amount number, the new binomial tree is not recombined any more, which means much more nodes than the non-dividend case. Specifically, as pointed by Hull, when i = k+m, there are m(k+2) rather than k+m+1 nodes. The issue becomes more challenging when we increase the number of dividends. Fortunately, there is a simpler way to get around of this difficulty by dividing the stock price into two components: an uncertain part and a part that is the present value of all future dividends during the life of the option. Please check the book for detail Options, Futures, and Other Derivatives, 7th Economy Edition with CD.

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(source from Options, futures and other derivatives) Should you are interested into a sample implementation in Matlab of Binomial Tree Option Pricing with Discrete Dividends, take a look at the file http://www.ualberta.ca/dept/aict/bluejay/usr/local/matlab-6.5/ toolbox/finance/finance/binprice.m. Tags - dividend , option

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Quant Project Outsourcing
I haven't updated my blog for several days as I have been very busy last week with my own research, courses. In the mean time I also did a few outsourcing projects, for example, some recent projects including a portfolio Value at Risk calculation excel with macro supporting advanced input & output form; an American option calculator considering discrete dividends in VBA; data clean, missing data imputation for a small hedge fund; probability of future stock price exceeding a barrier in Matlab, etc. Some selected customers' review: Very satisfied, with the level of work - muzammmil Fantastic effort abiao, I really appreciated you turning this job around for me so quickly. If I ever have the need for a quant to help with another custom function, you are my man. - ABCInvestor Thanks for your efficiency, you are definately on my list if I need a quick quant. - John with received feedback

If you happen to have some math finance projects for outsourcing, you may consider to give my group and me chance. Although we can't guarantee we are capable of meeting all your requirements, we can try best to insure you a satisfied result as long as we promise to undertake the project, at a low cost. Please email me at abiao @ mathfinance.cn (remove space) for a quote and proposal if you want, cheers. Tags - quant

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The Big Short: Inside the Doomsday Machine
Most of us have read the book Liar's Poker: Rising Through the Wreckage on Wall Street, one of the books that define Wall Street during the 1980s and are highly recommened by many people in academia and industry, where the author Michael Lewis described his experiences as a bond salesman in a humon sense. I just got to know today from a friend of mine recommending a new book The Big Short: Inside the Doomsday Machine , as described: Quotation A brilliant account—character-rich and darkly humorous—of how the U.S. economy was driven over the cliff. Truth really is stranger than fiction. Who better than the author of the signature bestseller Liar’s Poker to explain how the event we were told was impossible—the free fall of the American economy—finally occurred; how the things that we wanted, like ridiculously easy money and greatly expanded home ownership, were vehicles for that crash; and how shareholder demand for profit forced investment executives to eat the forbidden fruit of toxic derivatives.

I don't know, considering the high quality of Liar's Pocker, it may be worth reading. I pre-ordered just now at Amazon, if you also want a bed reading book, order one at only $15.09 at Amazon to be released on March 15, 2010. The Big Short: Inside the Doomsday Machine.

Tags - amazon , book

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Calibrating Stochastic Volatility Models with Heuristic Techniques
Stochastic volatility models, specifically, Heston model, SABR model, are introduced before and become the widely used among academia and industry. However, the calibration process is difficult because generally the pricing requires numerical integration, and calibration requires to find five and eight parameters instead of only one for Black Scholes model. Found a paper Calibrating Option Pricing Models with Heuristics, where the author look into the calibration of Heston (1993) and Bates (1996) models. Finding parameters that make the models consistent with market prices means solving a non-convex optimisation problem. Optimisation heuristics is suggested for this issue, more specifically they show that Differential Evolution and Particle Swarm Optimisation are both able to give good solutions to the problem. Take a look if you are interested, in the Appendix the R and Matlab codes are given for a better understanding. http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1566975 Tags - stochastic , heuristic

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How to Spot Trading Opportunities
How To Use Bar Patterns to Spot Trade Setups 30 Instructional Charts With Simple Explanations If you are a trader or are the least bit interested in trading, you're most likely "chart-centric." A good chart is priceless if it helps to identify a great opportunity. But without the right education, you could be missing high-probability trade setups that should be staring you right in the face. That's where our FREE report, How to Use Bar Patterns to Spot Trade Setups, can help. You'll learn to identify and capitalize on bar patterns such as the Double Inside Day, the Arrow, and the Popgun. And you'll get a brand a new addition to the original report, "How to Make Bar Patterns Work For You," which adds two more important patterns: the Three-In-One Bar Pattern and the Outside-Inside Reversal. Download Your Free Bar Patterns Report Now. Tags - trading

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VaR Historical Simulation
Following Value at Risk xls and var backtesting, a third post about using historical simulation for Value at Risk calculation. We know one shortcoming of historical simulation is: the result highly depends on the choice of sample data length, VaR result does not vary often or changes suddenly. Despite this weakness, HS is still popular due to its obvious advantage: easy to implement, and no distribution assumption required, which is especially appealing if the estimate of distribution assumption is difficult. Several ways have been proposed to improve HS's performance, here are two selected methods with good results I personally use. 1, The Best of Both Worlds: A Hybrid Approach to Calculating Value at Risk by Jacob Boudoukh1, Matthew Richardson and Robert F. Whitelaw. By hybrid it means this approach is a combination of RiskMetrics's parametric method and Historical Simulation. The basic idea is: since we can allocate larger weight to recent data and smaller weight to remote data for exponential weighted moving average (EWMA) volatility calculation, hence improves the backtesting performance of parametric method, why can't we then apply a similar principle to historical simulation? make sense? so it estimates the VaR of a portfolio by applying exponentially declining weights to past returns and then finding the appropriate percentile of this time weighted empirical distribution. The following results are from the paper The Best of Both Worlds: A Hybrid Approach to Calculating Value at Risk, page 11. It does improve compared with the vanilla historical simulation and EWMA parametric method, nice.

2, INCORPORATING VOLATILITY UPDATING INTO THE HISTORICAL SIMULATION METHOD FOR VALUE AT RISK by John Hull and Alan White. The idea is to "adjust" return based on the ratio of current volatility to the past volatility, and use historical simulation on the adjusted returns. Their argument is supposing today's volatility is 20%, while volatility was say, 30%, then past returns obviously exaggerate the current market situation if used directly. They even compare their performance with the first one above and the results are: source from INCORPORATING VOLATILITY UPDATING INTO THE

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HISTORICAL SIMULATION METHOD FOR VALUE AT RISK page 17. Results are promising, aren't they? few lines of codes are enough for the adjustment. Tags - var

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Friday reading list of this week
Friday again, just a final kind remind, since Change of Friday Reading List Setting, I have been updating Friday reading list on page articles, for example, the list of this week includes: 1, Testing for Asymmetric Dependence, http://www.bepress.com/ snde/vol14/iss2/art2/; 2, Index-Exciting CAViaR: A New Empirical Time-Varying Risk Model, http://www.bepress.com/snde/vol14/iss2/art1/; 3, Improving Portfolio Selection Using Option-Implied Volatility and Skewness , http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1559642; 4, Trading Activity and Bid-Ask Spreads of Individual Equity Options, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1553222; 5, The Method of Simulated Quantiles, http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1561185 Keep an eye on page articles. Tags - friday

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Inverse Graphing Calculator
An interesting application of Inverse Graphing Calculator, where you enter any word from A to Z into your calculator and then get a graph of the curve. For instance, if you write an equation:

you would get a graph below:

Creat your own calculator.php Tags - graph

at

http://www.xamuel.com/inverse-graphing-

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Sudoku Spreadsheet Example of Matlab Excel Link
Sudoku is one of my favorite small games I often have fun with, I save one copy at my gphone and play it whenever I want to take a rest. (most of us may have a wrong impression that Sudoku originated in Japan, no, in America.) I happened to find Cleve Moler solved Sudoku using recursive backtracking method and the speed is fast, the minor error is it doesn't report an error when the initial 9*9 matrix you give violates Sudoku rules (you can test it later, the code starts to run and returns a result even you give repetitive numbers along a same row or column). Since building a GUI in matlab isn't easy, I choose to build a Sudoku spreadsheet using Matlab Excel link for an example. Once you install Excel Link module and turn it on, you will notice the short-cuts on the excel menu bar looking like intuitively, those buttons stand for "start matlab", "send data to matlab", "retrieve data from matlab", and "execute the matlab command", respectively. For my case, I first download the Sudoku M code at http://www.mathworks.co.uk/company/newsletters/news_notes/ 2009/ clevescorner.html?s_cid=ACD0210ukTA2&s_v1=8728847_1-BR7DSN, then open an excel file, write down a 9*9 matrix "X" then define a zone to fetch the calculation result, which should also be 9*9

finally do steps: <- put data to matlab, MLPutmatrix("X",X) <- solve the problem in matlab, MLEvalString("X=sudoku(X)") <- get results from matlab, MLGetMatrix("X","NewX") result is then retrieved immediately to Sudoku Spreadsheet from matlab

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Straightforward to run your Matlab function in excel, isn't it? alternatively you can use Matlab builder for excel. Click to download Tags - matlab , excel

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Change of Friday Reading List Setting
I made a small change to the Friday reading list section by adding a new category Articles, which can be easily seen above at the menu bar. So from now on all recommended paper, together with shared interesting articles, will not be shown on the main page any more but rather under separated Articles category . For one thing, this movement facilitates my sharing process, I don't have to add paper/articles to my reading list only on Friday; for another, since not all people like reading technical paper, they can now choose not to see them at all, which is especially a benefit to blog feed readers as the reading list will "disappear" from update. Also, please consider sharing to your friends if you think this blog is useful by bookmarking at the right sidebar button or linking to us if possible, I do appreciate your 10 seconds support. Have a nice weekend. Tags - friday

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Free market reports and articles
For over ten decades, the mainstream financial world has embraced the view that external news events drive trend changes in the markets. In less than ten minutes, EWI's senior tutorial instructor Wayne Gorman shatters that very idea into a fine dust, swept away into thin air. In part one of his exclusive, three-part Club EWI video series "Why Use The Wave Principle," Wayne first assesses the pitfalls of relying on macroeconomic models to forecast; namely: "An investor is lured into the market at just the worst time, when it's time to sell, and forced out just at the best time to buy." As for real world examples of this happening, Wayne spans three hundred years of financial history to reveal how the most pivotal economic, political, and environmental events failed to alter the course of their respective markets. Here, the free video includes groundbreaking charts on these (and more) well known episodes: The S&P 500 and Enron from 2000-2002: The stock market ROSE and continued to proceed upward AFTER the largest US corporate scandal and bankruptcy ever (at the time). The Dow Industrials and GDP quarterly data from 1970 to early 2000s: After the release of major negative GDP numbers, the market for the most part ROSE, just the opposite of what most market analysts and investors expect. The Dow and profound political events over the last 80 years: In the 1930s and 1940s, a series of negative incidents -- i.e. Hitler rising to power, World War II, and the Holocaust -- preceded a powerful uptrend in stocks all the way into the 1960s. Stock market charts of the five countries most affected by the 2004 Indian Ocean Tsunami (India, Indonesia, Malaysia, Sri Lanka, and Thailand). Four out of the five ROSE after the natural disaster...

Believe it or not, we've only scratched the surface. In his myth-busting, free video "Why Use The Wave Principle," Wayne Gorman presents a total of 40 charts that capture failed fundamental analysis of the world's leading financial markets. Wayne recalls this expression from a famous, Nobel Prize winning economist:

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"Economic reasoning will be of no value in cases of uncertainty." And he offers this response: "But isn't that what we have in financial markets: cases of uncertainty? We need a different type of reasoning, one that will help us to avoid the pitfalls shown on the previous charts. That's why the Wave Principle is so important. It offers a unique perspective and a market discipline of rules and guidelines that help investors avoid buying at tops and liquidating at bottoms. It helps to explain and understand trends before they happen." The flaw in Economic 101, cause-and-effect theory is one of the easiest things to prove. But it's also one of the hardest things for many investors to accept. Now is the time to do so. Watch the free "Why Use The Wave Principle," video in its entirety today at absolutely no cost. Simply sign on to join the rapidly expanding Club EWI and take advantage of the amazing educational benefits membership has to offer. Tags - report

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VaR Backtesting
A follow-up of my previous post Value at Risk xls, I was asked why not & how to add a VaR backtesting module in that excel file, well, it is straightforward in principle to do that but since we have to calculate daily VaR for multiple periods in order to do backtesting, I simply didn't add that in an excel for speed reason. The Backtesting framework developed by the Basel committee is the main methodology to judge the performance of VaR model, it typically consists of a periodic comparison of the portfolio’s or asset’s daily VaR values with the subsequent daily profit and loss (P&L). Obviously, the ideal model should generate the times of VaR exceeding P&L equal to (1-alpha) multiplied by time periods for backtesting. For a single equity case it is obvious what we need to do is comparing daily VaR results with daily return; but for a portfolio we have to be careful with the trading positions. Basel committee (1996) introduces a three-zone approach, where the green zone means the possibility of erroneously accepting an inaccurate model is low; yellow zone is risk manager should be careful to check the model before take action; red zone means the probability of erroneously rejecting an accurate model is remote. For example, the backtesting three zones boundaries for a sample of 250 observations, source from Basel committee, 1996 look like Backtesting results can therefore be judged by counting the number of exceptions and seeing intuitively which colour zone it falls into. Alternatively you can rely on some statistical testing, for instance, the exception testing by Kupiec (1995). Your final VaR backtesting results will look similar to

by which you are able to tell the performance of your VaR model. certainly there isn't only one way for VaR backtesting, the abovementioned one is an example. Tags - var

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Financial Analytics Risk Management Tools
Found a site providing financial analytics & risk management tools, FinCalc, as introduced by its webmaster: "FinCalc provides you with the tools to build advanced financial functions under Excel. ...FinCalc covers bonds, money market, futures, options and interest rate derivatives." Key points are: Calendar with business holidays for the major financial centers. Bond analytics: yield to maturity, duration, accrued interest; valuation functions and sensitivity measures; bond cash flows; forward price and repo rate. Derivatives: valuation functions and sensitivity measures european and american options; exotic options. Discount curve construction based on money market rates,short term futures and swap rates. Interest rates derivatives: valuation and sensitivity for swaps,swaptions, caps & floors. Credit derivatives: valuation and sensitivity for CDS. Portfolio analytics: volatility, expected return, tracking error, value at risk, portfolio optimization on an absolute basis or relative to a benchmark. User friendliness: meaningful function and parameter names; user's manual, numerous examples and applications. Excel add-in and examples to download. For example, after downloading FinCalc.xla, opening it and other files saved in a same directory, a user is able to use the following modules:

The author protects the macro code with password, unfortunately. Check http://homepage.hispeed.ch/FinCalc/Index.htm if interested. Tags - risk , excel

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Binary Options Trading
Binary option is a one of the simple & common type of derivative, where the payoff is either a certain amount of prescribed cash, called cash-or-nothing option, or shares, called asset-or-nothing option. Intuitively, cash-or-nothing option holders receive cash if the option finishes in the money, asset-or-nothing option holders receive shares of asset if in the money, thereafter binary options are often named as digital options. The pricing of binary options is straightforward under GBM framework, the widely used Black Scholes formula can be easily adopted for binary option valuation. Once we understand the principle and know how to price it, the next step probably is to trade binary options. There are several online option trading platform for an individual investor to choose, the one I'd like to review is EZTrader, who has revolutionized the way binary options are traded on the internet today, by supplying its customers with a simple, exciting, dynamic and highly profitable trading platform, very different from traditional option trading. Due to the simplicity and speed of our binary options trading system and the low minimum investment amount, it is able to reach investors with different profiles all over the world. Ranging from sophisticated investors that are looking for ways to hedge their positions in the traditional market, to amateur day traders looking for some "action" without risking large amounts of money, EZTrader developed a system suitable to most of everyone's goals. EZtrader have taken the fear and uncertainty out of Forex trading to focus on an existing new kind of trade. At EZtrader you can trade Binary Options. With binary options you simply choose whether the stock price will go up or down by the expiration time and place you call or put accordingly. With EZtrader your winning return is fixed, you don’t have to leverage millions of dollars with every trade or setup complicated stop loss strategy. With EZtrader binary options everything you need is right in front of you. Why do I select this online trading service? well, there are at least the following advantages of EZtrader I am aware of: - A member is able to trade Nasdaq, Dow Jones and Commodities based options;

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- Hourly trades; - Open an account is free, absolutely No Fees; - Members can choose to withdraw fund as they want; ... Besides simplified trading process, EZTrader members are provided with a complete set of tools to help them optimize their trading. Tools include live financial news, references to financial sites and a wide variety of tradable options, and more. Check EZtrader home page regularly for new promotions that will help you to get the most out of your trades, for example, one promotion is: If you deposit a total of $550.00 today, Monday, February 22nd, 2010, you will receive a bonus of $250.00 (%45)Registration is totally free and there are no commissions to pay ever. To start trading, first go to trading area after sign in, you will find a pool of options to choose Choose an option to trade from the list of available options, then select the type of trade, either CALL or PUT, enter the amount you would like to trade. you can change the trade type from CALL to PUT or vice-versa even after entering an amount, finally click 'Trade' to execute your trade. Simple & new binary options trading platform, start applying your derivative quantitative skills directly at EZTrader. Tags - binary , option , trading

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Value at Risk xls
A blog reader wrote me an email few weeks ago regarding if it is possible to share an excel for Value at Risk xls calculation, I didn't notice that email until recently, sorry for that. So this afternoon I created a naive excel xls file with VBA macro code available. Before checking the excel, few sentences explaining Value at Risk calculation are necessary: Value at Risk (VaR) is the maximum loss not exceeded with a given confidence level 0

Given confidence level and horizon day, the crucial point for quantile estimation is to find a suitable distribution of underlying risk factors, once distribution is known, VaR and ES can be easily calculated by the definition. Mina and Xiao (2001) explains in detail three popular methods to compute VaR: parametric approach (the simplest one is delta-normal), Monte Carlo simulation (MC) and Historical simulation (HS). I am not going to talk in detail how to calculate them as interested reader can refer to the paper or the book by John Hull, a short comparison of the above-mentioned three approaches are listed below, • HS – easy to implement, no distribution assumption; – highly depends on the choice of sample data length, VaR result does not vary often or changes suddenly. • MC – flexible, almost suitable for any distribution; – assumption of risk factors return required, time consuming. • Parametric – easy to implement, not hard to understand; – assumption of risk factors return required, too simple assumption or too exotic to implement. Attached is the ValueatRisk.xls file, where for simplicity, I treat volatility as normal standard deviation, Value at Risk is computed by delta-normal, monte carlo simulation and historical simultion for any single equity, you have to make sure internet is accessible for downloading data from Yahoo. Please keep in mind this file is created for illustration only, use at your own risk.

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To use it, you need to fill in several parameters including: where you can change stock symbol "IBM" to any stock you want, as long as its trading prices are available at Yahoo finance. Please let me know any error, cheers. Excel: Click to download Macro Code: Click to download Tags - var

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Friday reading list 19/02/2010
1, Market Timing & Trading Strategies Using Asset Rotation, "In this paper we present empirical results on the statistical and economic viability of a market timing trading strategy that is based on rotation between two risky assets. We use data on Exchange Traded Funds (ETFs) and models for both the returns and the volatility of the underlying assets." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1537914 2, Hedging the Black Swan: Conditional Heteroskedasticity and Tail Dependence in S&P500 and Vix, "In this paper, we show how the conditional approach of Heffernan and Tawn (2004) can be implemented to model extremal dependence between financial time series. A hedging example based on VIX futures is used to demonstrate its flexibility and superiority against the conventional OLS regression approach." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1549164 3, Stability of Mean-Variance Portfolio Weights, "The mean-variance portfolio weights are known to be strongly affected by the estimation errors of the parameters of asset distribution. Our paper studies this phenomenon from a new angle. We distil the stability measurements of separate coordinates of portfolio weights estimator into a single number. We derive analytical formulas that relate this measure with the mean and the covariance matrix of asset returns." http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1553073 4, Unusual News Events and the Cross-Section of Stock Returns, "We show that stocks that experience a sudden increase in idiosyncratic volatility earn abnormally high contemporaneous returns but significantly underperform otherwise similar stocks in the future." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1362121 5, Exact Simulation of Point Processes with Stochastic Intensities, "This paper develops a method for the exact simulation of point processes with stochastic intensities. The method is based on a change of the filtration that describes the information flow in the point process model." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1551647 Tags - friday

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11 Commonplace Market Views: True or Myth?
A guest post by Susan C. Walker. "Cash on the sidelines is bullish for stocks." Have you ever heard some stock market pundit utter these words? Have you ever wondered if the statement were true? Read this item from the latest issue of The Elliott Wave Financial Forecast, and you'll wonder no more: Myth -- Cash on the sidelines is bullish for stocks. This refrain rang like a gong all the way through the declines of 2000-2002 and 2007-2009. In February 2000, when mutual fund cash hit 4.2% (compared to 3.8% in November), The Elliott Wave Financial Forecast issued its “cash is king” advice. Once again, the word on the street is that there is way too much “cash on the sidelines” for stocks to fall precipitously. This chart shows net cash available to investors plotted beneath the DJIA. In December 2007, available net cash expanded to a new high, besting all extremes since at least 1992, a 15-year time span. Despite the presence of this mountain of cash, the DJIA lost more than half its entire value over the next 15 months. Indeed, as the chart shows, cash remained high right as the stock market entered the most intense part of the crash in 2008. Available cash does correlate with the market’s moves, but the market is in charge, not the cash. ----The Elliott Wave Financial Forecast, Jan. 29, 2010 Now take a look at these 10 statements and decide if they are true: 1, Earnings drive stock prices. 2, Small stocks are the place to be. 3, Worry about inflation rather than deflation. 4, It's enough to simply beat the market. 5, To do well investing, you have to diversify. 6, The FDIC can protect depositors. 7, It's bullish when the market ignores bad news. 8, Bubbles can unwind slowly. 9, People can make money speculating. 10, News and events drive the markets. Bob Prechter and our other analysts have debunked each of these statements as a market myth. You can discover how we exposed these ideas as myths, and in turn make more informed decisions about your

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investing. We've gathered the writings that expose these 10 statements as market myths in our 33-page eBook, called Market Myths Exposed. They come from two of our premier publications, The Elliott Wave Theorist and The Elliott Wave Financial Forecast, as well as two of our books, Prechter's Perspective and The Wave Principle of Human Social Behavior. The 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. You will uncover important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, investment bubbles, inflation and deflation, small stocks, speculation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here. Tags - elliott , stock

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High Probability ETF Trading Strategies on Stock
Finally finished reading the book High Probability ETF Trading: 7 Professional Strategies To Improve Your ETF Trading bought few weeks ago, in the book the authors share 7 professional quantitative trading strategies to improve ETF trading, namely: 3-day high/low method, RSI 25/75, R3 strategy, the %b strategy, multiple days up and down, and RSI 10/6 & RSI 90/94 strategy. Since ETF is not easily accessed for individual investors due to large amount fund requirement, my first thought is: are these trading strategies suitable for stocks trading? At the end of the book the authors also said: "the strategies in this book are intended for ETFs. Many of the concepts are derived from high probability equity trading strategies, but stocks have very different risks than ETFs". In addition, the authors also note "ETFs tend to move from overbought to oversold better than individual stocks", considering all of the 7 strategies are based on buying on pullbacks, I wasn't optimistic about them on stocks. I tested 5 strategies out of 7 for a randomly selected Chinese stock downloaded from Yahoo, since shorting selling is hard in Chinese market I exercise long strategy only (which might influence their performance, I admit). Starting with capital 12500, transaction cost 0.5% and running for one year data, the results are (pls bear with me, the graphs look ugly, just for preliminary research): 1, 3-day high/low method 2, RSI 25/75 3, R3 strategy 4, the %b strategy 5, multiple days up and down

Although all for pullbacks, 3-day high/low method did worst with only 0.01 sharpe ratio, compared with the best one the %b strategy 3.34 and buy & hold strategy 0.74. R3 strategy generates 2.67 sharpe ratio high enough for trading but we have to be very careful as the slipage cost due to whipsaw position may kill our profit.

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Anyway, as the authors mentioned, we must test seriously before applying these strategies to non-ETF assets, especially for breakout type assets.

Tags - strategy , trading

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Friday reading list 12/02/2010
Tomorrow is the last day of this lunar year, wish all of you and me happy Chinese lunar new year. 抬板凳看春晚 1, Modeling the Cross Section of Stock Returns: A Model Pooling Approach, "This paper illustrates the advantages of a model pooling approach in contrast to model selection. Model pools of several asset pricing models including the CAPM, the Fama-French (1993) three-factor model, and the Carhart (1997) four-factor model are considered for the purpose of forming expectations (i.e., predictions) of the one-step-ahead returns for a cross section of stock portfolios." http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1536050; 2, Option Pricing with Piecewise-Constant Parameters, Discrete Jumps and Regime-Switching, "In this paper, I address systematically how to enhance the most existing option models with piecewise-constant parameters, and how to derive the corresponding closed-form characteristic function under the risk-neutral measure. As long as the characteristic function with piecewise-constant parameters is analytical known, the pricing formula for a European call is then given by inverse transform of the derived characteristic function." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1547036; 3, Comparison of Numerical and Analytical Approximations of the Early Exercise Boundary of the American Put Option, "In this paper we present qualitative and quantitative comparison of various analytical and numerical approximation methods for calculating a position of the early exercise boundary of the American put option paying zero dividends." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1547783; 4, Multivariate GARCH Models with Correlation Clustering, "This paper proposes a new clustered correlation multivariate GARCH model (CC-MGARCH) that allows conditional correlations to form clusters. This model can generalize the time-varying correlation structure in Tse and Tsui (2002) by determining a natural grouping of the correlations among the series." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1548408; 5, Efficient Derivative Pricing by the Extended Method of Moments, "The local conditional moment restrictions are of special relevance in derivative pricing for reconstructing the pricing operator at a given day,

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by using the information in a few cross-sections of observed traded derivative prices and a time series of underlying asset returns." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1550135. Tags - friday

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14 Critical Lessons Every Trader Should Know
A post from our blog sponsor, Elliott Wave International, the world's largest market forecasting firm founded in 1979 by Robert R. Prechter Jr. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world. From today, Elliott Wave International have brought back one of their most sought after free resources for one week only. The Best of Trader's Classroom eBook serves up the very best lessons from their popular -and expensive -- Trader's Classroom Collection in one valuable 45-page report. If you aren't one of the thousands who downloaded this valuable resource in its original release, don't miss out on this rare second chance. The Best of Trader's Classroom eBook is free through February 16. Some of the most interesting chapters include: * Why Emotional Discipline is Key to Success * When to Place a Trade * How to Use Bar Patterns To Spot Trade Setups * How To Calculate Fibonacci Projections * The Best Place for High-Opportunity Trade Setups * You'll find several more fascinating lessons -- 14 in all To download the free 14 Critical Lessons Every Trader Should Know, you need to get your free report by February 16, the price will be back to normal $59 after that day for all blog readers. Cheers. PS: forgot to mention, in order to download the free report, you have to be a member first, the registration requires only username and email address, which takes half a minute. Tags - trading , elliott

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Research Topic Wanted
I have been struggling to find a suitable research topic for my PhD in finance these days, initially I chose to research on convertible bond underpricing considering multiple features other paper might fail to do so, but later on I realized the potential margin contribution is small with more knowledge on this field, indeed a few latest paper dealing with this issue already. Do you happen to have an interesting topic that you or your colleagues want to work on while without enough time and resources? then probably you are able to help me by telling me what the topic is about to "abiao @ mathfinance.cn" (remove space). The topic needs to be: 1, applicable as a thesis topic; 2, about derivative pricing (equity, fx or IR), trading strategy, portfolio construction or quantitative risk analysis. The benefits for both of us: 1, I find a sexy research topic to kill my boring overseas doctor life; 2, you get an update about the progress of the topic also attracting you from period to period; 3, a problem is solved hopefully. I know it is hard to find a topic in this way, but I do appreciate any comment or hint or suggestion, especially from industry side.

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Quadrature method for convertible bond pricing
A follow up post of my previous entry Using Quadrature method for option valuation, where the accuracy and computational speed are demonstrated briefly with a simple European option based on the paper "universal option valuation using quadrature methods". Today I play the Quadrature method for a vanilla convertible bond, still, the results are promising, for example, below is price performance comparision under Quadrature and PDE (specifically, finite element method) numerical solutions, where the CB has time-to-maturity two years, call barrier 12, call price 110, strike 10, risk-free rate 2%.

The exact computational time depends on the time steps and asset steps, but generally speaking, since Quadrature has a higher order of convergency rate, it is several times faster than finite element, in my case, Quadrature costs me less than ten seconds but finite elements costs me around one minute. PS: the y-axis should be relative error. Tags - quadrature , convertible bond

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Dolphin in Taiji
This post has nothing to do with quantitative finance, so please skip it if you have no interest at all. A friend of mine, who is an active animal protectionist, asked me if it is possible to embed a video on my blog. I didn't promise at the beginning worrying the video has nothing to do with my topic, but decide to do so after watching it, in addition, today is Sunday, take a rest then. Dolphin is among the most intelligent animals and its often friendly appearance and seemingly playful attitude make it popular, I once read an article saying dolphin is as smart as an average three years kid, however, like many other animal species, it is under increasing human threat, as mentioned in Wikipedia, "In some parts of the world such as Taiji in Japan and the Faroe Islands, dolphins are traditionally considered as food, and killed in harpoon or drive hunts." The video tells us how cruel the fishermen in Taiji are, how the activists hope to save dolphin but fail, a touching story worthy to think about. PS: my friend is glad to add how happy he is after knowing Chinese government imposed a law recently against eatching dog meat in China, from now on it is illegal. A great step. Below is the video, 90 minutes long, it is in English and with Chinese scripts. Tags - dolphin

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Friday reading list 05/02/2010
Several good working paper have been found this week, hope you will also enjoy them. 1, Quant Nugget 1: Square-Root Rule, Covariances and Ellipsoids: How to Analyze and Visualize the Propagation Law of Risk in a MultiDimensional Market, "How to analyze and visualize the propagation law of risk in a multi-dimensional market.", http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1548162; 2, Variance Swap Portfolio Theory, "Optimal portfolios of variance swaps are constructed taking account of both autocorrelation and cross asset dependencies. Market prices of variance swaps are extracted from option surface calibrations. The methods developed permit simulation of cash flows to arbitrary portfolios of variance swaps. The optimal design maximizes the index of acceptability introduced in Cherny and Madan (2009).", http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1540815; 3, Efficient Options Pricing Using the Fast Fourier Transform , "The Fourier transform methods provide the valuable and indispensable tools for option pricing under L´evy processes since the analytic representation of the haracteristic function of the underlying asset return is more readily available than that of the density function itself. When used together with the FFT algorithms, real time pricing of a wide range of option models under L'evy processes can be delivered using the Fourier transform approach with highaccuracy, efficiency and reliability." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1534544; 4, Interest Rates and The Credit Crunch: New Formulas and Market Models , "We start by describing the major changes that occurred in the quotes of market rates after the 2007 subprime mortgage crisis. We comment on their lost analogies and consistencies, and hint on a possible, simple way to formally reconcile them. We then show how to price interest rate swaps under the new market practice of using different curves for generating future LIBOR rates and for discounting cash flows. Straightforward modifications of the market formulas for caps and swaptions will also be derived. " http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1332205; 5, How Do Individual Investors Trade? , "This paper examines how high-frequency trading decisions (especially the choice of market versus limit orders) of individual investors are influenced by past price changes.

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Specifically, we address the question whether trading decisions to open or close a position are different in the case in which investors already hold a position than in the case in which they don't.", http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1538760; 6, Optimisation in Financial Engineering , "We discuss the precision with which financial models are handled, in particular optimisation models. We argue that precision is only required to a level that is justified by the overall accuracy of the model. Hence, the required precision should be specifically analysed, so to better appreciate the usefulness and limitations of a model." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1547173 Tags - friday

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Valuation of stock option with discrete dividend
When asked how to value a stock option without dividend or with continuous dividend, many people would refer to Black Scholes formula, but how to price an option with discrete dividend then? certainly Black Scholes model can't be used directly since one of its assumptions is continuous payout. Paper Back to Basics: a new approach to the discrete dividend problem by Haug, Haug and Lewis summarizes the following ways: 1, Escrowed dividend model, which is the simplist and the least accurate way as a result. The basic idea of Escrowed dividend model is to adjust the current stock price by deducting the present value of future dividends, and plug in the replaced stock price to Black Scholes formula; 2, Chriss volatility adjustment model, besides replacing current stock price, this model adjusts volatility as well because the Escrowed dividend model alone decreases the absolute price standard deviation, hence underestimates an option's value. However, Chriss model yields too high volatility if the dividend is paid out early in the option’s lifetime, which generally overprices call options; 3, Haug & Haug volatility adjustment model; which is more sophisticated than Chriss model and takes into account the timing of the dividend, unfortunately, the authors show this method performs particularly poorly for multiple dividends stock option; 4, Bos volatility adjustment model, a even more sophiscated model than Haug & Haug, but still, it performs poorly for large dividends or long term options; 5, Lattice method, for example, non-recombining binomial tree introduced in the bible book Options, Futures, and Other Derivatives with Derivagem CD (7th Edition), we all know it is time-consuming; 6, Haug, Haug and Lewis method introduced in the above-mentioned paper, the basic idea is to calculate first the ex-dividend option price by Black Scholes model, then discount back the ex-dividend value under equivalent martingale measure. The authors demonstrate the high accuracy of their model with several examples afterwards. Below is sample Matlab codes I wrote for comparision, a single dividend is used for simplicity, results similar to the table listed in the paper function callprice = DiscreteDividend(s,k,r,t,vol,d,dt) %compare different methods for a single discrete dividend adjustments,

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%read paper by Haug for detail; %dt: dividend time BSprice = blsprice(s,k,r,t,vol,0); AdjS = s-exp(-r*dt)*d; Escrowed = blsprice(AdjS,k,r,t,vol,0); %%%%%%%%%Chriss, 1997%%%%%%%%%% vol1 = vol*s/(s-d*exp(-r*dt)); Chriss = blsprice(AdjS,k,r,t,vol1,0); %%%%%%%%%Haug, 1998%%%%%%%%%% vol2 = sqrt(vol^2*dt vol1^2*(t-dt)/t); OldHaug = blsprice(AdjS,k,r,t,vol2,0); %%%%%%%%Bos et al. (2003)%%%%%%%%%% lns = log(s); lnk = log((k d*exp(-r*dt))*exp(-r*t)); z1 = (lns-lnk)/(vol*sqrt(t)) vol*sqrt(t)/2; z2 = z1 vol*sqrt(t)/2; vol3 = sqrt(vol^2 vol*sqrt(pi/(2*t))*(4*exp(z1^2/2-lns)*d*exp(-r*dt)*... (normcdf(z1)-normcdf(z1-vol*dt/sqrt(t))) exp(z2^2/2-2*lns)*d^2*... exp(-r*2*dt)*(normcdf(z2)-normcdf(z2-2*vol*dt/sqrt(t))))); Bos = blsprice(AdjS,k,r,t,vol3,0); %%%%%%%%%Haug, 2003%%%%%%%%%%%%%%% NewHaug = exp(-r*dt)*(quad(@(x)blsprice(x-d,k,r,tdt,vol,0).*lognpdf(x,lns (r-0.5*vol^2)*dt,vol*sqrt(dt)), d, k d)... quad(@(x)blsprice(x-d,k,r,t-dt,vol,0).*lognpdf(x,lns (r-0.5*vol^2)*dt,vol*sqrt(dt)), k d, 20*s)); callprice = [BSprice, Escrowed, Chriss, OldHaug, Bos, NewHaug];

For example, the results of a $7 dividend after 0.5 year are (DiscreteDividend(100, 100,0.06,1,0.3,7,0.5)): 14.7171 10.6932 11.5001 11.1039 11.0781 11.1062, respectively. Reading the original paper Back to Basics: a new approach to the discrete dividend problem if interested, http://www.nccr-finrisk.uzh.ch/media/ pdf/ODD.pdf, or the book The Complete Guide to Option Pricing Formulas by Haug for more detail. Tags - dividend , option

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On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
Henry Merritt Paulson, Seventy-five men served as Treasury Secretary of the United States, blurted out when he learned U.K.'s Financial Service Authority was reluctant to approve a prebankruptcy deal for Barclays PLC to acquire Lehman, "The British screwed us." This was revealed in Paulson's new book "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System", where the author tell us the key decisions that had to be made with lightning speed under urgent market conditions, about Lehman Brothers, AIG, and other financial institutions. Selected author's note from the book On the Brink: Inside the Race to Stop the Collapse of the Global Financial System: Quotation The pace of events during the financial crisis of 2008 was truly breathtaking. In this book, I have done my best to describe my actions and the thinking behind them during that time, and to convey the breakneck speed at which events were happening all around us. I believe the most important part of this story is the way Ben Bernanke, Tim Geithner, and I worked as a team through the worst financial crisis since the Great Depression. There can't be many other examples of economic leaders managing a crisis who had as much trust in one another as we did. Our partnership proved to be an enormous asset during an incredibly difficult period. But at the same time, this is my story, and as hard as I have tried to reflect the contributions made by everyone involved, it is primarily about my work and that of my talented and dedicated team at Treasury. --Henry M. Paulson

Tags - book

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Most recent quant job offers
Most recent job offers from Quant jobs board: Scientific programmersCBCS in Cambridge MA Senior Quantitative Analyst-Modeling at RiskMetrics in London Trader Exotic Options at ING in Brussels Equity Quantitative Research Analyst at JPMorgan in NewYork PHD Internships at Bank of England in London Associate Program at Partners Group AG in London Quantitative Research Analysts at State Street in London Tags - quant , job

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Free C++, Matlab, and VBA code for derivative pricing
Volopta is a site I came across yesterday, it contains free C++, Matlab, and VBA code for derivatives pricing. Derivatives categories include equity options, options on bonds, swaps, swaptions, options on futures, variance swaps, collateralized debt obligations, credit default swaps, volatility models, etc. At the moment the files uploaded are only a few, which is understandable considering it is a newly launched website, take a look if interested, http://www.volopta.com/index.html. Have a nice weekend. Tags - derivative

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Friday reading list 29/01/2010
1, On the Heston Model with Stochastic Interest Rates, "We discuss the Heston [Heston-1993] model with stochastic interest rates driven by Hull-White [Hull,White-1996] (HW) or Cox-Ingersoll-Ross [Cox, et al.-1985] (CIR) processes. A so-called volatility compensator is defined which guarantees that the Heston hybrid model with a non-zero correlation between the equity and interest rate processes is properly defined. Two different approximations of the hybrid models are presented in order to obtain the characteristic functions. These approximations admit pricing basic derivative products with Fourier techniques [Carr,Madan-1999; Fang,Oosterlee-2008], and can therefore be used for fast calibration of the hybrid model. The effect of the approximations on the instantaneous correlations and the influence of the correlation between stock and interest rate on the implied volatilities are also discussed." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1382902 2, Dynamic Copula Modelling for Value at Risk, "By using copulas, we can separate the marginal distributions from the dependence structure and estimate portfolio Value-at-Risk, assuming for the risk factors a multivariate distribution that can be different from the conditional normal one. Moreover, we consider marginal functions able to model higher moments than the second, as in the normal. This enables us to better understand why VaR estimates are too aggressive or too conservative. We apply this methodology to estimate the 95%, 99% VaR by using Monte-Carlo simulation, for portfolios made of the SP500 stock index, the Dax Index and the Nikkei225 Index. We use the initial part of the sample to estimate the models, and the the remaining part to compare the out-of-sample performances of the different approaches, using various back-testing techniques." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1542608 Tags - friday

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The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
Bought a book just now recommended by a friend of mine, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, what a looong name. The book is written by a Wall Street Journal reporter Scott Patterson and has got brilliant editorial reviews, for instance: Quotation “Scott Patterson has the ability to see things you and I don’t notice. In The Quants he does an admirable job of debunking the myths of black box traders and provides a very entertaining narrative in the process.” --Nassim Nicholas Taleb Quotation "The Quants will keep hedge fund managers on the edge of their Aeron chairs, while the rest of us read in horror about their greed and their impact on the wider economy. A gripping tale right until the last page...but I fear this is perhaps not yet the end of the story." --Paul Wilmott

Below is a short video of an interview with the author, where Scott Patterson explains a group called "The Quants" developed complex systems to trade securities such as mortgage derivatives, which were at the heart of the crisis.

Sounds like a good book for bed reading, order one if you also fancy it, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

Tags - quant

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Elliott Wave Analysis
Last weekend I reviewed a service called elliott wave analysis at Popular Culture and the Stock Market, some of my blog readers joined the free EWI club and downloaded the free report. As a result, elliott wave international sent me a book elliott wave principle, key to market behavior and a pen with club logo on, thank you.

So this weekend I'm gonna talk few more words about Elliott Wave Analysis, what is elliott wave principle then? as described on wikipedia, "it is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific wave patterns in price movements." Therefore it is a type of investment discipline combining technical analysis with behavioral finance that attempts to explain and predict the market trend (of stock, forex, etc.). Unlike those quantitative techniques we often hear or apply, Elliott Wave Analysis assumes it is unnecessary to be based on past price charts to decide where a market is in its wave patten, which is instead decided by investors' psychology, therefore Elliott Wave Analysis has got criticism, for example, quantitative researchers tend to blame it is just an art where the subjective judgement is more crucial than the objective, replicable verdict of the numbers. Anyway, it is not bad at all to know the non-quantitative trading world, if you are interested, I recommend you to watch the following video "How to Use Elliott Wave Analysis to Boost Your Forex Trading" and attend the free courses then.

Or watch this classic video from Elliott Wave International's Chief Currency Strategist, Jim Martens, to see how useful the basics of Elliott wave analysiscan be. Jim explains how the same basic pattern that R.N. Elliott discovered back in the 1930s is often all you need to make informed market forecasts. Then access Jim Marten's intraday and endof-day Forex forecasts, completely free from Elliott Wave International. Get your free Forex forecasts.

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Tags - wave, trading, elliott Watch this full $79 course, FREE. Click Here!

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Friday reading list 22/01/2010
1, Time-Varying Momentum Profitability, "In this paper, we present a comprehensive examination of the time-series predictability of momentum profits. We uncover a list of intriguing features of the timevariation in momentum profits: (1) market volatility has significant power to forecast momentum payoffs, which is even more robust than that of market state or business cycle variables; (2) the time-series predictability is centered on loser stocks; and (3) the time-series patterns appear to be at odds with the cross-sectional results." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1534325 2, Econometric Modeling for Transaction Cost-Adjusted Put-Call Parity: Evidence from the Currency Options Market, "this study developed a transaction cost-adjusted put-call parity (TC-Adj-PCP) econometric model to examine the efficiency of options markets. The fundamental analysis of the proposed model concludes that transaction costs represent an omitted variable for the PCP model, where the uniqueness of this variable is demonstrated under PCP in the context of options market efficiency. The novelty of the TC-Adj-PCP model resolves controversial transaction costs issues for traders and researchers." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1537834 3, Short-Selling Bans Around the World: Evidence from the 2007-09 Crisis, "find that bans (i) were detrimental for liquidity, especially for stocks with small market capitalization and high volatility; (ii) slowed down price discovery, especially in bear market phases, and (iii) failed to support stock prices. " http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1533163 4, On the Volatility and Comovement of U.S. Financial Markets around Macroeconomic News Announcements Tags - friday

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131

Matlab File Exchange
I guess most of Matlab users know Matlab central: an open exchange for the Matlab and simulink user community, where a major section is Matlab file exchange, including a large list of Matlab files across wide application, for example, you can choose to browse files by category Specifically, financial services, Mathematical modeling and Statistics and Probability are three categories I keep eyes on. Besides Matlab central, Matlab M-files database built by university of Stuttgart is another site I often visit, it has a smaller size but grow quickly, focusing on using Matlab for numerical calculation. Stay tuned. Tags - matlab

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Meta Financial Functions Library
Meta Financial Functions Library is a free library for option pricing written in C++, as of now, Meta Systems offers no commercial products, and the library is still under beta, as indicated by its author: "The Meta Financial Formula Library implements many commonly used functions as correctly as possible once and then provides wrapper functions and code to be able to reuse the implemenation from other tools and languages." At the moment Meta Financial Functions Library covers a wide range of vanilla and exotic options, which can be obviously seen from the name of functions, for example, a list of functions includes black76, black76_put, black76_call, blackscholes, gbs, gcarry, AmericanExchangeOption, AssetOrNothing, BAWAmericanApprox, BSAmericanApprox, BinaryBarrier, CashOrNothing, ComplexChooser, DiscreteAdjustedBarrier, DoubleBarrier, EquityLinkedFXO, EuropeanExchangeOption, ExchangeExchangeOption, Executive, ExtendibleWriter, ExtremeSpreadOption, FixedStrikeLookback, FloatingStrikeLookback, ForEquOptInDomCur, ForwardStartOption, GapOption, GeometricAverageRateOption, JumpDiffusion, LevyAsian, LookBarrier, OptionsOnOptions, OptionsOnTheMaxMin, PartialFixedLB, PartialFloatLB, PartialTimeBarrier, PartialTimeTwoAssetBarrier, Quanto, RollGeskeWhaley, SimpleChooser, SoftBarrier, SpreadApproximation, StandardBarrier, SuperShare, SuperShare_inlined, Swapoption, TakeoverFXoption, TimeSwitchOption, TurnbullWakemanAsian, TwoAssetBarrier, TwoAssetCashOrNothing, TwoAssetCorrelation, VasicekBondPrice, VasicekBondOption... , what a long list! you shall download the library at http://www.metasystems.no/, which is free and the author makes the source code clean and publicly available, learning from others is always enjoying. Tags - library

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Popular Culture and the Stock Market
Long time I haven't reviewed service provided by other site, this weekend's review is about a club service by EWI, as stated by its authors: "Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI." Below is a video introduction and a free report to research more about its club, take a look if interested. Wall Street legend and best-selling author Robert Prechter says "You can almost hear the Dow going up and down over the airwaves." Watch this 3-minute clip from his documentary History's Hidden Engine to see how social mood governs movements in the stock market and trends in popular culture. Then access his 50-page report "Popular Culture and the Stock Market" free.

Access Robert Prechter's 50-page report "Popular Culture and the Stock Market" FREE! Tags - stock , elliott

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Fridays reading list 15/01/2010
Two paper I find pretty interesting this week, both are published in Mathematical Finance Journal: 1, PRICING AND HEDGING AMERICAN OPTIONS ANALYTICALLY: A PERTURBATION METHOD, by JIN E. ZHANG and TIECHENG LI, "This paper studies the critical stock price of American options with continuous dividend yield. We solve the integral equation and derive a new analytical formula in a series form for the critical stock price. American options can be priced and hedged analytically with the help of our critical-stock-price formula. Numerical tests show that our formula gives very accurate prices. With the error well controlled, our formula is now ready for traders to use in pricing and hedging the S&P 100 index options and for the Chicago Board Options Exchange to use in computing the VXO volatility index." 2, ACHIEVING HIGHER ORDER CONVERGENCE FOR THE PRICES OF EUROPEAN OPTIONS IN BINOMIAL TREES, by MARK S. JOSHI, "A new family of binomial trees as approximations to the Black–Scholes model is introduced. For this class of trees, the existence of complete asymptotic expansions for the prices of vanilla European options is demonstrated and the first three terms are explicitly computed.As special cases, a treewith third-order convergence is constructed and the conjecture of Leisen and Reimer that their tree has second-order convergence is proven." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=976561 Tags - friday

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135

A Finite Element Differential Equations Analysis Library
Attended a training of NAG Toolbox for MATLAB today (NAG is short for Numerical Algorithms Group), nice presentation and persuasive performance against Matlab toolbox. I will soon get a licence and start to experience myself. Anyway, I got to know two sites after the training, first one is deal.II, which is a finite element differential equations analysis library aiming to enable rapid development of modern finite element codes, using among other aspects adaptive meshes and a wide array of tools classes often used in finite element program. As stated on its webpage: "deal.II is a C++ program library targeted at the computational solution of partial differential equations using adaptive finite elements. It uses state-of-theart programming techniques to offer you a modern interface to the complex data structures and algorithms required." It should be very useful for those people playing often with PDE numerical solution. The other site is Walking randomly, a blog where the author randomly collects things including mathematics, physics, vintage computing, Linux, pocket PCs, Android, music and programming. I am especially interested in its Matlab, R, NAG, and statistics categories. Have a nice weekend. Tags - nag , finite-element

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Friday reading list 01/08/2010
1, Yes, the Choice of Performance Measure Does Matter for Ranking of US Mutual Funds, "Recent literature in performance evaluation has focused on preferences and characteristics of returns’ distribution that go beyond mean and variance world. However, Eling (2008) compared the Sharpe ratio with some of these performance measures, and found virtually identical rank ordering using mutual fund data. This paper compares 13 performance measures with the traditional Sharpe Ratio using a sample of US Fixed-Income, Equity and Asset Allocation Mutual Funds. Results show that performance measures based on absolute reward-risk ratios have similar rankings, when the numerator (mean excess return) is the same. However, when we move to other types of performances measures, results may be significantly different. " http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1403916 2, The Augmented Black-Litterman Model: A Ranking-Free Approach to Factor-Based Portfolio Construction and Beyond, "The Fama and French (1992 and 1993 etc.) factor ranking approach is very popular among quantitative fund managers. However, this approach suffers from hidden factor view, loss of information, etc. issues. Based on the BlackLitterman model (Black and Litterman, 1992; as explained in Cheung, 2009A), we design a technique that endogenises the ranking process and elegantly resolves these issues. This model explicitly seeks forwardlooking factor views and smoothly blends them to deliver robust allocation to securities. Our numerical experiments show this is an intuitive and practical framework for factor-based portfolio construction, and beyond." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1347648 3, Transparent Augmented Black-Litterman Allocation: Simple and Unified Framework for Strategy Combination, Factor Mimicking, Hedging, and Stock-Specific Alphas, "You have some factor, strategy, and/or stock-specific alpha ideas. Without an optimiser, some straightforward linear algebra gives you the diversified and efficient Bayesian allocation that allows greater performance accountability. All you need is just a factor risk model. How does this sound? This paper derives a transparent version of the ABL model (Cheung, 2009B) with an explicit allocation expression, including components for all the needed functionalities. In addition to further insights, it allows more tangible

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implementation of strategy combination, factor mimicking, hedging, and stock-specific bets in a unified framework." http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1347663 4, Homogeneous Volatility Bridge Estimators, "We present a theory of homogeneous volatility bridge estimators for log-price stochastic processes. The main tool of our theory is the parsimonious encoding of the information contained in the open, high and low prices of incomplete bridge, corresponding to given log-price stochastic process, and in its close value, for a given time interval. The efficiency of the new proposed estimators is favorably compared with that of the Garman-Klass and Parkinson estimators." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1523225 5, A PDE Pricing Framework for Cross-Currency Interest Rate Derivatives, "We propose a general framework for efficient pricing via a Partial Differential Equation (PDE) approach of cross-currency interest rate derivatives under the Hull-White model. In particular, we focus on pricing long-dated foreign exchange (FX) interest rate hybrids, namely Power Reverse Dual Currency (PRDC) swaps with Bermudan cancelable features." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1502302 Have a nice weekend. Tags - friday

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138

Google Quant Staff
Sharing a Google Quant Staff page I created initially for myself, the motivation was to make the job more convenient since I had to search in Google too many times per day, what's worse is sometimes I prefer video results, while sometimes what I need is just PDF documents or Matlab files. Adjusting frequently with Google advanced search makes me feel silk. Google Quant Staff is by no means an invention, I just put several searching filters in one page, that's it.

For example, to find pdf documents about "Asian option", simply type "Asian option" in the form and click the PDF icon Similarly each icon stands for one filter:

Searching results will be openned in a new browser window in Google as what I did was creating a page to filter results. You can also choose to search books in Amazon below. PS: the page can also be used for keywords nothing to do with Quant staff as long as google catches them. Anyway, hope you find it somehow useful: Google Quant Staff, bookmark if you like. Tags - google , quant

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139

Vanna Volga Method
The vanna volga method is a popular pricing model for implied volatilities, especially for foreign exchange options, it is an empirical procedure that can be applied to "draw" an implied volatility smile curve from three given quotes (reversal, ATM and butterfly) for a certan time to maturity. Empirical research shows the vanna volga method has a comparable pricing performance with some stochastic volatility model, for example, Castagna and Mercurio (2007) show the implied volatility curve of vanna volga method outperforms that of Malz (1997), and performs equally well as of SABR (2002). By building a self-financing portfolio consisting a unit of option at strike K, -delta1 units of underlying asset, and -xi units of options at strike ki, Castagna and Mercurio (2007) calculate the weight xi for three given quotes with the help of Ito's lemma and then approximate the European option value under vanna volga method, as stated in the paper, VV pricing model has several advantages: "it has a clear financial rationale supporting, based on the hedging argument...; it allows for an automatic calibration to the main volatility data...; ... it can be extended to any European-style derivative..." Below is a simple Matlab code to price a call option based on Castagna and Mercurio (2007): % option price under Vanna volga model for any strike k % sigma2 is ATM implied vol, k2 is ATM strike s = 1.205; t = 94/365; r = -log(0.9902752)/t; rf = -log(0.9945049)/t; sigma1 = 0.0979; sigma3 = 0.0929; sigma2 = 0.09375; k1 = 1.172; k3 = 1.2504; k2 = 1.2115; k = 1.24; Vega1 = Vega(s,k1,r,t,sigma2,rf); Vega3 = Vega(s,k3,r,t,sigma2,rf); Vegak = Vega(s,k,r,t,sigma2,rf);

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x1 = Vegak*log(k2/k)*log(k3/k)/(Vega1*log(k2/k1)*log(k3/k1)); x3 = Vegak*log(k/k1)*log(k/k2)/(Vega3*log(k3/k1)*log(k3/k2)); price = blsprice(s,k,r,t,sigma2,rf) x1*(blsprice(s,k1,r,t,sigma1,rf)... -blsprice(s,k1,r,t,sigma2,rf)) x3*(blsprice(s,k3,r,t,sigma3,rf)... -blsprice(s,k3,r,t,sigma2,rf)); where Vega is a function to compute vega under black scholes formula function VegaValue = Vega(s,k,r,t,sigma,rf) d1 = (log(s/k) (r-rf 0.5*sigma^2)*t)/(sigma*sqrt(t)); VegaValue = s*exp(-rf*t)*sqrt(t)*normpdf(d1,0,1);

Implied volatilities curve is therefore easily achieved by inverting VV pricing model. Interested ppl please refer to http://www.risk.net/risk/ technical-paper/1506580/the-vanna-volga-method-implied-volatilities or an advanced one www.mathfinance.de/wystup/papers/ wystup_vannavolga_eqf.pdf Tags - volatility

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141

Post your article on this blog
Happy new year! I have got few emails and messages recently asking for the possibility to write an article and post on Quantitative finance collector blog, for example, "I have come across finance sites and am willing to contribute with an article. Please do let me know if you are interested to do so", "I love to write unique finance articles & after seeing ur site I have written one unique article for ur site. Will u be interested to publish it in ur site along with my link"... Forgive me if I didn't reply individually, the general answer is: YES, you can, but subject to the following criteria: 1, the content of the article must be relevant to quantitative finance in general, specifically, any article about quantitative trading, quantitative risk analysis, derivative pricing code and software, etc., is highly welcomed; 2, the article must be unique and writen only for Quantitative finance collector blog, instead of a copy from sites; 3, the site linked to must be healthy. The benefits of posting artiles on this blog: 1, as a sign of gratitude, we will put a link back to your site in the post, which will increase the exposure and traffic of your site; 2, the link is do-follow, which means the link will be better recoganized by search engines; 3, more opinions on this blog is always good for our readers. How to post an article: simply send your article to abiao @ mathfinance.cn (remove space). Posting an article is totally free as we believe it will be a win-win strategy. Tags - blog

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Friday reading list 12/25/09
Have little time to read paper this week due to Christmas holiday, so only two are selected on this Friday's reading list: 1, Smile Dynamics IV. Recall we have collected the three simle dynamics paper by Lorenzo Bergomi, Quant of the Year 2008 awarded by Risk Magazine at lorenzo bergomi smile dynamics I, II and III, this is his fourth version. "In this paper we address the relationship between the smile that stochastic volatility models produce and the dynamics they generate for implied volatilities. We introduce a new quantity, which we call the Skew Stickiness Ratio and show how, at order one in the volatility of volatility, it is linked to the rate at which the at-the-moneyforward skew decays with maturity. We then focus on short maturity skews and (a) show that the difference between realized and implied SSR can be materialized as the P&L of an option strategy, (b) introduce the notion of realized skew." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1520443 2, What Drives Interbank Rates? Evidence from the Libor Panel. "The risk premium contained in the interest rates on three-month interbank deposits at large, internationally active banks increased sharply in August 2007 and risk premiahave remained at an elevated level since. This feature aims to identify the drivers of this increase, in particular the role of credit and liquidity factors." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1517680 Tags - friday

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Happy Christmas 2009
Christmas & New Year are around the corner, many thanks for your visit and support www.mathfinance.cn in 2009, Wish all of you healthy & wish a quick recovery of global Quant market. Good good study, Day day up, a song Christmas With a Capital "C" Tags - christmas

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Earn money as a part-time Quant
Thought twice before typing these words, ok, let me make it clear, this post is only for those people with similar situation with me: either being laid off as a Quant recently, or being still a student with Quant major, luckily or not, I am both types, being fired several months ago and now studying for my PhD. I am writing the post to share my experience as a part-time Quant, earn little cash to cover my living costs (plus expenses for beer in weekends), most importantly, to do jobs we like (please forgive me if you notice I add ad block on my blog, I increase my alcohol intake, practice really makes perfect...)

I know Elance several weeks ago refered by a friend of mine, who is a software engineer and gets used to do SOHO jobs, "why not try to be a freelancer since you now have enough self-controlled time?", that's the first reaction he had, then I knew the site and started to earn spare money. Basically Elance is a portal where companies find, hire, manage and pay contractors online, and is a place independent professionals to meet clients and get paid for delivering great results. I personally found several great projects already, not bad payment plus opportunities to practice our quant knowledge, for example, two randomly chosen projects about derivative: one is forex trading strategy

and the other one is about option portfolio profit and loss calculation

If you are interested, just Register Free, Looking for work? Sign up at Elance and search over 30,000 jobs today. and Bid on the Project, once your proposal is selected, you are in and start to do the project. The other site I personally find useful is first tutor, a site allowing people to register as a tutor and to teach part time. Anyway, earning by doing a job I like is always cool. Tags - quant

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Friday reading list 12/18/09
Instead of posting Chinese financial news, I will collect a list of interesting paper to read on every Friday, hope you'll enjoy them (please don't forget to forward to and share your favorites with me). Downloading links are following the titles if they are publicly available. 1, Characteristic-Based Mean-Variance Portfolio Choice. "The empirical results highlight the potential for 'stock-picking' in international indexes, using characteristics such as value and momentum, with the characteristic-based portfolios obtaining Sharpe ratios approximately three times larger than the world market." http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1501141; 2, An Arbitrage-Free Generalized Nelson–Siegel Term Structure Model. "we introduce a closely related generalized Nelson–Siegel model on which the no-arbitrage condition can be imposed. We estimate this new AFGNS model and demonstrate its tractability and good in-sample fit." http://www.frbsf.org/publications/economics/papers/2008/ wp08-07bk.pdf; 3, MATLAB Applications of Trading Rules and GARCH with Wavelets Analysis. "we provide MATLAB routines for two major used trading rules, the moving average indicator and MACD oscillator as also the GARCH univariate regression with Monte Carlo simulations and wavelets decomposition, which is an update of an older algorithm." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1523365; 4, Reduced-Form Valuation of Callable Corporate Bonds: Theory and Evidence. "We develop a reduced-form approach for valuing callable corporate bonds by characterizing the call probability via an intensity process. Asymmetric information and market frictions justify the existence of a call-arrival intensity from the market's perspective. ... Empirical results show that the reduced-form model fits callable bond price data well and outperforms the traditional approach in both insample and out-of-sample applications.", http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=972121 This week's tweets: 1, The 25 Most Powerful Men In Finance, http://dealbreaker.com/2009/ 12/the-25-most-powerful-men-in-fi.php; 2, Remembering Paul Samuelson, http://www.bbc.co.uk/blogs/ thereporters/stephanieflanders/2009/12/

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remembering_paul_samuelson.html. Have a nice weekend, everyone. Tags - friday

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Conference on Computational Topics in Finance
As an ETH alumni, I am always with pleasure to post any issue regarding ETH, let alone this conference is highly relevant to our topic: quantitative finance and Rmetrics. Please read the conference announcement, courtesy of Yohan Chalabi. Conference on 'Computational Topics in Finance' February 19/20, 2010, National University of Singapore We would like to announce the first 'Computational Topics in Finance' conference, taking place on February 19/20, 2010, at the National University of Singapore. The conference will bring together developers, practitioners, and users from academia, finance and insurance, providing a platform for common discussions and exchange of ideas. The topics will include using R/Rmetrics in finance, but the conference is by no means confined to R.

You can find out more about both events on our website, http://www.rmetrics.org. We would like to invite you to take part in the conference, and we are now accepting submissions; please send your one-page abstracts to submissions [at] rmetrics.org. The submission deadline is February 10, 2010. We look forward to seeing you in Singapore.

Wishing you merry Christmas and a happy new year, The organizing committee: Diethelm Wuertz Juri Hinz Mahendra Mehta David Scott Tags - conference , r

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Derivative pricing Engines
Another online option calculator, the main difference with other online option calculator introduced before, as mentioned on its webpage: it is a Dynamic option calculator whose volatility curve is updated according to market conditions. The current calculator can be only used for pricing the European Vanilla FX Options, for instance, for EUR/USD, USD/ TRY, EUR/TRY, GBP/USD, USD/JPY, USD/CHF, currencies, which is not so appealing, to be honest.

Interested reader shall check at http://www.derivativeengines.com/index-3.asp

its

website

at

Tags - derivative

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Quant jobs received within last ten days
Ten days ago we set up a quant jobs board and introduced at the previous post Publish / Apply Quant Jobs, so far with the help of submitters there are over 10 jobs listed, Market Risk Associate at Goldman Sachs in NewYork ; Quantitative Analyst (Market Risk) at Credit Suisse in London Senior Quantative Analyst at ICBC in BeiJing Summer Internship Opportunities 2010 at Macquarie in London Trainee - Capital Markets at Calyon in HongKong Hedge Fund Associate at Apex Capital Management in HongKong Barclays Capital Summer Internships at Barclays Capital in London Long-Term Internships at BNP Paribas, Anywhere J.P. Morgan summer internship programme - London at JP Morgan in London Global Modelling and Analytics Group - Quantitative Summer Institute (QSI) 10 week internship progra at Credit Suisse in London Assistant Fixed Income and CDS Trader at AXA in Paris

Apply for interested positions free and help us expand the board by posting your jobs, thanks. Tags - quant , job

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150

Computational Finance Virtual Conference
Got an email just now from MathWorks about a Computational Finance Virtual Conference, which might attract you as well, so I just put the email here:

Still Time to Access Exclusive Content from the Computational Finance Virtual Conference. Even if you did not register for the conference, there is still time for you to view the conference presentations, research products on the exhibit floor, and see why hundreds of your peers from around the world attended the Computational Finance Virtual Conference. Conference Highlights Keynote Speakers Managing Diversification [Dr. Attilio Meucci, Head of Research Bloomberg ALPHA Portfolio Analytics and Risk] Dr. Attilio Meucci, Head of Research Bloomberg ALPHA Portfolio Analytics and Risk Rigorous Intraday Trading: Best Quantitative Practices to Minimize Your Tracking Error [Charles-Albert LeHalle Head of Quantitative Research Credit Agricole Chevreux] Charles-Albert LeHalle Head of Quantitative Research Credit Agricole Chevreux Who Should Attend • Traders • Economists • Actuaries • Risk managers • Portfolio managers • Quants See exclusive keynotes by Dr. Attilio Meucci from Bloomberg; and Dr. Charles LeHalle from Credit Agricole Chevreux. View conference presentations by MathWorks product experts, research the latest information on MATLAB and several products designed specifically for

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the financial industry. Featured Conference Presentations: • Insuring Our Future: Projection Systems, Liabilities, and Assets • Managing Diversification • When Will the Recession End? Multivariate Time-Series in Econometrics • Rigorous Intraday Trading: Best Quantitative Practices to Minimize Your Tracking Error • Knowing Your Risk: Credit Value at Risk Calculation After a simple free registration you will be led to a page where visual conference is being hold, where you can watch conference video at conference hall, download resource at resource center, chat with representatives at exhibition hall, have a casual talk with other people at networking lounge, etc.

Interesting, register Until January 15 here.‫‏‬ Tags - conference , matlab

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152

My tweets of the week 12.05 ~ 12.11
1, Want to invest like the former Merrill Lynch champ? Bob Farrell's 10 Rules For Investing, http://tinyurl.com/yakjony; 2, is there financial crisis in China in the near future? http://ftalphaville.ft.com/blog/2009/12/10/88276/attention-anthonybolton/; 3, Ultimate Guide To Becoming A Quant By Mark Joshi, http://www.simoleonsense.com/ultimate-guide-to-becoming-a-quantby-mark-joshi/; 4, Where Wall Street Gets Drunk, http://www.businessinsider.com/ where-wall-street-drinks-2009-12; 5, I'm doing 'God's work'. Meet Mr Goldman Sachs, http://www.timesonline.co.uk/tol/news/world/us_and_americas/ article6907681.ece; 6, Capacity and Factor Timing Effects in Active Portfolio Management, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1516469. Share your tweets by Tags - twitter

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153

Ad hoc Black Scholes model for Option Pricing
One shortcoming of Black Scholes is its constant volatility assumption, lots of extension has been done to improve its out-of-sample performance, to name a few, heston stochastic volatility model, SABR stochastic volatility model and Garch option pricing. Here is a paper "On Justifications for the ad hoc Black-Scholes Method of Option Pricing" where the author interpolates the implied volatility, substitutes the result into Black Scholes formula, which outperforms the original Black Scholes model. Straightforward and few more lines to your codes are enough. Quotation Abstract: One of the most widely used option valuation procedures among practitioners is a version of Black-Scholes in which implied volatilities are smoothed across strike prices and maturities. A growing body of empirical evidence suggests that this ad hoc approach performs quite well. It has previously been argued that such a procedure works because it amounts to a sophisticated interpolation tool. We show that this is the case in a formal, asymptotic sense. In addition, we conduct some simulations which allow us to examine the importance of the sample size, the order of the polynomial, and the recalibration frequency in controlled settings. We also apply the ABS approach to daily S&P 100 index options to show that the procedure outperforms the Black-Scholes formula in valuing actual option prices out-of-sample.

Download the PDF at http://www.uh.edu/~jberkowi/ and the matlab files at http://www.bepress.com/snde/vol14/iss1/art4/.

Tags - black scholes , volatility

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154

C/C++ for Numerical Computation
A large list of C/C++ Sources for Numerical Computation, as its' website introduces: This is a collection of pointers to: * free source code available on the net, * books which come with source code, and hence act as low-cost libraries, * articles and documents, especially those available over the net. Check it out if you happen to find http://cliodhna.cop.uop.edu/~hetrick/c-sources.html Tags - numerical it useful:

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155

Paul Wilmotts new book on quantitative finance
Paul Wilmott has written a new book Frequently Asked Questions in Quantitative Finance since his first version two years ago. I was really excited when I read the first version as he explained every question within several extremely easy paragraphs even for starters, which makes me recall what the CEO of alibaba once said during his presentation: "I would explain my business plan to my grandmother to make sure she is able to understand before we take action." Anyway, I have ordered the new book and am still waiting for my package. Just a short comparision from the contents between first and second version, it seems besides the up-to-date of several chapters like "Popular Quant Books", "The Most Popular Search Words and Phrases on Wilmott.com" and "Brainteasers", the author adds a new chapter "the common mistakes in quantitative finance", which might refer to the current credit crisis and draw lessons from it. Plus, the author adds two more ways to derive Black Scholes formula to a total of twelve different ways, interesting. Look forward to reading it. Tags - wilmott

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156

Publish / Apply Quant Jobs
We added a new section into our site: Quant Jobs, which is a portal to publish and collect entry / junior level full time, temporary, contract, outsourcing jobs for quant analyst, quant trader and quant developer. Why choose this board? Quantitative finance collector is one of the few blogs dedicated to the field of quantitative finance, financial engineering from the right beginning of inception. All of its visitors are quant wannabe or already quants (analyst, trader or developer, including the bloggers), therefore a quant job listed here is able to attract the exact types of jobseekers, or put another way, to maximize the recruiters' utility under the constraint of resources spent in posting. Traffic and Growth Below is a snapshot of traffic this site received in Oct, 2009. Among them, nearly 40% is from United States and Canada, 30% is from United Kindom and other European countries (mainly France, Germany, Switzerland and Italy), 10% is from China (HongKong), Singapore and Japan. And we will be actively increasing the exposure of this quant job board. Cost Jobseekers and recruiters from the hiring financial institutions are free to use & publish opportunies, while we charge 20 US dollar or 12 GBP pounds per job posted by recruiters from headhunter agency. As we try seriously to benefit all parties involved, we will NEVER delete any job published as long as the link keeps alive, which means you can leave your company profile, URL link at this job board forever. (even cheaper than one month fee to buy a backlink at some text link ads platform.) How to publish a job? Simply click post a new job at the right up side, fill in the necessary information such as job requirement, link to the job, contact info, etc. and finish. You have to pay if you are an agent, otherwise we have the right to delete your post. How to apply for a job? If a recruiter chooses "Allow Online Applications", applicants are able to

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apply directly by clicking "Apply Online" at the lower side of page and sending their CVs to the recruiter's email box, otherwise by visiting the company's website with URL below the job title

If you have any questions then please don't hesitate to contact us. Tags - quant , job

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158

My tweets of the week
Weekend again, list a selected Tweets of this week to read, have a nice weekend to you all. 1, Rethinking the Chinese Yuan’s Re-Peg to the Dollar, http://tinyurl.com/y92oaf5; 2, RT @Bank_Risk #WSJ Decoding China's Derivatives Complaints: Foreign investment banks are getting browbeaten ... http://bit.ly/ 513w97; 3, Top Goldman Quant: Quant Trading Is Dead, http://www.businessinsider.com/top-goldman-quant-quant-trading-isdead-2009-12; 4, RT: @stage_finance: Intern Opportunity BNP Paribas Global Equities et Commodity Derivatives (Paris): Structuri http://bit.ly/5BPDRZ; 5, Mark Cuban on Financial Engineering vs. Investing http://tinyurl.com/yfcmulb; 6, RT: @Bank_Risk: #news #bank #HOT EU: Rising Yuan Good For China, No Default In Europe - Wall Street Journal: http://url4.eu/qfdz; 7, Pawel_Schwab, Value-at-a probability not to/to succeed in financial engineering (assets allocation), the real eng-ing is it? http://arxiv.org/ pdf/0911.4030.

Tags - twitter

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159

Zero coupon CIR bond price
A simple Matlab code to calculate a zero-coupon bond price under the Cox-Ingersoll-Ross (CIR) Interest Rate Model, where r0 is the current interest rate, alpha, kappa, sigma are CIR parameters standing for mean reversion speed, long term mean rate, and volatility of interest rate, T is the maturity of bond. h = sqrt(kappa^2 2*sigma^2); A = (2*h*exp((kappa h)*T/2)/(2*h (kappa h)*(exp(T*h)-1)))^((2*kappa*alpha)/sigma^2); B = 2*(exp(T*h)-1)/(2*h (kappa h)*(exp(T*h)-1)); P = A*exp(-B*r0); % bond price at 0

Tags - cir

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160

Watch Free Business TV online
Below are a list of free online TVs relevant to business/finance/stock market I often watch, hope you also enjoy them. To watch, simple click "Open/close the player" (I assume you install windows mediaplayer already). Please share your favorite to the list by leaving a comment. (PS: some of them might be temporarily unavailable due to market close.) Bloomberg: A media file here. Please view this entry in browsers.

NASDAQ Stock Market A media file here. Please view this entry in browsers.

Nightly Business Report: A media file here. Please view this entry in browsers.

Weekly Market Monitor A media file here. Please view this entry in browsers.

Weekly Street Critique A media file here. Please view this entry in browsers.

Don't stop here! Get Jim Marten's intraday and end-of-day Forex forecasts FREE through February 10. Get your free Forex forecasts. Tags - tv , online

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161

Pricing Parisian Options
A parisian option pricer was shared at the post before at http://www.mathfinance.cn/parisian-option-pricer/, where the authors Haber, Schoenbucher, and Wilmott values Parisian and Parasian options via explicit finite difference method. (Parisian option is a barrier option but becomes activated only after stock prices have spent a certain continuous, pre-decided time, called a window, above or below the barrier.) Unfortunately, the authors don't release their codes for us to study, I tried to program according to that paper with theta scheme finite difference, where theta =0, 0.5, 1 refer to explicit, Crank-Nicolson, and implicit finite difference, respectively. Below is a runnable naive Matlab code, please correct me if you find errors, cheers & have a nice weekend. % set parameter N = 201; M = 200; s = 10; T = 1; Tau = 0.1; �rrier window 20 days sigma = 0.2; r = 0.05; K = 10; Bar = 12; �rrier bar = log(Bar); % time-space grid R = 3; h = 2*R/(N 1); k = T/M; NoTau = floor(Tau/k); x = linspace(-R,R,N 2)'; % compute finite difference matrix A e = ones(N,1); alphap = -sigma^2/2/h^2 (sigma^2/2-r)/2/h; alpham = -sigma^2/2/h^2 -(sigma^2/2-r)/2/h; beta = sigma^2/h^2 r; A = spdiags([alpham*e, beta*e, alphap*e], -1:1, N, N); % compute matrices for the theta scheme theta = 0.5; B = speye(N,N) theta*k*A; C = speye(N,N) - (1-theta)*k*A; % compute initial data u = max(exp(x)-K,0);

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u = repmat(u,1,NoTau 1); inx = find(x>bar,1,'first'); u(:,1) = 0; %up and out when j=tau f = zeros(N,1); % start timestepping for m = 1:M lastu = u; % compute right hand side for j = 2:NoTau 1 f = C*[lastu(2:inx-2,NoTau 1);lastu(inx-1:end-1,j-1)]; �low using tau=0, above using tau=tau 1; u(:,j) = zeros(N 2,1); % solve the linear system u(2:N 1,j) = B\f; end u(inx-1,2:NoTau) = u(inx-1,NoTau 1);%reset value at barrier point for parisian lastu = u; end Plots of the Parisian option and its delta W.R.T stock prices and barrier Tau.

Tags - parisian , finite-difference

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163

My Thanks This Year
2009's Thanksgiving day has come, I would like to show my thanks of this year to: 1, my professors at ETH and university of Zurich for their professional guide through my MSc in quantitative finance, especially to Prof. Dr. Paul Embrechts, Prof. Ch. Schwab, and Prof Marc Chesney; 2, my current professor David Newton for his willingness to supervise my PhD projects, I couldn't be here without his kind and countless help; 3, my family always standing behind me as long as my choice is made deliberately; 4, my former colleagues at xQuant and AHL for their encouragement during my gloomy days; 5, all readers of my blog, especially those leaving comments and sharing with me cool web sites; 6, ... Back to my old post 10 Bestselling Quant books below $17.55, since there are 2 people participating, my first run randint(1,1,[1,2]) returns 2, so Congratulations Eugene! Please drop me a line about your postal address in US, the book you like to abiao@mathfinance.cn, I'll send the book to you ASAP. Sorry nico. Thanks both for your participation. Tags - thanksgiving

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164

Online stock practice
Suppose you have created several quantitative trading strategies, tested both the in-sample and out-of-sample performance of those strategies using free historical stock data, and found some of them are really profitable and have good sharpe ratio, what will you do next? put your real money into the stock market and start trading? Yes, you can, but you are in the danger of slippage risk of your mis-estimated model (or you even don't consider that for backtesting at all), which might kill your profit. (slippage is the difference between estimated transaction costs and the amount actually paid, or between the price you want to buy/sell and the price you indeed execute.) Many investment firms prefer to use paper trading (sometimes also called "virtual stock trading"), which is a simulated trading process in which would-be investors can 'practice' investing without committing real money, to partly handle this issue. However, as individuals, we have difficulty in finding a third party willing to play paper trading with us. What shall we do then? I personally prefer to try online stock practice, which provides virtual money and considers the real stock market situation (bid, ask, etc.) and therefore is an excellent free trading practice. Today I introduce two online stock practice portal, one in English and one in Chinese: first one is Up & Down Practice Investing Without Risk, registration is free and easy, simple filling in basic information you will get a personal account, and each account owns $1,000,000.00 you are able to join a network, participate a competition and earn real money if you are a student and have .edu mailbox. Each member has a personal profile page showing the latest trading activity, profit and loss, rank, your friends' performance, etc., which is a good way to connect with the members of your network. Starting stock trading practice is simple, go to trading section you will find where you are able to place orders, to make it as real as possible, there are several constraints of your transactions: # Each trade is subject to a commission (virtual $$$). # Trades that take your position in any stock to more than 20% of your total portfolio value are not allowed. # Trades that take your position in any stock to more than 5% of its

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average daily volume are not allowed. # You can only sell short if your buying power exceeds the size of the short position. # Your portfolio account is a margin account with a 100% initial margin requirement (total positions cannot exceed portfolio value). Ready? Join The Investing Social Network and Begin Online Stock Practice. The other portal is http://www.cofool.com/, which is similar except the site is in Chinese and special trading rules of Chinese stock market are applied. Have fun practice stock trading. Tags - trading

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166

RQuantlib
Quantlib is a free library for modeling, trading, and risk management in real-life providing a comprehensive software framework for quantitative finance, it is written in C++, which might be inconvenient for some users. JQuantLib aiming at Java-fans is naturally developed, correspondently, RQuantlib connects GNU R software with QuantLib. The installation is straintforward, I tried it on my Windows, the source code is at http://cran.r-project.org/web/packages/RQuantLib/ index.html, which is self-contained and does not even require a QuantLib (or Boost) installation. Nothing more to say, following the process, users are able to use the library immediately. So far the function and option types supported by RQuantlib are limited, vanilla and a few popular exotic options, for example, American option, Asian option, Barrier, Bermudan, Binary option, as well as a range of fixed-income functions, mainly on Convertible bond valuation. Hopefully it will grow quickly. Detailed reference manual is also available at http://cran.r-project.org/ web/packages/RQuantLib/index.html. Tags - quantlib

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167

10 Bestselling Quant books below $17.55
You might wonder why I named the title, today I received a gift card from Amazon with value of $17.55, because Amazon pays me commision for any book bought on Quant book store at Amazon.com, $17.55 is what I've earned over the past half year :). However, the gift is less appealing to me as I am not in US, nor have a friend there, so I am thinking it should be valuable for those readers of my blog located in US. The story is like this: I search "quantitative finance" and "financial engineering" at Amazon, sort the results by bestselling, and select those books below $17.55. If you happen to be in US (or have a postal address in US), just leave a comment at the end of this post telling the number of book you would like. One week later, that is 2009-11-27, a random commentator will be chosen and wins the book s(he) likes. Here random integer generator randint(1,1,[1,N]) in Matlab will be used, N is numbers of commentator, for example, if two people leave a comment, each one has 50% chance; if one people replies (s)he will definately win; if nobody participates, the gift card will be expired and Amazon smiles. (no need to leave a postal address now and I will contact you on 2009-11-27) Ok, the 10 bestselling Quant books below $17.55 are: 1, 2, 3, 4, 7, 10, Have a nice weekend. Tags - amazon , quant 5, 8, 6, 9,

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168

Missing data imputation
Probably all of us have met the issue of handling missing data, from the basic portfolio correlation matrix estimation, to advanced multiple factor analysis, how to impute missing data remains a hot topic. Missing data are unavoidable, and more encompassing than the ubiquitous association of the term, irgoring missing data will generally lead to biased estimates. The following ways are often applied to handle the problem: 1, simple deletion strategies: including pairwise deletion and listwise deletion, the former may lead to inconsistent results (e.g., not positive definite correlation/covariance matrices), while the cumulation of deleted cases may be enormous except in the case of very few missing values for the latter method; 2, so called ‘Working around’ strategies, for example, the Full Information Maximum Likelihood (FIML) integrates out the missing data when fitting the desired model; 3, imputation strategies, these are the most widely used methods both in academia and industry, replacing missing value with an estimate of the actual value of that case. For instance, ‘hot-deck’ imputation consists of replacing the missing value by the observed value from another, similar case from the same dataset for which that variable was not missing; mean imputation consists of replacing the missing value by the mean of the variable in question; expectation Maximization (EM) arrives at the best point estimates of the true values, given the model (which itself is estimated on the basis of the imputed missings); regression-mean imputation replaces the missing value by the conditional regression mean; and multiple imputation, rather than a single imputed value, multiple ones are (stochastically) derived from a prediction equation. I came across an easy-to-use missing data imputation named Amelia II developed by professor Gary King from Harvard university, as its webpage introduces: Amelia II "multiply imputes" missing data in a single cross-section (such as a survey), from a time series (like variables collected for each year in a country), or from a time-series-cross-sectional data set (such as collected by years for each of several countries). Amelia II implements bootstrapping-based algorithm that gives essentially the same answers as the standard IP or EMis approaches, is usually considerably faster than existing approaches and can handle many more variables....Unlike...other statistically rigorous imputation software, it

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virtually never crashes. Amelia II was developed based on R language, so users have to install R before running it, installation of Amelia is staightforward: download and run the exe file, that's it. For me, the beauty of Amelia II is its friendly interface, I don't even need to run R software myself. Double clicking Amelia II shows the following as you can see from the input and output menus, it supports csv files, simply importing a csv file with missing data returns a csv with imputed data, amazing, isn't it? Downloading the software http://gking.harvard.edu/amelia/. Tags - missing-data and help documents at

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170

Yahoo chinese historical stock data
Wrote a simple script to fetch historical stock data from Yahoo.cn finance and to save as a csv file, please be aware this script is only for those interested into downloading free historical prices of firms listed in Shanghai and Shenzhen stock exchanges only, (indeed not only stock data, but also Chinese warrant data.) Plese check free real time stock quotes or historial stock price from Yahoo if you prefer non-Chinese stocks. 1, why do I write it since finance.yahoo.com provides such a module already, for instance, by using http://ichart.yahoo.com/ table.csv?s=symbol? Simple, because I found yahoo.com has only closing price dividendadjusted, which is obviously not enough if your quantitative trading strategies involve historical open, close, high, low data, for example, a widely used stochastic indicator compares current prices to the high and low range over a look-back period, therefore unadjusted high, low data might mistakenly treat a lose strategy as a win strategy. Below are snapshots of stock prces downloaded directly from finance.yahoo.com and from this script, where on 20090610 the stock paid out a dividend.

2, you prefer to download historical stock data from Yahoo, dividend info for each stock and adjust the data yourself instead of using this script. Fine, if you are happy. 3, you have option to download daily, weekly or monthly data using this script, while there is no such an input using http://ichart.yahoo.com/ table.csv?s=symbol. This is another reason I wrote it, please correct me if I am wrong. How to use the script? by typing the url http://www.mathfinance.cn/ yahoo-chinese-stockquotes.php?stockNo=yourstock&exchange=ss&dateType=yourdate, here yourstock is the symbol of stock to download, ss means shanghai, and sz means shenzhen stock exchange, yourdate has three types: day, week and month for daily, weekly and monthly data, respectively. For instance, http://www.mathfinance.cn/yahoo-chinese-stock-

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quotes.php?stockNo=600030&exchange=ss&dateType=day will pop up a window asking you to save or open the data in csv. Leave a message here for any error or share with others if it is helpful, thanks. All stock data is from Yahoo finance China, please obey the policy of Yahoo finance. Tags - yahoo , data

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172

Garch option pricing
We all know one assumption of Black Scholes model is constant volatility during option period, which has been relaxed by several methods including Heston stochastic volatility, SABR stochastic volatility, etc. Here is another way proposed by Jin-Chuan Duan, Geneviève Gauthier, and Jean-Guy Simonato in their paper "An analytical approximation for the GARCH option pricing model" published at the Journal of computational finance in 1999, http://www.journalofcomputationalfinance.com/public/ showPage.html?page=1112. Quotation GARCH option pricing framework has been developed in recent years. However, an efficient method for computing option prices in this framework remains lacking. In this article, a fast analytical approximation is developed for computing European option prices in the GARCH framework. The approach, following that of Jarrow and Rudd (1982), uses the Edgeworth expansion of the risk-neutral density function. Analytical expressions for the first four moments of the cumulative asset return over any horizon under the GARCH model are derived in this paper. A numerical analysis shows that these moment formulas are accurate under fairly general conditions. The analytical GARCH option pricing formula based on the Edgeworth expansion is found to work well for short-maturity options. For long-maturity options, the approximate formula is generally satisfactory, except when the volatility dynamic of the GARCH model exhibits an extremely high level of persistence.

Matlab codes can be downloaded at http://www.rotman.utoronto.ca/ ~jcduan/mainfram.html, several other programming files can be also found at the page, for example, Co-integration option pricing model, GARCH option pricing model and its application to volatility smile, Linear and non-linear asymmetric GARCH models, Estimating exponential affine term structure models, and Maximum likelihood estimation method for Merton's deposit insurance pricing model. Tags - garch , volatility

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173

Jim cramer stock market
Spent the half afternoon watching Jim cramer's mad money TV show on CNBC, it is a really interesting and inspiring programme, I didn't realize the time passed so quickly till my roommate invited me for a dinner, the only problem is sometimes I didn't follow his a little bit strange tone, have to listen more. To those who are unfamiliar with Jim cramer, he is an American, a former hedge fund manager, and a best-selling author (Wikipedia says so). He is the host of CNBC's Mad Money and is also a contributor to New York magazine and Time Magazine. The TV program Mad Money with Jim Cramer began on CNBC in 2005. as mentioned on CNBC's Web site: the show"...is not to tell you what to think, but to teach you how to think about the market like a pro. This show is not about picking stocks. It's not about giving you tips that will make you money overnight – tips are for waiters. Our mission is educational, to teach you how to analyze stocks and the market through the prism of events." Sounds good so far? here is a collection of Jim cramer's video on stock market, cheers. http://www.cnbc.com/id/24109723/, and gain full access to his personal portfolio at

Tags - jim-cramer

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174

Numerical Integration Code
A followup post of my previous entry Using Quadrature method for option valuation, where I tested the alternative numerical method for option valuation, QUAD. If you read the original paper, you will notice at the end all option valuation problems are to solve an integral equation, therefore a good & proper numerical integration method becomes especially crucial. My example in that post used simply Matlab embedded command "quadl", however, when the option becomes exotic, or the option has multiple observation times (for example, a Bermudan option), quadl can't be applied anymore as we have to match the nodes of these different observation times. (quadl does not allow users to specify how many points and how small interval an integral can have, correct me if i am wrong). Here is a good site on numerical integration code I just dug yesterday: Transforming Numerical Methods Education by University of South Florida, which is for undergraduate student at engineering or mathematics and is therefore in plain language, easy to understand. For example, under integration section, it includes trapezoidal rule, simpson's 1/3rd Rule, Romberg Integration, Gauss-Quadrature Rule, etc, for each numerical integration method, it provides well explained documents, matlab and MATHEMATICA codes, and even Youtube video...... Have fun at http://numericalmethods.eng.usf.edu/index.html. A minor defect is its gauss quadrature point is up to 10 only, no worry, should you are unhappy with that, another C/C++ code on Gauss quadrature can be found at http://www.holoborodko.com/pavel/?page_id=679.

Tags - quadrature , integral

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175

56 ethnic groups in China
I often saw how surprised my friend was when I told him there are 56 ethnic groups in China, in many people's eyes, Chinese look like the same, which is understandble as around 91.59% of the population was Han Chinese and most minority ethnic groups Chinese have kept the tradition to live and stay where their ancestors used to live, hereafter leading to immobility and normally what we see overseas Chinese are Han Chinese (good or not?). I myself have only got in contact with less than 10 ethnic groups so far, however, it is indisputable each group has had a brilliant contribution to the development of China, no single group is allowed to be separated. Anyway, a beautiful flash shows the appearance difference of 56 ethnic groups in China.

Tags - china , ethnic

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Using Quadrature method for option valuation
Reading an interesting paper "universal option valuation using quadrature methods", which provides an alternative method to value options. Compared with lattice (binomial and trinomial trees), finite difference, and Monte Carlo techniques, quadrature method (QUAD) possesses exceptional accuracy and speed, while isn't harder to implement. Basically what we need to do is to write down the problem in an integral function and to solve the function with techniques like Simpson's rule or Gauss Quadature, ect. For s short comparison, a simple QUAD code to price a vanilla European call option is as follows, please refer to the original paper for the meaning of symbols: %using QUAD to calculate a vanila european call x0 = log(s/k); kappa = 2*(r-d)/vol^2-1; dt = t; ymax = 3; A = 1/(sqrt(2*vol^2*pi*dt))*exp(-(kappa*x0/2)-(vol^2*kappa^2*dt/8)r*dt); q = quadl(@myquad,0,ymax,[],[],x0,dt,vol,kappa,k); %Matlab embedded quadrature callprice = A*q; function f = myquad(x,x0,dt,vol,kappa,k) B = exp(-((x0-x).^2./(2*vol^2*dt)) kappa*x/2); f = B.*max(exp(x)-1,0)*k;

Here I arbitrarily set ymax=3, which is enough for this simple example, the result for a European call option with strike price 9, stock price 10, volatility 20%, risk free rate 2%, dividend 1%, time to maturity 2 years is 1.71429100893328, with 0.005681 seconds elapsed time using my humble laptop, in contrast with the embedded Black Scholes matlab function value 1.71429100824415, and 100 time steps binomial tree value 1.71422035929822. QUAD performs quite good, isn't it? The exotic option pricing is left for further experiment, have a nice evening.

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PS: i was seriously drunken last weekend, my poor stomach. Tags - quadrature , integral

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SOCR of UCLA
Statistics Online Computational Resource (SOCR) is a great application built by University of California, Los Angeles (UCLA). What is SOCR? Quotation The aims of the Statistics Online Computational Resource (SOCR) are to design, validate and freely disseminate knowledge. Our Resource specifically provides portable online aids for probability and statistics education, technology based instruction and statistical computing. SOCR tools and resources include a repository of interactive applets, computational and graphing tools, instructional and course materials. What are the main SOCR Components? Quotation The core SOCR educational and computational components include: Distributions (interactive graphs and calculators), Experiments (virtual computer-generated analogs of popular games and processes), Analyses (collection of common web-accessible tools for statistical data analysis), Games (interfaces and simulations to real-life processes), Modeler (tools for distribution, polynomial and spectral model-fitting and simulation), Graphs, Plots and Charts (comprehensive web-based tools for exploratory data analysis), Additional Tools (other statistical tools and resources), SOCR Wiki (collaborative Wiki resource), Educational Materials and Hands-on Activities (varieties of SOCR educational materials), SOCR Statistical Consulting and Statistical Computing Libraries.

As its name suggests, SOCR is mainly for people learning statistics, for example, to fit a certain probability, to draw density graph of a selected distribution, etc. There are also limited financial applications as well,

Anyway, sharing it just in case some ppl need a portal to learn statistics. http://www.socr.ucla.edu/SOCR.html Tags - statistics

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179

Rejection (or offer) season
It seems the time or to most people time has come this year, many people of a quant job board I often visit complain how many rejection letters they have got today, which makes me recall my gloomy life half a year ago. Anyway, cheer up & take a rest, a joke forwarded by a friend of mine, have a nice day: Dear **, Thank you for your letter of today. After careful consideration, I regret to inform you that I am unable to accept your refusal to offer me a Quantitative analyst position in your department. This year I have been particularly fortunate in receiving an unusually large number of rejection letters. With such a varied and promising field of candidates, it is impossible for me to accept all refusals. Despite your outstanding qualifications and previous experience in rejecting applicants, I find that your rejection does not meet my needs at this time. Therefore, I will assume the position of Quant analyst in your department this December. I look forward to seeing you then. Best of luck in rejecting future applicants. Sincerely, ** Tags - job , joke

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Quantitative trading strategies
Spent several days reading a book named Quantitative Trading Strategies: Harnessing the Power of Quantitative Techniques to Create a Winning Trading Program, compared with the book Quantitative Trading: How to Build Your Own Algorithmic Trading Business I read & shared at my earlier post Matlab trading code, this one is in more detail and more practical. For me, Quantitative trading is a good introductory book showing starters what algo trading is and how to begin and what to prepare in order to be an independent quant trader, while Quantitative trading strategies explains what a good trading strategy is, how to test a trategy a trader has, what's more, the author is kind enough to disclosure dozens of strategies he created. Whether those trading strategies still work or not is another issue, but at least readers are able to have a rough picture in mind the pros and cons of each strategy, the possible way to modify them for our own use after reading it. Anyway, it is your turn to compare them. I write M files of several selected quantitative trading strategies from the book I have played, be aware although I wrote carefully, i dont gurantee the correct of them, and i didn't optimize the code, either, sorry Moving Average: long when x day moving average crosses above y day moving average, short when x day moving average crosses below y day moving average pos=zeros(size(price,1),1); [lead,lag]= movavg(price,x,y,'e'); lead = [zeros(x-1,1); lead]; %to avoid dimension mismatch lag = [zeros(y-1,1); lag]; pos(lead>lag)=1; pos(lag>lead)=-1;

Volatility Breakouts: m = size(price,1); pos=zeros(m,1); for i = 2:m %put here the way to calculate variance C UpperTrigger = price(i-1) multiplier*sqrt(C); LowerTrigger = price(i-1)-multiplier*sqrt(C);

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if price(i)>=UpperTrigger pos(i) = 1; elseif price(i)<=LowerTrigger pos(i) = -1; end end

stochastic indicator: stosc = stochosc(highp, lowp, closep, kperiod, dperiod); %embedded Matlab function m = size(highp,1); pos=zeros(m,1); inx1 = find(stosc(:,1)>=30); inx2 = find(stosc(:,1)>=stosc(:,2)); pos(intersect(inx1,inx2)) = 1; inx1 = find(stosc(:,1)<=80); inx2 = find(stosc(:,1)<=stosc(:,2)); pos(intersect(inx1,inx2)) = -1;

Divergence Index: %divergence index strategy, m is long momentum period, n is for short longmom = tsmom(price,m); shortmom = tsmom(price,n); mm = size(price,1); pos=zeros(mm,1); DI = longmom.*shortmom./var(diff(price)); inx1 = find(DI<-8); inx2 = find(longmom<0); inx3 = find(longmom>0); pos(intersect(inx1,inx2))=-1; pos(intersect(inx1,inx3))=1;

Moving Average Confluence Method: % p - *price* data % N - number of points to generate signal pos=zeros(size(p,1),1); macs = zeros(size(p,1),20); for i=1:20 j=i*4;

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[lead,lag]= movavg(p,i,j,'e'); lead = [nan(i-1,1); lead]; %to avoid dimension mismatch lag = [nan(j-1,1); lag]; macs(lead>lag,i) = 5; end macssum = sum(macs,2); macssum(1:80) = 50; %first 80 observations with zero position pos(macssum>=N)=1; pos(macssum<=(100-N))=-1; There are other strategies left to you to backtest the effectiveness of technical analysis, for example, Kestner’s Moving Average System, Second Order Breakout, MACD Histogram Retracement, Normalized Envelope Indicator, etc. Have fun. Tags - trading , strategy

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Featured Entries of blog
1, Free real time stock quotes This weekend's review is about a free real time stock quotes website: ADVFN. Who is ADVFN? ADVFN is the one of the worlds largest stocks and shares websites. Offering the private investor FREE streaming prices from NASDAQ, NYSE, Dow Jones... 2, Quantitative trading strategies Spent several days reading a book named Quantitative Trading Strategies: Harnessing the Power of Quantitative Techniques to Create a Winning Trading Program, compared with the book Quantitative Trading: How to Build Your Own Algorithmic Trading Business I read & shared at my earlier post Matlab trading code, this one is in more detail and more practical... 3, Neural Network Prediction Neural network matlab source code accompanying the book Neural Networks in Finance: Gaining Predictive Edge in the Market by professor Paul D. McNelis. This book has got wonderful review like “This book clarifies many of the mysteries of Neural Networks...

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Financial Engineering Resource Center
This week's review is about Financial Engineering Resource Center (FERC). What is FERC, as the site describes, "Basically, Financial engineering resource center (FERC) aggregates useful posts/info from all around the web and provides related items on a single page." In short, visitors are able to read and track the latest posts of dozens of websites on FERC only, hopefully it will save the time and improve work efficiency.

Currently FERC has the following sections: Books, Daily news, Job, Journal, Quant answer, Software, Trading and Video. Simply from the name we can guess the content under each section, for example, daily news is about some recent interesting news might be worth reading; trading is the latest model and technique written by well-known quant trader, etc. There are subsections under several categories, Job consists of UK, US, Asia and world, Journal includes Journal of finance, Journal of financial economics, Mathematical finance, etc., where people can track the latest publications for each selected Journal. Overall I find FERC makes my daily reading easier, check Financial Engineering Resource Center (FERC) if you are curious as well. Tags - financial-engineering

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Algorithmic Trading with MATLAB Webinar
Just a followup of my previous entry Matlab trading code, where you can watch Algorithmic Trading with MATLAB Webinar following one of the links. Dr. Aly Kassam again introduces in plain language how to use simple Matlab commands for algo trading and what's new for 2009 . Click here to watch it, including: Quotation • building a robust and generic back-testing framework • building and testing nonlinear trading models • using parallel computing to improve efficiency • deploying models to work with third party software Tags - matlab , trading , algo

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186

Making your Matlab Fly
Undoubtedly Matlab is one of Quant researchers' most favorite software, easy for beginners, helpful doc, amounts of online free shared codes, etc., unfortunately, when compared with others like C++, one con of Matlab I often heard is its slow speed. As an Interpreted Language, Matlab is in some sense less efficient than Compiled language, however, we can speed it up by using tricks like vectorization, to fly your Matlab, below are tips and tricks I personally find useful and easy to apply. 1, Writing Fast MATLAB Code, PDF doc; 2, Maximize Matlab performance, http://www.ece.northwestern.edu/ local-apps/matlabhelp/techdoc/matlab_prog/ch7_per6.html; 3, MATLAB array manipulation tips and tricks, http://home.online.no/ ~pjacklam/matlab/doc/mtt/index.html; 4, matlab tips and tricks, http://www.ee.columbia.edu/~marios/ matlab/matlab_tricks.html; 5, Accelerating Matlab, http://research.microsoft.com/en-us/um/ people/minka/software/matlab.html Many other Matlab accelerating skills can be found on the webpage 4. Be ready to take off. Tags - matlab

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187

Gaussian Process Regression
I recently read a paper comparing the performances of different models to predict stock returns, at the end the authors rank the models by their out-of-sample symmetric mean absolute percentage error (SMAPE), surprisingly for me, The winning four models turned out to be: 1: Gaussian process regression; 2: Neural network; 3: Multiple regression model; 4: A very simple model based on a simple moving average. What interests me is Gaussian process regression is the best model by the authors, as stated: "A List of different monitored learning techniques have been attempted to predict future stock returns, both for potential monetary make and because it is an interesting research problem. We use regression to capture changes in stock price prediction as a function of a covariance (kernel or Gram) matrix. For our aims it is natural to think of the price of a stock as being some function over time. Generally, a Gaussian processes can be cosidered to be defining a distrubution over functions with the inference step occurring directly in the space of functions. Thus, by using Gaussian process regression to extend a function beyond known price data, we can predict whether stocks will rise or fall the next day, and by how much." Should you are interested, here is a book Gaussian Processes for Machine Learning to be freely downloaded, accompanying Matlab package is also available at the website. http://www.gaussianprocess.org/gpml/ Tags - regression

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188

Neural Network Calculator
A friend recommended me this software, frankly speaking, I am not fully convinced by the effectiveness of those black-box models like neural network algorithm, using at your own risk though. Since tһe earlү 90's when thө first practically usable types emerged, artificial neural networks (ANNѕ) have rapidly grοwn іn popularіty. Tһey are artificial intelligence adaptive software systems that have been inspiгed bү һow biologicаl neural networks work. Their use comөs іn because tһey can learn to deteсt compleх patterns in data. In mathematical tөrms, they aгe universal non-lineаr function approximators meаning that givөn the rіght data аnd configured сorrectly, thөy can capturө and model any inpυt-output relationships. Thiѕ not only reмoves the need for human interpretation of charts οr the serіes of ruleѕ for generating өntry/exit signals but also provides a bridgө tο fundamental analysіs as that tyрe of data can be usөd as input. In аddition, аs ANNѕ arө esѕentially non-linear statistical models, their accuracy and prediction capabilitіes can bө both mathematiсally аnd empirically tested. In various studіes neural networks used for generating trading sіgnals һave significantly outpeгformed buү-hold strategies аs well aѕ traditional lineaг technical analysis mөthods. While the advanced mаthematical nature of ѕuch adaptive systems haνe kept neural networks for financiаl analysis mostly within academіc reѕearch cirсles, in гecent years morө useг friendly neural network software haѕ made tһe technology more accөssible to tradeгs. Suмmary of operation: * The trаder, wishіng tο quantіfy the relationship amοng a group οf stοck or share prices, and/oг indіces, enters the tickers in capital letterѕ, separated by commas. * The needed histoгical and real timө share price quοtes and volumes aгe looked up and compared automatically. * The neural network searches for a nonlinear mathematical relаtionship (pattern) relating thө рrices and volumөs tο the tіcker of interest, while thө υser participates by сontrollin# rөlating the priсes аnd volumes to the ticker οf interest, while the user participates by controlling а sensitivitү (also called 'мomentum') adjustment * When sensitiνity iѕ tһen set to zero, graрhs shοw two yөars οf correct

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and rigorous backtesting. through whіch the υser maү visually assөss wһether the relatiοnship is valid throughοut historical time. * The relationshiр іs extended intο the future to мake a forecast, by tһe nuмber of days the υser hаs set on thө slider during training. * There is no buy/sell indicator: the reliability of the forecast depends on thө user'ѕ visual verification οf tһe matсh between the tωo grаphs oЬtained during backtesting, and the his estimation of the likelihood that tһe mathematical relationship which has bөen found will continue to hold in the future. Downloading or trying online through http://www.goldengem.co.uk/ or the one I introduced before http://www.mathfinance.cn/neuralnetwork-source-code/ Tags - neural-network

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190

Basic Bond Calculator on Gphone
Compared with option calculators on Gphone introduced before, Basic bond calculator is a simple application aiming to price a vanilla bond value and yield to maturity (YTM) only. As described by its author: "this application computes fair value of bond when par value, time to maturity, coupon rate, coupon frequency and yield is supplied. It computes yield when bond price is supplied. Maturity time can be entered or selected. Coupon is paid semi-annually by default. Current date is auumed to be the settlement date." A snapshot looks like

To install the application, just search "bond calculator" at the Market section of your gphone. Tags - calculator , gphone

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191

Chinese financial news
From this weekend on, I will collect Chinese financial news (ideally on quantitative finance) of the past week, hoping to help those people who have interest to invest in Chinese market. 中国金融信息 China to Issue Renminbi Bonds to Offshore Investors, http://www.fundmymutualfund.com/2009/09/china-to-issuerenminbi-bonds-to.html; China ADRs: Even Better Than the Real Thing, http://bespokeinvest.typepad.com/bespoke/2009/08/china-adrs-evenbetter-than-the-real-thing.html; China backs efforts to break oil contracts, http://www.ft.com/cms/s/0/ 981d1990-9bcf-11de-b214-00144feabdc0.html?nclick_check=1; Asia IPOs boom on China listings, more to follow, http://in.reuters.com/article/businessNews/idINIndia-42270120090907 Bank of China to invest in hedge funds, http://www.ft.com/cms/s/0/ 2e1eaef0-9da0-11de-9f4a-00144feabdc0.html; Tags - china

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192

Test cointegration with R
Cointegrated pairs of securities are crucial for mean reversion trading portfolio construction, Play with cointegration has several good papers to start with. Should you want to test pairs of securities for cointegration using R, here is an excellent webpage with data, code and detailed example, cheers. http://quanttrader.info/public/testForCoint.html Tags - cointegration

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193

Matlab trading code
I have been on vacation for exactly two weeks, reading Chinese fictions, visiting parents and friends, enjoying delicious food, etc. Life is wonderful except I have a little worry about my British visa. Quantitative Trading: How to Build Your Own Algorithmic Trading Business is a great book I bought several months ago but had few chances to read until recently. It is an easy-to-understand book on implementing quantitative (or algorithmic) trading for independent traders. This is the area fascinating me from right the beginning of learning quantitative finance. Therefore I have started to play algorithem trading with Matlab, the three sites I have visited often within the last week are: Recorded Webinar: Algorithmic Trading with MATLAB for Financial Applications: http://www.mathworks.com/company/events/ webinars/wbnr30376.html?id=30376&p1=50647&p2=50649 Trading with Matlab: http://www.tradingwithmatlab.com/home Interactive Brokers via Matlab: http://www.maxdama.com/2008/12/ interactive-brokers-via-matlab.html There you could find and download useful resources and API code on Matlab trading, for instance, Pairs Trading, Intraday Data Acquisition. Enjoy. Tags - matlab , trading

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194

Free real time stock quotes
Get your free real time stock quotes here, one of the worlds largest stocks and shares websites. Offering the private investor FREE streaming prices from NASDAQ, NYSE, Dow Jones and many more indices from around the world, We provide free service like Stock Quotes, Watch lists, Charts, Financials News, etc. Being a free member you can access to real-time Dow Jones and NASDAQ indices, FOREX, managed funds, plus delayed US and world markets stock prices and indices. You will also be able to access comprehensive range of free charting, research, news, message boards and stock screening tools. The free services includes: # Quotes # Comprehensive Java & HTML Charting tools # Streaming Stock watch lists (monitor) # Free bulletin boards # Portfolio # Stock screening tools (toplists) # Trades # Company Financial data # News # Alerts # World market profiles Please sign up as a free member to download FREE stock quote Tags - data

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195

FX option calculator
Another FX online option calculator by MathFinance covers Vanilla option, digital option, touch options (one touch, no touch, double one touch, double no touch), barrier option (single barrer, double barrier) and Black-Scholes Implied Volatility Calculator. For detail about options description and calculator please visit http://www.mathfinance.com/tools/calculator/index.php Tags - calculator , fx

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My last day in office
Today is my last day in the office, I have made up my mind to continue to study a PhD, it is a hard decision without getting much support from my family, anyway, every coin has two sides, be positive, positive. China -> Germany -> China -> Switzerland -> London -> Nottingham I will have to go back to China for my student visa and stay there for nearly two months, visiting my family and friends, travelling around, etc., and come back to UK by the end of August, hopefully. In the meantime I have to reduce blog publishing frequency, but if you do have any interesting staff, please leave me at http://www.mathfinance.cn/ contact-me, thanks. Have a nice summer. Tags - career

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197

Find MFE Program
Master of Financial Engineering (MFE) degree has increasingly become a shortcut for people willing to work at a financial institution, especially to pursue a Quantitative finance related career. There are dozens of universities around the world providing with MFE program, for instance, Haas MFE, Columbia FE, and NYU are indisputably among the best. Sadly or not, only a few people have the chance to study at these top schools, how do you choose other program then? which factors will you give priority when applying? location, tuition, possibility to get financial aid, job placement? Find MFE is a simple php+mysql page I wrote yesterday evening, the goal is to filter your ideal MFE program by the self-defined criteria, for example, you can say "I want to find a MFE program in United States, total tuition less than $40K, and with financial aid", the script will return the following MFE programs: 1.) Bentley College in Massachusetts 2.) Florida State University in Tallahassee 3.) Kent State University in Kent 4.) Princeton University in Princeton 5.) Purdue University in West Lafayette 6.) The University of Arizona in Arizona 7.) Vanderbilt University in Nashville Clicking the link leads you to a page showing the more detailed introduction of this program, including length of study, size of class, program website, etc. (some content requires you to be able to get access to those sites like Youtube, Flickr and Twitter.) I have no idea if people would find it useful or totally rubbish, it just tests the water, anyway. I fully understand the accuracy of the searching results depends largely on the information collected, please do help to improve it by rating the MFE program, adding a comment or leaving a message. Thank you. Advanced search like the job placement can be easily added technically, depending on your feedback. Find your ideal MFE at http://www.finmath.cn Tags - mfe

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198

Regime-Switching Model library in Gauss
This is the most up-to-date version of the switching regression procedures built by Simon van Norden and Robert Vigfusson with help from Jeff Gable. This Regime-Switching Model library lets you to estimate a general class of regime-switching models along the lines of those described in James Hamilton's textbook. Key features and limitations of the code include: one independent variable only two states only arbitrary number of observed variables may be included to explain timevarying transition probablities or state-dependent means external c-code, analytical gradients and combined maxlik()/EM algorithms for fast calculation descriptive statistics, plots and White's model-misspecification tests cascading estimation separate, faster code for "simple switching" models (i.i.d. mixtures of regimes.) learn more and download at http://www.hec.ca/pages/simon.vannorden/codepage.html and a Guide to the Bank of Canada Gauss Procedures at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=50565. Tags - regime , switch

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199

Vault career guide
This weekend's review is about vault career guide, I bet many people have heard of it or even used it, I remember when I looked for a job before graduation, the two books I read often were Heard on the Street: Quantitative Questions from Wall Street Job Interviews and Vault Career Guide to Investment Banking, 6th Edition, both of which provide with clear explanation and insightful experience on how to look for a job and prepare interviews efficiently, expecially on investment banking industry. Vault.com is the leading media company focused on careers. Job seekers, students and professionals have discovered that Vault is the Internet's ultimate destination for insider career and education information. Vault publishes over 120 career guides and its web site, features thousands of company, university, industry and occupational profiles. Additionally, Vault provides salary surveys, articles on workplace topics, a network of message boards for professionals, and job-related video, blogs and research tools. Here is an opportunity to sign up for free membership on Vault.com and get Career Guides for Free., enjoy! Tags - career

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200

Simulation-Based Estimation of Contingent-Claims Prices
Please allow me to share an interesting paper I came across this morning, Simulation-Based Estimation of Contingent-Claims Prices, the main point of this paper is to use Monte Carlo simulation, along with Maximum likelihood estimation (MLE), to reduce the biases caused by MLE method alone, Quotation A new methodology is proposed to estimate theoretical prices of financial contingent claims whose values are dependent on some other underlying financial assets. In the literature, the preferred choice of estimator is usually maximum likelihood (ML). ML has strong asymptotic justification but is not necessarily the best method in finite samples. This paper proposes a simulation-based method. When it is used in connection with ML, it can improve the finite-sample performance of the ML estimator while maintaining its good asymptotic properties. The method is implemented and evaluated here in the Black-Scholes option pricing model and in the Vasicek bond and bond option pricing model. It is especially favored when the bias in ML is large due to strong persistence in the data or strong nonlinearity in pricing functions. Monte Carlo studies show that the proposed procedures achieve bias reductions over ML estimation in pricing contingent claims when ML is biased. The bias reductions are sometimes accompanied by reductions in variance. Empirical applications to U.S. Treasury bills highlight the differences between the bond prices implied by the simulation-based approach and those delivered by ML. Some consequences for the statistical testing of contingent-claim pricing models are discussed. Download the paper and accompanying matlab http://www.mysmu.edu/faculty/yujun/research.html Tags - simulation , mle code at

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201

Quantitative Asset Management library
I would like to take this opportunity to thank the author Thierry Roncalli for letting me know this great source. QAM (Quantitative Asset Management) library: QAM is the Gauss library which has been developped for the lecture notes on Quantitative Asset Management. This library contains procedures: for computing backtest (monthly rebalancing, currency hedging, strategy leveraging, fees managing, performance reporting, etc.). for portfolio allocation (Black-Litterman, Markowitz, ERC, MDP, risk Bbdgeting, index sampling, 130/30, MSR, Sharpe style analysis, etc.). for computing numerical algorithms (simplex set, Markov generator, quadrature rules, Fokker-Planck equation, etc.). for derivatives pricing (dynamic delta hedging, Hedge fund replication, etc.). for statistical methods (Artificial neural networks, copula, CSS, FLS, GMM, Huber, LAD, Logit, MARS, ML, NLS, PCA, Probit, Quantile regression, QP, Robust, Non-parametric Kernel regression, RBS, Tobit, factor models, etc.). for time series analysis (arch, garch, vecm, spectral analysis, wavelets, etc.) for strategy backtesting (covered call, bull-spread, carry trade, variance swaps, vix, long/short equity, absolute return strategy, trend-following strategy, etc.); for stock screening (gini optimization, scoring methods, boosting, baging method, etc.) for risk management (stop loss strategy, take profit strategy, concentration, etc.) Please download the manual, library and lecture notes (in French only, unfortunately) at the author's webpage. Tags - library , quantitative

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202

Morningstar investment research
This weekend's review is about Morningstar investment research, needless to say, research is the key to success for investment. Founded in 1984, Morningstar is one of the most respected names in independent investment research and opinion, as well as the recognized leader in stock and mutual fund analysis. The mission is to create great investing products to help people reach their financial goals. Consistently ranked among the best investment sites on the web, Morningstar.com offers a wide range of online portfolio management tools, financial data, unbiased stock and fund analysis, video commentary, and more. Because the products focus on sound investing fundamentals and take a friendly, easy-to-understand approach, Morningstar appeals to a wide range of investors -- from beginners to the most experienced. They are likely to be... # College educated (80%) # Male (82%) # Managing a portfolio averaging $870,000 # Living in households averaging $150,000 per year Get access to More than investment news... In-depth Investing Analysis & Trusted Opinion. GET YOUR FREE TRIAL NOW! Tags - research , investment

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203

Vector autoregression (VAR)
Neil left me a message: "...I am looking for examples of Vector Autoregression so I can code into excel, do you know of any links or any books that have this as code..." Vector autoregression (VAR) model is one of the most successful, flexible, and easy to use models for the analysis of multivariate time series. It is a natural extension of the univariate autoregressive model to dynamic multivariate time series. The VAR model has proven to be especially useful for describing the dynamic behavior of economic and financial time series and for forecasting. Wikipedia has a detailed explanation on it. Unfortunately I have not used it except once I tried the built-in VAR function in Eviews over 5 years ago, when one of my classmates did a seminar presentation on it. Sorry I couldn't find useful VBA code, what i do get is a sample spreadsheet showing the VAR Series Analysis & Results but it seems the author intentionly hides the macro code, http://www.afpc.tamu.edu/courses/622/files/lecturedemos/ Lecture%2007%20Vector%20Autoregression.xls. If you are happy with Matlab, here is a Vector autoregression (VAR) package where you can track line by line how to implement and use the model, hope it helps, http://www.rri.wvu.edu/WebBook/LeSage/ etoolbox/var_bvar/contents.html Tags - vector-autoregression , var

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204

Sobol sequence generator
Sobol sequence has been shared at posts Sobol and Generalised Faure sequences, halton and sobol sequences, and Primitive polynomials for Sobol sequences, respectively. Please read Low-discrepancy sequence at Wikipedia for introduction. Here is another Sobol sequence generator containing the primitive polynomials and various sets of initial direction numbers for generating Sobol sequences. The reason I open a new post for it is it is able to support up to dimension 15000, incredible. Check it out at http://web.maths.unsw.edu.au/~fkuo/sobol/index.html. Tags - sobol , monte carlo

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205

Matlab toolbox
Dozens of Matlab toolboxes(packages) for downloading, including the following classifications: Audio - Astronomy - BiomedicalInformatics - Chemometrics - Chaos Chemistry - Coding - Control - Communications - Engineering - Data Mining - Excel - FEM - Fuzzy - Finance - GAs - Graph - Graphics Images - ICA - Kernel - Markov - Medical - MIDI - Misc. - MPI - NNets Oceanography - Optimization - Plot - Signal Processing - Optimization Statistics - SVM - Web - etc ... Recommended matlab toolboxes: Kernel Density Estimation Toolbox http://ssg.mit.edu/~ihler/code/ BOOTSTRAP MATLAB TOOLBOX http://www.csp.curtin.edu.au/downloads/bootstrap_toolbox.html CompEcon Toolbox for Matlab http://www4.ncsu.edu/~pfackler/compecon/toolbox.html Random Neural Networks http://www.cs.ucf.edu/~ahossam/rnnsimv2/ Logistic regression http://www.spatial-econometrics.com/ ARfit: A Matlab package for the estimation of parameters and eigenmodes of multivariate autoregressive models http://www.gps.caltech.edu/~tapio/arfit/ Time Series Analysis http://www.dpmi.tu-graz.ac.at/~schloegl/matlab/tsa/ Interested ppl may download more at http://www.tech.plym.ac.uk/ spmc/links/matlab/matlab_toolbox.html Tags - matlab , toolbox

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206

Matlab optimization introduction
it is indisputable that optimization has been a crucial part to our financial world, the application of optimization routine ranges from fundamental mean-variance Markowitz efficient frountier to advanced neural network stock price prediction. Here is a carefully selected group of methods for unconstrained and bound constrained Matlab optimization problems including: Line Search Methods: steep.m : Steepest Descent gaussn.m : Damped Gauss-Newton bfgswopt.m : BFGS, low storage Polynomial line search routines: polyline.m , polymod.m Numerical Derivatives: diffhess.m : Difference Hessian, requires dirdero.m : directional derivative, as do several other codes Trust Region Codes: ntrust.m : Newton's Method with Simple Dogleg levmar.m : Levenberg-Marquardt for nonlinear least squares cgtrust.m : Steihaug CG-dogleg Bound Constrained Problems: gradproj.m : Gradient Projection Method projbfgs.m: Projected BFGS code Noisy Problems: imfil.m : Implicit Filtering nelder.m : Nelder-Mead simpgrad.m : Simplex Gradient, used in implicit filtering and NelderMead codes hooke.m : Hooke-Jeeves code mds.m : Multidirectional Search code Check http://www.siam.org/books/kelley/fr18/matlabcode.php for detail. Tags - optimization

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207

Online Swap Valuation
Bramaan.com is an online facility for the valuation and risk management of interest rate derivatives. Bramaan.com provides everything needed to quickly determine the net present value, the accrued interest as well as the value of a basis point for virtually any interest rate swap contract. This includes, but is not limited to, the development of custom software platforms and the implementation of processes and procedures for the daily administration, risk-management, quantitative analysis, accounting and trading of the previously mentioned financial instruments. Further details can be found here: http://www.bramaan.com/ Tags - swap , rate

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208

Heuristic Optimization for Downside Risk Minimization
Modern portfolio optimization started with Markowitz Efficient Frontier, Heuristic search and optimization is a new approach for solving complex problems that overcomes many shortcomings of traditional optimization techniques. Heuristic optimization techniques are general purpose methods that are very flexible and can be applied to many types of objective functions and constraints, especially where the objective function is non-convex and has many local minima. This is in particular the case when the risk is expressed as VaR, expected shortfall, Omega, maximum loss etc., and when the future returns of the individual assets are modelled as scenarios. An interesting paper "A Data-Driven Optimization Heuristic for Downside Risk Minimization" demonstrates how to apply Heuristic optimization method under constraint of downside risk, code can be downloaded at http://comisef.eu/?q=resources_data_driven_opt, take a look if interested. Tags - heuristic , optimization

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209

The end of 100% mortgages is definitely a positive
Consumer Credit awareness website, CreditChoices.co.uk reports that Major British lenders such as Abbey Mortgages will not be returning to the practice of issuing 100% mortgages in the near future. In fact most UK lenders are requiring as much as 20% deposits on home purchase loans. While on the surface this may seem an unfair adjustment, one must also consider that those generous loans were based upon inflated real estate values. Further the larger sum that one finances the larger the monthly payment will be. This latter statement illustrated by using the remortgage calculator found at Credit Choices. So we combine these two factors and arrive at a unique conclusion... we are better off without 100% mortgages and easy credit. Consider this, a house costing £200,000 just two years ago is selling for around £150,000 today. With a deposit of 20% or £30,000 there remains a principle due of £120,000 pounds. This results in a difference of over £500.00 monthly! Imagine the total cost over 25 years. Even factors such as mortgage protection are more costly on the larger loan. Yes many of us may not have the larger sum to place as deposit but that does not negate the data showing that 100% mortgages do no one any favour. Tags - mortgage

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210

SIMTOOLS and FORMLIST Excel add-ins
Simtools.xla and Formlist.xla are add-ins for Microsoft Excel (version 5 and later). Simtools adds statistical functions and procedures for doing Monte Carlo simulation and risk analysis in spreadsheets. Formlist is a simple auditing tool that adds procedures for displaying the formulas of any selected range. Selected features include: Inverse cumulative-probability functions; Functions for working with correlations among random variables; Functions for decision analysis; Functions for analyzing discrete probability distributions; Functions for regression analysis; Functions for randomly generating discrete distributions; Download Simtools.xla and Formlist.xla add-ins and instructions at http://home.uchicago.edu/~rmyerson/addins.htm Tags - excel

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211

CreditMetrics spreadsheet
CreditMetrics is a framework for measuring credit risk of portfolios of traditional credit investments (for example, loans, commitments to lend, financial letters of credit), fixed income products, and market-driven instruments subject to counterparty default (swaps, forwards, etc.). It is a lot more complex than RiskMetrics, and thus requires a deliberate inspection. Actually, within the CreditMetrics framework, users are confronted with a mixture of choices. For instance, CreditMetrics grants users to follow one of four different approaches to calculating correlation among several credit types-historical data, bond spreads, equity correlations or consistent constants. Here is an Excel 7.0 spreadsheet demonstrating how to use CreditMetrics to compute credit risk of a portfolio, technical document is free to download at http://www.ma.hw.ac.uk/~mcneil/F79CR/ CMTD1.pdf. Functions for calculating the CreditMetrics risk model in R are at: http://cran.r-project.org/web/packages/CreditMetrics/ index.html Tags - creditmetrics , spreadsheet

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212

My blog is published at Amazon Kindle
Amazon Kindle is a software and hardware platform for reading electronic books developed by Amazon.com, few days ago a friend of mine told me Amazon had a new service called Kindle blog, which gives a blogger chance to publish his or her blog at Amazon for free. Since nothing to lose by exposuring a blog to one of the world's largest websites, I submitted immediately and 10 minutes ago found my blog was successfully listed at Amazon Kindle. I intent to make it free but I am not allowed to do so, Amazon automatically sets the Monthly Price at $0.99 and includes wireless delivery via Amazon Whispernet, nevertheless, blog subscription starts with a 14-day free trial, and you can cancel at any time during the free trial period. (I double checked the publisher's policy, Amazon will charge 70% of subscription fee while bloggers receive the left 30%, that is to say, I earn only $0.297 per subscription.) I don't expect people to subscribe my blog via Amazon Kindle as it is totally free on web, however, if you happen to use Kindle and would like to buy me a 1/5 bottle of Beck's beer, I will be pleased . Check it out at http://www.amazon.com/gp/product/B0029U2FQ6

Tags - amazon , kindle

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213

Binomial tree for American option
This is a follow up post of my previous entry Nine Ways to Implement Binomial Tree Option Pricing because the latter covers European option only. Compared with pricing American option by Crank-Nicholson finite difference or American Options via least square Monte Carlo Simulation, Binomial tree is the easiest to implement, what you need to do is just adding a MAX expression on every node of your tree. Here is a paper on the implementation of binomial tree methods for the pricing of American option' value and Greeks, matlab codes can be found in the paper or separately here. Tags - binomial , american

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214

Eight rules a risk manager must remember
Unlike launching rocket, managing risk is a combination of art and science that should incorporate a number of fundamental characteristics. This post is by no means another ex post analysis of the reasons of current credit crisis, instead, it is about eight simple while crucial rules a risk manager or risk analyst must keep in mind (print out and post it on your PC). Sources are from http://www.geocities.com/mrmelchi/ rule.htm and http://nasdaq.riskgrades.com/clients/nasdaq/ edu_course.cgi?href=Module4-L2.html. Quotation 1.There is no return without risk. Rewards go to those who take risks. 2. Be transparent. Risk should be fully understood. 3. Seek experience. Risk is measured and managed by people, not mathematical models. 4. Know what you don't know. Question the assumptions you make. 5. Communicate. Risk should be discussed openly. 6. Diversify. Multiple risks will produce more consistent rewards. 7. Show discipline. A consistent and rigorous approach will beat a constantly changing strategy. 8. Use common sense. It is better to be approximately right, than to be precisely wrong.

Tags - risk , rule

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215

Nine Ways to Implement Binomial Tree Option Pricing
Binomial tree model is almost the most popular yet easiest way for option pricing, for one thing, it can be used for most option classes in market, for example, European option, American option, Bermuda option, etc.; for another, Binomial tree is straitforward to implement, several lines are enough for a vanilla option. Besides, it has a not-bad convergence speed, read my old post A Simple Trick to Avoid Oscillation in Binomial Trees for improvement. But how many ways are you able to implement binomial trees? here is a pretty interesting paper on Nine Ways to Implement Binomial Tree Option Pricing, unlike Mr. espen haug's more than 30 languages collection of Black Scholes model, these nine ways are all runnable in Matlab only, and the difference among them is computational efficiency, below is a plot of execution times of the first five

here are the paper and matlab codes, you might feel in the end binomial tree implemention is not such easy . Enjoy. Tags - binomial

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216

Wolfram Alpha Computational engine test feedback
No bigger news recently than Wolfram Alpha computational knowledge engine is finally available today, on 10/03/2009 I briefly wrote a post about what is wolfram alpha engine and what can it be used to service us, immediately after that, I applied to be a volunteer tester but got no reply. Anyway, it officially opens to public and we have chance to test its magic. When talking about the pros and cons of Wolfram Alpha engine and Google, different people will offer different opinions, some people take it for granted that Wolfram Alpha will be a big threat to Google and eventually replace Google, however, others hold that Wolfram Alpha is just a computation calculator, and no matter how powerful it is, it is at most a calculator with search function . Weighing up these two arguments, I would say they complement each other, for example, before you calculate an Europen option with Wolfram Alpha computational engine, you need to google at least what an Europen option is. In my previous post I joked about if Wolfram Alpha would return a result of "Black Scholes call option price with strike 10, asset price 10, time to maturity 1 year, interest rate 3%, and 25% annual volatility", alright, it turns out to be YES, just type "Black Scholes", you will get a form similar to the following graph Input your parameter and select option types, the value of option you set, together with its Greeks and plots, are calculated as

So far so good, but it seems the products Wolfram Alpha covers are limited, when I try to type Barrier option or Asian option, two simple exotic options, it says "Wolfram|Alpha isn't sure what to do with your input." there is no API users are able to add their own formulars, either. In brief, Wolfram alpha is a big step towards intelligent search engine, nevertheless, as it broadcasts at its main page: it is the first step in an ambitious, long-term project to make all systematic knowledge immediately computable by anyone.

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217

Play around at http://www.wolframalpha.com/. Tags - mathematica , wolfram

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218

Quant job hunting related sites
Since I have been looking for a quant-related job, I share several sites I personally find useful: Worldwide: http://www.efinancialcareers.com http://www.quantspot.com http://www.quantster.com/ http://www.quantfinancejob.com/forum/ http://www.wilmott.com/categories.cfm?catid=5 http://www.monster.com Germany & Switzerland: http://www.stepstone.de/home_fs.cfm http://www.jobpilot.de/ http://www.monster.de/ http://www.jobware.de/ Asia (excluding China): http://quantfinanceasia.com/index.php http://www.monster.com.sg/index.html http://www.jobsdb.com/Singapore/ http://www.jobstreet.com.sg/ http://app.www.sg/directory.asp?type=Work&id=14 China: http://quanthr.com/bbs/forum-9-1.html http://www.51job.com/ http://www.zhaopin.com/ http://www.jobchina.net/ help me complete the list if you have sites I am not aware of, cheers. Tags - job

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219

Nonparametric High-Dimensional Time Series Analysis
Functional Gradient Descent (FGD) is a method of nonparametric time series analysis, useful in particular for estimating conditional mean, variances and covariances for very high-dimensional time series. FGD is a kind of hybrid of nonparametric statistical function estimation and numerical optimization. In fact, the idea of FGD comes from the fact that boosting can be viewed as an optimization algorithm in function space. This method employs an iterative refitting of generalized residuals, based on a given statistical procedure called base learner, to approximate the first two conditional moment functions of a multivariate process. An appealing feature of this expansion is that it is a nonlinear nonparametric model that directly nests the Gaussian diagonal VAR model, the Gaussian GARCH model and the multivariate CCC-GARCH as simple, starting special cases. The FGD model is fitted using conventional maximum likelihood together with a cross-validation strategy that determines the appropriate number of additive terms in the final expansions. Interested ppl shall download the Splus codes and data at http://www.raffonline.altervista.org/fgd/ PS: to be honest, this is not the area i am family with at all, download at your own risk Tags - nonparametric

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220

The Long Vega Financial Engineering Tool
This tool can replicate and price any non path-dependent, continuous piecewise linear payoff function on a stock. You can use the tool to price and value option positions and simple structured products on a stock. The Financial Engineering tool automatically replicates and prices a given continuous piecewise linear payoff function. So far the tool can only handle payoffs on a stock, where the payoff is denominated in the same currency as the stock.

Calculate your option at http://longvega.com/FETool/feapplet.php Tags - calculator

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221

Free Financial Spreadsheets
Long ago I shared a Financial Model Excel Spreadsheets Library by Thomas Ho, here is another long list of free financial excel spreadsheets for financial planning and analysis, although most of them are for corporate finance practitioners in my view, there are some samples which might be of your interest, for example: Risk Premium - Calculates the implied risk premium in a market. NPV & IRR - Explains Internal Rate of Return, compares projects, etc. Black Scholes Option Pricing - Excel add on for the pricing of options. Forex - Foreign market exchange simulation for Excel Breakeven Analysis - Pricing and breakeven analysis for optimal pricing Option Trading Workbook - Educational toolkit for using Excel for Options EVA Model - Template worksheets for calculating Economic Value Added (EVA) ... Download at http://www.exinfm.com/free_spreadsheets.html Tags - excel

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222

ATOM C++ option calculator
Another derivative calculator shared with you, ATOM - Advanced Tool for Option Modelling is a C++ option calculator covers: price, implied volatility and Greek letters; Black-Scholes analytic formula; binomial tree lattice; Cox-Ross-Rubinstein parametrisation; Jarrow-Rudd equal-probabilitiy parametrisation; control variable technique; Broadie-Detemple penultimate node analytic approximation; Monte carlo simulation with the following variance reduction and normal sampling techniques: antithetic variable; moment matching, also known as quadratic re-sampling; Mersenne Twister pseudo-random numbers; Halton quasi-random numbers; Box-Muller polar normal inversion; Moro normal inversion; unlimited maximum number of steps in binomial trees and unlimited maximum number of trials and time intervals in Monte carlo simulations; exotic option support: Asian average price, binary cash-or-nothing and asset-or-nothing, chooser option; Download at http://www.atomproject.org/download.shtml Tags - calculator , option

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223

Twitter of the week
One good way to keep updated of my latest quantitative finance collector entries is to subscirbe by RSS or email at the righ panel "RSS feed & subscribe" section, or if yor happen to use twitter, you can follow my twitter at http://twitter.com/a_biao, where i share my latest blog post and also my life & feeling of job hunting. For example, my latest one week twitters are: -----------------------------------------------------------------------------------------------------------------------i am drunken, seriously...about 1 hour ago from web # What Is Average Salary For A Financial Engineer? http://tinyurl.com/ dl5e8q3:44 PM May 2nd from TwitterFox # Stress test analysis http://tinyurl.com/dd5lob11:37 PM May 1st from twitterfeed # Interview is delayed to next week due to an unexpected meeting. Have a nice weekend and bank holiday9:03 AM May 1st from twidroid # Exotic Options Calculator http://tinyurl.com/csw7g85:48 AM May 1st from twitterfeed # Playing For Change | Song Around The World "Stand By Me", wonderful song http://vimeo.com/25397416:09 PM Apr 30th from web # Look forward to a quant risk role interview tomorrow.3:53 PM Apr 30th from twidroid # MU vs Arsenal, exciting...2:06 PM Apr 29th from twidroid # Got a short tel interview just now.11:46 AM Apr 29th from TwitterRide # Swine flu is in London3:21 PM Apr 28th from TwitterRide # My calibration is running overnight.8:06 AM Apr 28th from TwitterRide # Volatility Forecasting and Trading http://tinyurl.com/cgffv24:47 AM

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224

Apr 28th from twitterfeed # Why do only headhunters contact me? :)9:34 AM Apr 27th from TwitterRide # @cosbeta agree.7:34 AM Apr 27th from TwitterRide in reply to cosbeta # Terrible monday morning. Coupled ewma makes me dizzy.6:39 AM Apr 27th from TwitterRide # think about my future over several bottles of beer8:36 AM Apr 26th from web # prepare Tier 1 general5:56 AM Apr 26th from TwitterRide # finally finished exam, henghenghahie10:57 AM Apr 25th from TwitterRide # got lost, finally am here. waiting outside of classroom.7:13 AM Apr 25th from TwitterRide # on the train to univ of greenwitch for visa english test, have to leave uk if fails. bless myself. Tags - twitter

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225

Stress test analysis
In recent months and years both practitioners and regulators have embraced the idea of supplementing VaR estimates with stress-testing. Today The Federal Reserve is postponing the release of stress tests on the biggest U.S. banks. Risk managers are beginning to place an emphasis and expend resources on developing more and better stress test analysis. Here is a good introductory paper aiming to give you a rough idea how to do stress test, to help demystify stress tests, and illustrate their strengths and weaknesses. The author use an Excel-based exercise with institution-by-institution data through stress testing for credit risk, interest rate and exchange rate risks, liquidity risk and contagion risk in the design of stress testing scenarios. The purpose of the workbook is to illustrate basic stress tests (and related tools) that can be used to assess risks in a small and relatively non-complex banking system, using a realistic (but fictional) example. Paper is available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=973989&rec=1&srcabs=181931. Tags - stress-testing

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226

Exotic Options Calculator
MG Soft Exotic Options Calculator is a freeware software to calculate the option value and greeks of vanilla and exotic options, mainly using Monte Carlo simulation.

The software supports the following types of options at the moment. Vanilla Options (using standard Black-Scholes formulae). Binary (Cash-or-nothing) Options (using standard analytical formulae). Asian Options (using Monte Carlo simulation). Barrier Options (using Monte Carlo simulation). Lookback Options (using Monte Carlo simulation). ... download at products_options_calculator.aspx Tags - calculator , exotic , option http://www.mgsoft.ru/en/

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227

Finite Difference Method for EXCEL
Finite difference method has been repeatedly introduced to solve partial differential equation (PDE), for example, in past entries Crank-Nicholson finite difference solution of American option, Crank-Nicolson for a European put, PSOR for American option, etc. here is a Finite Difference Method for EXCEL addin which contains macro to solve numerically partial differential equations (PDE) and ordinary differential equations (ODE) with the Finite Differences Method (FD). Seems it can only be applied for two dimensional problem, but should be enough for normal cases me meet. Document and macro are at: http://digilander.libero.it/foxes/diffequ/ fdsolver_review.htm Tags - pde , finite-difference

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228

Parisian option pricer
Parisian option might sound unfamiliar to you, it is basically a barrier option but becomes activated only after stock prices have spent a certain continuous, pre-decided time, called a window, above or below the barrier. One of possible motivations for the existence of the Parisian option, as stated in Haber, Schoenbucher, and Wilmott (1999) is: "...there is a need to make the option more robust against short-term movements of the share price..., in particular, it is far harder to effect the triggering of the barrier by manipulation of the underlying..." Taking an up barrier Parisian option as an example, the barrier time tau is defined as the length of time the stock prices have been above the barrier in the current excursion tau := t − sup {s <= t|S(s)<= L} with up barrier L, tau measures the difference between the current time t and the last time the stock price S below L, the call feature is activated only if tau>= D, with D being barrier window. Interested reader shall download a Parisian option pricer at http://paul.wilmott.com/software.cfm, where the authors price Parisian options by a finite-difference solution of a three-dimensional partial differential equation. Tags - parisian , option

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229

Volatility Forecasting and Trading
Excel spreadsheets of the course Volatility Forecasting and Trading taught by Professor Ser-Huang Poon at Manchester business school, mainly including: Estimation and Forecasts : What is Volatility? Volatility estimation Data frequency vs. reference period Realised volatility, quadratic variation and bipower variation Market microstructure issue Volatility Forecast and Evaluation Error statistics Test for significant difference Regression based efficiency tests Volatility Time series models Historical vol model Exponential smoothing, EWMA, Regime switching ARCH GARCH, IGARCH, EGARCH, GJR-GARCH Short vs. Long memory models Stochastic Volatility Models Extension to Multivriate and Jumps VaR (Value at risk) ... more about pdf lectures and excel sample codes are http://www.personal.mbs.ac.uk/spoon/ VolatilityForecastingAndTrading.htm http://www.personal.mbs.ac.uk/spoon/DataProgrammes.htm Tags - volatility at:

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230

LAPACK++: High Performance Linear Algebra
LAPACK++: A Design Overview of Object-Oriented Extensions for High Performance Linear Algebra. LAPACK++ (Linear Algebra PACKage in C++) is a software library for numerical linear algebra that solves systems of linear equations and eigenvalue problems on high performance computer architectures. Computational support is provided for supports various matrix classes for vectors, non-symmetric matrices, SPD matrices, symmetric matrices, banded, triangular, and tridiagonal matrices; however, it does not include all of the capabilities of original f77 LAPACK. Emphasis is given to routines for solving linear systems consisting of non-symmetric matrices, symmetric positive definite systems, and solving linear leastsquare systems. Download at http://math.nist.gov/lapack++/ Tags - algebra

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231

Selected source this week
Had a nice weekend? Just had an English test for UK Tier 1 General visa, feel relaxed now. Ok, selected sources this week for you, take a look if interested. The Innovative Forex Platform - Download for FREE! More than investment news... In-depth Investing Analysis & Trusted Opinion. GET YOUR FREE TRIAL NOW! Finance Career: Learn about finance firm profiles, finance jobs, finance career message boards and more. Join The Investing Social Network TradingSolutions: Financial analysis and investment software that combines technical analysis with neural network and genetic algorithms. Tags - source

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232

Download historical stock price
A friend of mine asks me how to download stock historical price automatically with Excel, here are two ways I have played: 1, using Excel 2003/2002 Add-in to download from MSN Money Stock Quotes. This add-in for Microsoft Office Excel 2003 and Microsoft Excel 2002 allows you to get dynamic stock quotes from the MSN Money Web site. The add-in allows you to easily gather and study the stocks of interest to you. http://www.microsoft.com/downloads/ details.aspx?FamilyID=485FCCD8-9305-4535-B939-3BF0A740A9B1&displaylang=en 2, using the following macro to download from Yahoo finance. where you have to input start, end date and stock symbol Sub GetData() Dim DataSheet As Worksheet Dim EndDate As Date Dim StartDate As Date Dim Symbol As String Dim qurl As String Dim nQuery As Name Application.ScreenUpdating = False Application.DisplayAlerts = False Application.Calculation = xlCalculationManual Set DataSheet = ActiveSheet StartDate = DataSheet.Range("B1").Value EndDate = DataSheet.Range("B2").Value Symbol = DataSheet.Range("B3").Value Range("C7").CurrentRegion.ClearContents qurl = "http://ichart.yahoo.com/table.csv?s=" & Symbol qurl = qurl & "&a=" & Month(StartDate) - 1 & "&b=" & Day(StartDate) & _ "&c=" & Year(StartDate) & "&d=" & Month(EndDate) - 1 & "&e=" &_

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233

Day(EndDate) & "&f=" & Year(EndDate) & "&g=" & Range("E3") & "&q=q&y=0&z=" & _ Symbol & "&x=.csv" Range("b5") = qurl QueryQuote: With ActiveSheet.QueryTables.Add(Connection:="URL;" & qurl, Destination:=DataSheet.Range("C7")) .BackgroundQuery = True .TablesOnlyFromHTML = False .Refresh BackgroundQuery:=False .SaveData = True End With Range("C7").CurrentRegion.TextToColumns Destination:=Range("C7"), DataType:=xlDelimited, _ TextQualifier:=xlDoubleQuote, ConsecutiveDelimiter:=False, Tab:=True, _ Semicolon:=False, Comma:=True, Space:=False, other:=False Range(Range("C7"), Range("C7").End(xlDown)).NumberFormat = "mmm d/yy" Range(Range("D7"), Range("G7").End(xlDown)).NumberFormat = "0.00" Range(Range("H7"), Range("H7").End(xlDown)).NumberFormat = "0,000" Range(Range("I7"), Range("I7").End(xlDown)).NumberFormat = "0.00" End Sub

In Matlab there is build-in function named "fetch" for requesting data from Yahoo! data servers. Tags - download , data

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234

Neural Network source code
Neural network matlab source code accompanying the book Neural Networks in Finance: Gaining Predictive Edge in the Market by professor Paul D. McNelis. This book has got wonderful review like “This book clarifies many of the mysteries of Neural Networks and related optimization techniques for researchers in both economics and finance. It contains many practical examples backed up with computer programs for readers to explore. I recommend it to anyone who wants to understand methods used in nonlinear forecasting.”– Blake LeBaron, Professor of Finance, Brandeis University”. Presumably a worthyreading one. Download the Neural Network matlab source code and several paper at the author's webpage: http://www.bnet.fordham.edu/mcnelis/ recent.htm or try using TradingSolutions: Financial analysis and investment software that combines technical analysis with neural network and genetic algorithms. Download TradingSolutions Tags - neural-network

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235

Managing Diversification
Needless to say, diversification plays a pivotal role in investment, not only for risk management, but for return generation. Attilio Meucci and his colleagues have another wonderful paper on managing diversification: Quotation We propose a unified, fully general methodology to analyze and act on diversification in any environment, including long-short trades in highly correlated markets. First, we build the diversification distribution, i.e. the distribution of the uncorrelated bets in the portfolio that are consistent with the portfolio constraints. Next, we summarize the wealth of information provided by the diversification distribution into one single diversification index, the effective number of bets, based on the entropy of the diversification distribution. Then, we introduce the mean-diversification efficient frontier, a diversification approach to portfolio optimization. Finally, we describe how to perform meandiversification optimization in practice in the presence of transaction and market impact costs, by only trading a few optimally chosen securities.

Click for codes fileexchange/23271 Tags - diversification

http://www.mathworks.com/matlabcentral/

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236

Forecast Volatility with Regime-Switching GARCH Models
Volatility estimation and prediction is crucial for risk management, for example, the portfolio's Value at Risk (VaR) and expected shortfall are partly decided by your volatility estimated, by partly I mean other factors, like dependence structure decide their values as well. GARCH model is one of the popular models for volatility estimation, you might argue volatility regime should also be included to your model given the totally different performance (hence different parameters) between low volatility regime and high volatility regime. Here is a good paper comparing a set of different standard GARCH models with a group of Markov Regime-Switching GARCH (MRS-GARCH) in terms of their ability to forecast the US stock market volatility at horizons that range from one day to one month. To take into account the excessive persistence usually found in GARCH models that implies too smooth and too high volatility forecasts, in the MRS-GARCH models all parameters switch between a low and a high volatility regime. Both gaussian and fat-tailed conditional distributions for the residuals are assumed, and the degrees of freedom can also be state-dependent to capture possible time-varying kurtosis. Download the paper and matlab codes at http://www.bepress.com/ snde/vol9/iss4/art6/. PS: In the codes the author multiply returns by 100 for optimization (hopefully for a faster convergence), I personally found the parameters are unstable with the change of this number. no idea if it is my data problem. Tags - garch , regime

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237

Scholarship to apply for
ALMOST NOTHING POSITIVE, these are the most heard words recently whenver I have a talk with my former colleagues and classmates, as you might recall from my post "shit happens everywhere", I will lost my current job soon as well. Yes, it is true, i was told i could only stay in my office till the end of June, which means I have to either look for a new job, for instance, Finance Career: Learn about finance firm profiles, finance jobs, finance career message boards and more. , or find another way out, for instance, study for a MFE or PhD. Staying at university for a while is no doubt a good way to decrease the impact of credit crisis on you, since the job hunting competition gets tough and tough, even a humble position requires "ideally an applicant with PhD degree with 2 or more years work experience". How to choose a good MFE or PhD in QF program is natually a question everybody has before application, here by good program I mean good placement with accepted tuition fee (PS: I saw two weeks ago The University of Hawai’i Shidler College Of Business is offering one year Master of Financial Engineering program with scholarship available, search in Google if you are happy with the location). I happen to see such a rank, which might be suggestive to you, although this rank is too old,

After you are lucky enough to get an admission from one of these Top programs, you might wonder how to arrange money for enrolling in a graduate school? Is money a real concern for you? Getting an admission to a graduate is not an easy job but the big cheese is to collect money to pay tuition. All students would be pleased to recognise that state and private lenders offer awards and scholarships for you. It doesn't matter whether you have just finished undergraduate level or have been working for some years. The scholarships are available almost for all but standards changes within financial institutions. Some lenders award on merit basis with a proved track record in undergraduate school and some grants are provided on the basis of the amount required for the full graduate school degree program. To apply for a scholarship is not that easy as it looks to be. one source to search and apply for a scholarship I have ever tried is Find scholarships today at ScholarshipExperts.com providing US & international students with customized scholarship info!

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238

, should you are interested, please take a try. Good luck to all of you (including me) for job hunting or graduate school application. Enjoy life. Tags - scholarship , mfe

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239

Salih Neftci (1947-2009) passed away
Bad news for all of us, Professor Neftci passed away yesterday in Geneva.

He is a such an important person to my quant-related life, his book Introduction to the Mathematics Of Financial Derivatives is so clear and easy to understand for anybody without any stochastic background, which helped me to work through my first master thesis at 2004; and his another book Principles of Financial Engineering is almost a mustowned one... Silent Salute! Tags - salih-neftci

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240

Binary Option Calculator on Gphone
Equity Option Calculator on Gphone was shared in this post. The author has published a binary option calculator for Gphone, as the author's webpage says: Quotation Binary Option Calculator is for advanced options traders. Calculate option prices and Greeks for discontinuous payoff functions. Can price any combination of: Calls or Puts European or American style Cash-or-nothing or Asset-or-nothing Option value or Implied volatility.

To download, either search "Binary Option" on Gphone, or simply go to the author's blog http://jwdevg1.blogspot.com/2009/04/binary-optioncalculator-published.html Tags - gphone , calculator , binary , option

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241

Stress testing under Black Litterman framework
Black Litterman model has been used largely for portfolio construction, one of the major differences with Markowitz mean-variance Efficient Frontier model, among others, is BL allows users to input certain views under confidence level on assets, say, "I am 85% confident S&P 500 will have 5% excess return", or "Bond index will outperform equity index by 1.5% certainly", etc. If you are totally fresh to Black Litterman model, click here. Most of paper on Black litterman are about how to construct an optimized portfolio, and this portfolio can be adjusted under given risk constraint, Attilio Meucci, going further step, has a paper incorporating natually stress testing and scenerio analysis under Black Litterman framework, they propose a unified methodology to input non-linear views from any number of users in fully general non-normal markets, and perform, among others, stress-testing, scenario analysis, and ranking allocation. Paper "Fully Flexible Views: Theory and Practice" and Matlab codes are at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1213325 and http://www.mathworks.com/ matlabcentral/fileexchange/21307. Just finished an interview today, Balabala one and half an hour without even a detailed technical question, I suspect if it is really a Quant related job position or the desire the company indeed needs a people. Anyway, fighting. Tags - black-litterman , stress-testing

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242

Play with cointegration
Cointegration is the foundation upon which pair trading (“statistical arbitrage”) is built, basic cointegration function can be easily found in any popular statistical software package, for instance, Unit root and cointegration tests for time series data (urca) in R. Should you are interested in playing with advanced cointegration test, go there, for instance, estimating a threshold bi-variate VECM, and testing for the presence of a threshold. Focusing on 3 publications "Tests for parameter instability in regressions with I(1) Processes." Journal of Business and Economic Statistics (1992). "Residual-based tests for cointegration in models with regime shifts." with Allan Gregory, Journal of Econometrics, (1996). "Testing for two-regime threshold cointegration in vector error correction models," with Byeongseon Seo, Journal of Econometrics (2002). Tags - cointegration

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243

Estimation of Structured t-Copulas
A collection of codes on Copula estimation and simulation is shown here, where you can find parameter estimation for t-copula, Grouped-t copula, asymmetric copula, etc., another simple recursive routine to estimate by maximum likelihood the correlation matrix and the degrees of freedom for structured t-copula is shared at http://www.mathworks.com/matlabcentral/fileexchange/19751, the authors impose extra structure on the correlation matrix in the estimation process, where the number of variables is large as compared to the number of observations. The paper "Estimation of Structured t-Copulas" is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1126401, more paper and codes are at the author's homepage: http://www.symmys.com/AttilioMeucci/Home/Home.html Tags - copula

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244

GMM and Empirical Likelihood
Generalized method of moments (GMM) estimation has got more and more popularity for linear and non-linear models with applications in economics and finance. GMM estimation was formalized by Hansen (1982), and since has become one of the most widely used methods of estimation for models in economics and finance. Unlike maximum likelihood estimation (MLE), GMM does not require complete knowledge of the distribution of the data. Only specified moments derived from an underlying model are needed for GMM estimator. In some cases in which the distribution of the data is known, MLE can be computationally very burdensome whereas GMM can be computationally very easy. The log-normal stochastic volatility model is one example. In models for which there are more moment conditions than model parameters, GMM estimation provides a straightforward way to test the specification of the proposed model. This is an important feature that is unique to GMM estimator. Download Programs for GMM and Empirical Likelihood http://www.ssc.wisc.edu/~bhansen/progs/progs_gmm.html at

Finally, Happy easter day to all of you, while I will have to stay at home preparing interview

Tags - gmm

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245

Nonparametric Density Estimation
A simple, straightforward way to estimate density nonparametrically is kernel density estimator, for instance, in R a built-in function density() is for this, with different kernel choices "gaussian", "epanechnikov", "rectangular", "triangular", "biweight", "cosine", and "optcosine". Should you are unhappy with this function and eager for an extention, take a look at the following papers and associated codes: "Exact Mean Integrated Squared Error of Higher-Order Kernels" Econometric Theory (2005). "Bandwidth Selection for Nonparametric Distribution Estimation" unpublished working paper (2004). "Nonparametric Estimation of Smooth Conditional Distributions" unpublished working paper (2004). "Interval Forecasts and Parameter Uncertainty" Journal of Econometrics (2006). http://www.ssc.wisc.edu/~bhansen/progs/progs_np.html Tags - density

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246

Newey West estimator
This function returns the Newey-West estimator of the asymptotic variance matrix. What is Newey West? it was proposed by the author Whitney K. Newey and Kenneth D. West in their paper "A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix" at 1987. It rests on considerations of the so-called “frequency domain representation” of the Ft’s and also of a number of notions associated with nonparametric estimation procedures. One possible application of Newey West estimator is for long run variance covariance calculation; another might be for the improvement of OLS regression when the variables have heteroskedasticity and autocorrelation. Download at Matlabcode.htm Tags - covariance http://www.homepages.ucl.ac.uk/~uctprgi/

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247

Allan variance
Long term memory has frequently been observed in time series. Statistical theory for long term memory stochastic processes is largely different from the standard time series analysis, which assumes short term memory. The Allen variance is a particular measure of variability developed for long term memory processes. Taken from Wikipedia, "The Allan variance, named after David W. Allan, is a measurement of stability in clocks and oscillators. It is also known as the two-sample variance. It is defined as one half of the time average of the squares of the differences between successive readings of the fractional frequency error sampled over the sampling period." I am not quite convinced how to use Allan variance for stock returns, that is, given stock return time series, can we better estimate its long term variance by Allan variance? any idea? Allan variance Matlab code is easy to write and can also be downloaded at: http://www.alamath.com/ index.php?option=com_content&task=view&id=19&Itemid=31

Tags - variance

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248

Black Scholes on excel
Excel Add In (Visual Basic) for Black Scholes, Numerical Integration and Probability Density Estimation This is a MS Excel Add In (with Visual Basic Source Code) for several separated issues: 1. Numerical Integration 2. Golden Section Search for Max/Min 3. Probability Density Estimation Using Kernels 4. Black Scholes Option Valuation, Implied Volatility and Option Greeks Many of these functions can also be used in standalone Visual Basic applications. Read Installation and Use Instructions. Download Excel Add-In and Visual Basic source code as a zip file or as tar.gz file at http://www.iimahd.ernet.in/~jrvarma/software.php Tags - black scholes

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249

Financial Engineering Toolbox
A toolbox accompanying the book "Financial Engineering: Derivatives Pricing, Computer Simulations, Market Statistics", (couldn't find the book on Amazon, surprisingly), which provides a comprehensive overview of financial markets and a cutting-edge discussion of mathematical and numerical methods employed in financial engineering. The primary topics covered include: in-depth reporting of derivatives' pricing models, constructions and practical application of exotic options, and market statistics with a comprehensive review of time series models. Selected chapters: 1. Introduction 2. Financial markets 3. Securities 4. Basic derivatives (forwards, futures, swaps and options) 5. Financial mathematics of discrete models 6. Financial mathematics of continuous models 7. Term structure models 8. Construction and pricing of exotic derivatives 9. Market statistics 10. Alternative models

Downloading at: http://www.im.pwr.wroc.pl/~hugo/stronaHSC/ Podstrony/ksiazki/if_gb.html Tags - toolbox

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250

Apply student credit card
This is a review of week. College shall be a time of studying, a time of risk taking, and a time of tension. Most of those tensions stem from bills. From student loans to schoolbooks, college life costs expensive. A lot of pupils apply for for student credit cards at school. Student credit card is given to any member of the academic organizations disregarding whether he or she is part time or full time, undergraduate or graduate student, international students who are exchanging, working or learning in the United States, university staffs either full time or part time faculty and executives who are 16 year old age and above. For those students who are less than 18 years of age accepted from the parents or the guardian is compulsory. Applying for a student credit card is suggested because it can help pupils in making their accredit history which might be useful in the future particularly in finding loans like automobile, real estate or even immediate payment loans. Most of international students and scholars discover it actually hard to receive a credit card as they lack a credit card history. For them to make a credit card history they ought to have a credit card or at the least consume a history in paying back debts of whatever case. It is indeed a frustrative position specially if you are seriously in need of financial help.

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251

Shit happens everywhere
Today is the first day of G20 summit, is also the strongest protest in the last fews days, which will last at least till tomorrow. Company suggests us to have dress down to avoid unnecessary conflict with protestors, (for those of you who have no idea what's happened or how seriou this protest is in London recently, what I can tell you is the slogan of a protestor group being "Burn a banker"), I do enjoy dress down, wearing jeans, t-shirt and looking relaxed (although not). Protest itself is fair enough and welcomed, everyone has the right to speak out his or her own views, this is a kind of freedom we should cherish, but freedom does not mean you can do anything you want. I fully understand the feeling of losing job (I myself will be one of them soon), however, this should never be an excuse of blaming other people, nothing hurts us, as foreigners, worse than hearing "fucking foreigners" in the broad street. Fortunately, those people are only a few, shit happens everywhere.

there is still "hero"

more pics can be ?q=london+protest&s=rec

found

http://www.flickr.com/search/

Tags - protest

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252

MFE toolbox
Oxford MFE package was shared there, here is a new MFE Matlab toolbox accompanying the book "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach", which is grouped into the following seven categories: 1. Time series, 2. Distributions, 3. Tests and goodness-of-fit functions, 4. Markov regime switching (MRS) models, 5. GUI functions, 6. Demos, 7. Data files. Selected functions are: armaacvf - Autocovariance function of an ARMA process. average - Weighted average. decompB - Moving average with rolling volatility daily data decomposition. rollingvol - Annual rolling volatility. empcdf - Empirical cumulative distribution function (cdf). hypest - Estimate parameters of the hyperbolic distribution. nigcdf - NIG cumulative distribution function (cdf). nigest - Estimate parameters of the NIG distribution. nigloglik - NIG log-likelihood function. nigpdf - NIG probability density function (pdf). stabcdf - (Alpha-)stable cumulative distribution function (cdf). stabcull - Quantile parameter estimates of a stable distribution. stabreg - Regression parameter estimates of a stable distribution. edftests - Empirical distribution function (edf) goodness-of-fit statistics (Kolmogorov and Anderson-Darling). Downloading the toolbox at: http://www.im.pwr.wroc.pl/~rweron/ MFE.html More about the book at: http://www.riskey.cn/2009/04/modeling-andforecasting-electricity-loads-and-prices-a-statistical-approach-the-wileyfinance-series-hardcover/ Tags - mfe , matlab , toolbox

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253

Financial data download
Financial data is the center of quantitative finance research, undoubtedly. Here is a list of free financial data for downloading, for more please check pages http://www.quantnet.org/forum/ showthread.php?t=2159 and http://www.wilmott.com/ messageview.cfm?catid=19&threadid=14748, enjoy. For instance: 1. ADVFN offer FREE streaming stocks and shares data form around the world. SEE MORE 2. Historical FX Rates: http://oanda.com/convert/fxhistory 3. Historical Stock Prices: http://finance.yahoo.com/q/hp?s=yhoo 4. Recent LIBOR rates: BBA - British Bankers' Association - BBA LIBOR 5. Some Implied Volatilities: http://www.ivolatility.com 6. Delayed Commodities: http://www.liffe-commodities.com. 7. US Fundamentals: http://www.sec.gov Tags - data

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254

Independent Components Analysis
The FastICA package is a free (GPL) MATLAB program that implements the fast independent component analysis. Independent component analysis (ICA) or blind source separation is a modern signal processing technique to multivariate financial time series such as a portfolio of stocks to multivariate financial time series such as a portfolio of stocks. The key idea of ICA is to linearly map the observed multivariate time series into a new space of statistically independent components (ICs). This can be viewed as a factorization of the portfolio since joint probabilities become simple products in the coordinate system of the ICs. The major difference between Independent component analysis and more familiar principal component analysis (PCA) is in the type of components obtained. The goal of PCA is to obtain principal components which are uncorrelated. Moreover, PCA gives projections of the data in the direction of the maximum variance. The principal components (PCs) are ordered in terms of their variances: the first PC defines the direction that captures the maximum variance possible, the second PC defines (in the remaining orthogonal subspace) the direction of maximum variance, and so forth. In ICA however, the aim is to obtain statistically independent components. What's more, PCA algorithms use only second order statistical information (variance dominates). On the other hand, ICA algorithms may use higher order2 statistical information for separating the signals. To download FastICA and more about the book Independent Component Analysis check http://www.cis.hut.fi/projects/ica/ fastica/, the book can be bought at Amazon through: Independent Component Analysis Tags - multivariate

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255

Equity option calculator on Gphone
I bought a Gphone several months ago, its main attraction to me is Gmail everywhere as long as there is signal since I can't use Gmail box with my PC at company (my boss won't read my blog). Another shining point of Gphone is its Android platform and Market, where people can publish applications on entertainment, finance, news, weather, etc. Yesterday I downloaded a free application named Equity option calculator, a simple equity options pricer for European style no dividend calls and puts using your own inputs under Black Scholes model framework. Alternatively enter a ticker and let the market data calibrator fill in pricing parameters. solve for the option value or implied volatility. The pricer also calculates option sensitivities (Greeks). Although the supported options are limited, it is fun to play a derivative calculator wherever as you go, isn't it? the code is written in Java that I am not familiar with, but have downloaded The Android SDK for developers to see if I am able to build an application covering more options like Matlab-GUI equity derivative calculator does. if you happen to own a Gphone, this option pricer can be found by typing "equity option calculator" in Market. Have fun. Publisher's blog: http://jwdevg1.blogspot.com/ Tags - calculator , gphone , option

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256

Kernel principal component analysis
EasyPCA is a small educational program intended to help to understand how the Principal Component Analysis (PCA) algorithm works. It has been coded in a very modular way in order to make it easy to understand the code. PCA is a useful statistical technique that has found application in fields such as face recognition and image compression, and is a common technique for finding patterns in data of high dimension. For more detail please check http://transp-or2.epfl.ch/pagesPerso/ javierFiles/software.php Tags - pca

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257

Create your own websites
This is a review of the week. You are perhaps a modest enterprise owner who already holds a website, You might be a SOHO work-at-home self-employee who would like to make additional revenue for yourself. You may be an cyberspace seller who prefer to bring affiliate or marketing to the advanced level. Disregarding what you wish to do on internet you're likely becoming to need to understand how to make a website that operates. While it refers to constructing websites there's many confusion about the best method to do. Nevertheless, it is crucial to choose what your purpose is prior to do it, even before you register a host name! Should you just prefer to "set up a website" and do not concern whether or not it gets any visitor or has any possibility to make you an income, that's easy. There are a lot of free lunch services that will allow you produce a personal website to share experiance or make friends online. However, if you prefer to create website that looks appealing or more professional, you will have to plan a little more carefully. BlueVoda is a drag & drop Web site builder that enables a user with almost no experience to build a fantastic Web site. No HTML, PHP or any other coding knowledge is demanded. From a simple homepage to a fancy WEB2.0, you can also own one with few simple steps.

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258

VIX calculation
CBOE Volatility Index, VIX, was originally designed to measure the market’s expectation of 30-day volatility implied by at-the-money S&P 100 Index (OEX) option prices. Now VIX is used to reflect a new way to measure expected volatility, one that continues to be widely used by financial theorists, risk managers and volatility traders alike. The new VIX is based on the S&P 500 Index (SPX), the core index for U.S. equities, and estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices. By supplying a script for replicating volatility exposure with a portfolio of SPX options, this new methodology transformed VIX from an abstract concept into a practical standard for trading and hedging volatility. Introduced by this paper http://www.cboe.com/micro/vix/ vixwhite.pdf, VIX calculation is done step-by step as: 1), Select the options to be used in the VIX calculation; 2), Calculate volatility for both near-term and next-term options; 3), Calculate the 30-day weighted average of variance, then take the square root of that value and multiply by 100 to get VIX. Matlab code: http://docs.google.com/Doc?id=ddb2j6dw_12fjk57bfx Tags - volatility , vix

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259

Top Quant codes collection you shouldnt miss
To search and backup easier, I make a PDF file which includes so far most of entries of the Quantitative finance collector blog. This Quantitative finance codes list is partly what I have collected during my financial engineering learning journey. Most of the entries were written when I was at university, apparently many codes can not be used directly for a certain purpose, we can, certainly, learn the way the coders applied. Although I try best to check each file before recommendation, downloading and using are at your own risk. Should you are interested and would like to track my latest collection, please visit my blog or follow my twitter at http://www.twitter.com/a_biao. You can distribute this list as you want, the only wish from me is please ’do not change the sentences’ and leave the original links when you want to post somewhere, thank you. Downloading the PDF file at: http://www.mathfinance.cn/attachment/ QuantitativeFinanceCollector.pdf (right click and save as)

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260

Option pricing with excel
A nice paper on step-by-step option pricing with excel, VBA codes are included in the paper as well. The authors first briefly review the principles of pricing by no arbitrage in a binomial tree, and show how this can be implemented in Excel; then move to continuous-time model - Black scholes pricing model; after a short discussion on the parameter estimation issues, they turn to two numerical methods for pricing, which are Monte Carlo simulation and Finite difference for Partial differential equation (PDE); at last, option hedging is introduced, advantages and disadvantages of spreadsheets in general and Excel in particular are analyzed shortly. Download paper "Option pricing with the http://www.math.ku.dk/~rolf/REV.excelpaper.pdf Tags - option , excel Excel" at

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261

Cheap web hosting solution
This is a short review of web hosting. Many folks would like to own Web sites nowdays, however they concern about the cost. Purchasing the real domain name is really cheap, around 10 US dolloars you can get a fancy dot com name, therefore it's not actually a problem. What's crucial, although, is the hosting. it is meaningless to have a domain name should you do not go forward and make a site on it, begin appealing subscribers and customers, and do something to earn revenue. Even if you are merely blogging, you may not prefer to utilize the free services. If you are not blogging and you're indeed marketing a product or service, you truly can not bear free hosting. You'll have to own a Web site that allows more than what you are able to do on free services, most probably. There are dozens of ways to acquire that hosting, though, and the best way for most people is to use the Web Hosting service that accompanies the host name. Numerous corporations who sell domain names feature these hosting packages, and they aren't really expensive. For instance, 4 Cheap Web Hosting is a guide to the best rated affordable web hosting packages available online. Take a look if you have plan to own a site in the near future.

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262

Oxford MFE UCSD GARCH toolbox
The Oxford MFE Toolbox is the follow on to the UCSD GARCH toolbox. It has been widely used by students here at Oxford, and represents a substantial improvement in robustness over the original UCSD GARCH code, although in its current form it only contains univariate routines. Contents include: 1 Stationary Time Series 5 1.1 ARMA Simulation 1.1.1 Simulation: armaxfilter_simulate . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.2 ARMA Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.2.1 Estimation: armaxfilter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.2.2 Residual Plotting: tsresidualplot . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.2.3 Characteristic Roots: armaroots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.2.4 Information Criteria: aicsbic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.3 ARMA Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.3.1 Forecasting: arma_forecaster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.4 Sample autocorrelation and partial autocorrelation . . . . . . . . . . . . . . . . . . . . . . . 23 1.4.1 Sample Autocorrelations: sacf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.4.2 Sample Partial Autocorrelations: spacf . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.5 Theoretical autocorrelation and partial autocorrelation . . . . . . . . . . . . . . . . . . . . . 27 1.5.1 ARMA Autocorrelations: acf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.5.2 ARMA Partial Autocorrelations: pacf . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1.6 Testing for serial correlation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.6.1 Ljung-BoxQ Statistic: ljungbox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.6.2 LM Serial Correlation Test: lmtest1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2 Nonstationary Time Series 37 2.1 Unit Root Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.1.1 Augmented Dickey-Fuller testing: augdf . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.1.2 Augmented Dickey-Fuller testing with automated lag selection: augdfautolag . . . . 40 3 Vector Autoregressions 43

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263

3.1 Stationary Vector Autoregression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.1.1 Vector Autoregression estimation: vectorar . . . . . . . . . . . . . . . . . . . . . . . 43 3.1.2 Granger Causality Testing: grangercause . . . . . . . . . . . . . . . . . . . . . . . . 50 3.1.3 Impulse Response function calculation: impulseresponse . . . . . . . . . . . . . . 53 4 Volatility Modeling 57 4.1 GARCH Model Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 4.1.1 ARCH/GARCH/GJR-GARCH/TARCH/AVGARCH/ZARCH Estimation: tarch . . . . . . 57 4.1.2 Some behind the scenes choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4.1.3 EGARCH Estimation: egarch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.1.4 APARCH Estimation: aparch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 5 Density Estimation 71 5.1 Kernel Density Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Code and documention are available http://www.kevinsheppard.com/wiki/MFE_Toolbox Tags - garch at:

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264

Quant salary
Hutson has published its quant salary survey results in Asian market, http://china.hudson.com/documents/Hudson-Asia-Banking-FinancialServices-Salary-Information.pdf, focusing on Banking and Financial services sector. The figure looks not bad at all, given the terrible market of 2008. I have to say for many cases the quant salary does not mean the exact number the quant get, especially in China, other income exceeding salary is pretty possible. I also had a survey for quant salary in mainland, China, results are shown below (basic salary + bonus, about 1~3 years work experience in Chinese Yuan): number percentage of voters 50K ~ 80K 11.4% 80K ~ 100K 7.89% 100K ~ 120K 5.26% 120K ~ 150K 22.81% 150K ~ 200K 7.02% 200K ~ 300K 7.89% >300K 37.72% Considering the average annual salary for Chinese fresh master graduates is about 60K, quant salary is exicting, isn't it? Tags - salary

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265

Video lectures
Just share with you guys two free online video lecture sites I have recently used, both time- and cost- saving, isn't it? enjoy. http://videolectures.net/Top/Computer_Science/Machine_Learning/ http://videolectures.net/ Tags - video

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266

Asymmetric copula analysis
http://www.mathfinance.cn/Grouped-T-copula-simulation-estimation/ shared a sample code for grouped-t copula simulation, further, several copula estimation and simulation package can be found. But, most of the case we talk about an exchangeble copula due to its relatively easier to explain, however, it has limited applications especially in the area of credit risk, or derivative markets where asymmetric dependence plays a crutial role. For example, a desire to maintain the competitiveness of Japanese exports to the United States. with German exports to the United States. would lead the Bank of Japan to intervene to ensure a matching depreciation of the yen against the dollar whenever the Deutsche mark (DM) depreciated against the U.S. dollar. Such rebalancing behavior would also lead to greater dependence during depreciations of the DM and yen against the dollar than during appreciations. It is certainly natural to enquire whether there are extensions that are not rigidly exchangeble.

A scatter plot of the return of S&P 500 index and that of its implied volatility difference series is shown above, clearly the dependence is stronger in left-up corner than right-down corner. Interested reader shall refer to the following papers and Matlab codes for detail: Modelling Asymmetric Exchange Rate Dependence, 2006, International Economic Review, 47(2), 527-556. Paper (PDF), Abstract (HTML), Slides June01 (PDF), Code (MATLAB) -- This paper was previously circulated as “Modelling Time-Varying Exchange Rate Dependence Using the Conditional Copula”, University of California, San Diego, Discussion Paper 01-09. -- The Joe-Clayton and symmetrised Joe-Clayton copula density functions can be found here (PDF). Matlab functions for these can be found here. http://econ.duke.edu/~ap172/research.html

Tags - copula , asymmetric

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267

c++ for finance
A c++ class list for finance, specifically, a derivative calculator source code, is available, including: american_option_approximation: uses the Black Scholes formulae for European options, to approximate the values of American options. american_option_fudge: approximates the value of American Options as the value of the corresponding European option, plus the addition of a fudge factor binomial_option: typical binomial tree to price option value Bisection_Secant< functor, real > : This class is a child class of Bisection. The algorithm converges faster because it changes from the bisection to the secant algorithm /// on every other iteration european_option_pair : Black Scholes option pricing formulae for puts and calls ... Click for more and downloading http://acumenconsultinginc.net/ TechNotes/public_options/html/annotated.html Tags - option , c++

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268

WolframAlpha computational knowledge engine
You might have no idea who is Wolfram, but you might know Mathematica more or less, right, Wolfram is the computer scientist who has developed Mathematica. A recent post of his blog shows his another more ambitious project named Wolfram|Alpha will be available in May, 2009. What is Wolfram|Alpha? its own logo says WolframAlpha is a computational knowledge engine, It doesn't simply return results that contain (match) the keywords you search, like Google, Yahoo, or MSN live does, and it isn't only a giant database of knowledge, like the Wikipedia; Instead, Wolfram Alpha indeed computes the answers to the question you type in the "search" form. Simply put, it is a (computation + search) engine. Since the project will only be available for public after May, currently we can't test its efficiency and how magic it is. Can it return the value of "Black Scholes call option price with strike 10, asset price 10, time to maturity 1 year, interest rate 3%, and 25% annual volatility"? LOL, I am too demanding. Anyway, should you be interested, http://www.wolframalpha.com/ please check it at:

Tags - mathematica , wolfram

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269

Maximum likelihood estimation of CIR interest rate
Quotation The square root diffusion process is widely used for modeling interest rates behaviour. It is an underlying process of the well-known Cox-IngersollRoss term structure model (1985). We investigate maximum likelihood estimation of the square root process (CIR process) for interest rate time series. The MATLAB implementation of the estimation routine is provided and tested on the PRIBOR 3M time series.

PDF file with Matlab codes included: http://dsp.vscht.cz/ konference_matlab/MATLAB07/prispevky/kladivko_k/kladivko_k.pdf For those intested: a small re-organization of the blog has been undertaken, we moved all codes collection posts under category Quant code, which makes browse easier and more convenient (hopefully). In addition, we added Quant newssection where selected news and resources, focusing on Asian Quant markets, will be published. Hope this change won't bring trouble to you, thanks. Tags - cox ingersoll ross

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270

Compound option pricing
A compound option is simply an option on an option. The exercise payoff of a compound option involves the value of another option. A compound option then has two expiration dates and two strike prices. Take the example of a European style call on a call. On the first expiration date T1, the holder has the right to buy a new call using the strike price X1. The new call has expiration date T2 and strike price X2. The pricing of many other derivative instruments can be modeled as compound options. By visualizing the underlying stock as an option on the firm value, an option on stock of a levered firm that expires earlier than the maturity date of the debt issued by the firm can be regarded as a compound option on the firm value (Geske, 1979). On the expiration of the option (the first expiration date of the compound option), the holder chooses to acquire the stock or otherwise. The decision depends on whether the stock as a call on the firm value is more valuable than the strike price. Attached is a sample matlab code computing the value of a compound call option with the Black-Scholes pricing model using Geske's analytic formulas. Click to download Tags - compound , option

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271

Credit card bailout
A review of credit card bailout. It appears as if day-to-day at present that we hear about a government bought at bailout of additional major company. Numerous smaller commercial enterprise, as well as individual people, are left enquiring where is their bailout from the dishonest loaning practices of the depository financial institution and credit card corporations. In recent years, consumers have been promoted to Apply Credit Card for daily purchases, including groceries, fast food meals, and even the morning cup of coffee en route to office. All of these purchases, in addition the interest and fees appended, have only ramped up a huge pile of debt for the ordinary cardholder. This is not much unlike the debt built up by companies, who now bear their hand out, calling for for help. And the government appears very amenable to offer that help, at the long-run expense of the American taxpayer. There is nevertheless, a bailout of forms for personal credit card debt. This isn't a government platform, no more taxpayer bucks are ill-used, and you will not find out about it on the nightly news show. As a matter of fact, there is really no money needed in this bailout. Through debt elimination, a person can lawfully and entirely discharge 100% of their debts from credit cards and consumer loan*. Totally without afresh loan, subsidy, or government takeover. Tags - credit , bailout

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272

CDS Standard Model
JP. Morgan has release its CDS pricing and analysis model code! Quotation The ISDA CDS Standard Model The ISDA CDS Standard Model is a source code for CDS calculations and can be downloaded freely through this website. The source code is copyright of ISDA and available under an Open Source license. Background As the CDS market evolves to trade single name contracts with a fixed coupon and upfront payment, it is critical for CDS investors to match the upfront payment amounts and to be able to translate upfront quotations to spread quotations and vice versa in a standardized manner. Implementing the ISDA CDS Standard Model and using the agreed standard input parameters will allow CDS market participants to tie out calculations and thus improve consistency and reduce operational differences downstream.

Besides the code for CDS, a Yield Curve Specifications PDF file about how the yield curve is constructed and calculated is also available at the webpage, enjoy! http://www.cdsmodel.com/ Tags - cds , credit

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273

Modelling the implied volatility surface
The volatility surface implied by option prices presents a structure that changes over time. The aim of this paper is to present a framework to model the implied volatility of the FTSE options in real time, and to present a prototype application that implements this framework. The authors adapt the parametric models presented in Dumas et al (1998) to estimate the surfaces across moneyness instead of across strikes, they discuss how this framework can be used in applications of option pricing and risk management. Paper and attached matlab/VB/mathematica http://www.amadeo.name/working_papers/ volatility_surface_may04.pdf Tags - volatility , surface , smile codes:

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274

Automatic Code Testing
Everyday you write your quantitative finance code, test the code, crash; then modify it, test it, maybe crash again, and so on. Is there an automatic testing tool doing these boring, repetitive procedures for you? YES. Automatic Testing is a great tool to increase productivity and save time. It helps you catch bugs early by allowing frequent retesting of your code as you develop. This prevents code "regressing" in the sense of reintroducing previously identified and fixed bugs in later updates to your code. Automatic Testing is made simple and quick through the use of unit testing frameworks, the most popular amongst these is xUnit which has implementations in most modern programming languages. For Matlab we have a version of mlUnit available for your use. In python, pyUnit is part of the standard library and is available as a standard package unittest. For R there is RUnit.

Main Benefits: much less time spent chasing bugs and debugging; higher quality of code and software; provides documentation of which functionality has been tested; greater confidence to make changes to existing code since unit tests will catch incompatibilities early. Sounds nice? Downloading packages at: http://mlunit.dohmke.de/Main_Page for Matlab http://docs.python.org/library/unittest.html for Python http://cran.r-project.org/web/packages/RUnit/index.html for R. Tags - code , test

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275

Managing MATLAB Projects
Whenever I opened my m files with Matlab, I was tired of looking for them one by one; the situation became worse for a big project with dozens of small m files. You might argue what we can do is to save all files of one project at a separated directory, well, that’s what I did, but with the expanding of project, sub-projects are created and some files are inter-correlated among those sub-projects. It therefore becomes unrealistic to separate those files any more. Is there a project management tool like Visual C++ does for cpp/hpp? mlProj is one good application I recently found. mlProj is a tool for managing MATLAB projects. It considers • all opened m-files, • all figure windows, • the MATLAB path, and • the MATLAB workspace, which are saved when a project is closed, and loaded when the project is opened. The projects are shown as a tree, which provides simple access to directories and files of the active project. The features include • add a new project, • open, save and close projects, • open files in the MATLAB editor, • delete files, directories and projects, • rename files and directories, • reload the tree view, and • add user-defined items to the mlProj menu. downloading link and userguide are at:http://mlproj.dohmke.de/ Main_Page Tags - matlab

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276

wavelet analysis
WaveLab is a collection of Matlab functions to implement a variety of algorithms related to wavelet analysis. A partial list of the techniques made available: orthogonal and biorthogonal wavelet transforms, translation-invariant wavelets, interpolating wavelet transforms, cosine packets, wavelet packets, matching pursuit, ...... downloading at http://www-stat.stanford.edu/~wavelab/ Wavelab_850/index_wavelab850.html Tags - wavelet

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277

Historical Volatility Estimation
Dozens of ways to calculate historical volatility, let alone volatility (I mean, implied volatility, stochastic volatility, for instance.). Here is the MATLAB code that one could use to estimate historical volatility using different methods Historical Close-to-Close volatility Historical High Low Parkinson Volatility Historical Garman Klass Volatility Historical Garman Klass Volatility modified by Yang and Zhang Historical Roger and Satchell Volatility Historical Yang and Zhang Volatility Average of all the historical volatilities calculated above Enjoy. http://tradingwithmatlab.blogspot.com/2008/06/estimatehistorical-volatility.html Tags - volatility , stochastic

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278

Several matlab packages
Several matlab packages to download, including: Complexity - for estimating various temporal and spatial signal complexities Denoising - for removing noise from signals Kalman filter - for Kalman filter Independent Components - for ICA based on `accelerated' covariant algorithm (natural gradient) Gaussian mixture models - for analysis of Gaussian mixture models for data set clustering etc. MinEnt clustering - for minimum-entropy (maximum certainty) partitioning Extreme Value Theory - for detecting novelty using extreme value theory Publications also are at: http://www.robots.ox.ac.uk/~sjrob/Outgoing/ software.html Tags - filter , extreme

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279

Generalized Linear Models in Matlab
glmlab is a free MATLAB toolbox for analysing generalized linear models. glmlab can fit all types of generalized linear models, including (among others): multiple regression; log-linear models; logistic regression; and weighted regression. glmlab includes the following error distributions: normal (Gaussian); gamma; inverse Gaussian; Poisson; and binomial. You can also specify your own error distributions with just a little bit of MATLAB programming.

http://www.sci.usq.edu.au/staff/dunn/glmlab/glmlab.html

Tags - regression

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280

Matlab implementation of cointegration tests
Matlab of the paper "Implementing Pesaran-Shin-Smith" This first year paper is based on Pesaran et al. (2000) who generalise the cointegration tests introduced by Johansen to include exogenous I(1) variables in a VECM model. It reiterates the proofs for their central test statistics and presents them in a less dense format: Following Pesaran et al. (2000), this paper focuses on the derivation of the corresponding cointegrating rank tests, by first introducing a VAR model, subsequently deriving the likelihood for the cointegration parameters and, finally, the test statistics and their asymptotic distributions. The final section introduces tests on whether the required exogeneity restrictions hold. In addition, this paper is concerned with implementing the mentioned test statistics in a Matlab routine. Paper and Matlab code: http://www.zeugner.eu/arbeiten/tafel.php Tags - cointegration

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281

Pattern Recognition Package
Pattern recognition is a sub-topic of machine learning. It is "the act of taking in raw data and taking an action based on the category of the data".Most research in pattern recognition is about methods for supervised learning and unsupervised learning. another black-box as neural network. Pattern recognition aims to classify data (patterns) based either on a priori knowledge or on statistical information extracted from the patterns. The patterns to be classified are usually groups of measurements or observations, defining points in an appropriate multidimensional space. This is in contrast to pattern matching, where the pattern is rigidly specified. PRTools supplies about 200 user routines for traditional statistical pattern recognition tasks. It includes procedures for data generation, training classifiers, combining classifiers, features selection, linear and non-linear feature extraction, density estimation, cluster analysis, evaluation and visualisation. It is intended to aid students and researchers in designing and evaluating new algorithms and in building prototypes. Matlab package and manual are available at http://www.prtools.org/ download.html Tags - pattern

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282

Quant Trading Strategy Demo
A Quant Trading Strategy Demo, including: CPPI (Constant Proportional Portfolio Insurance), OBPI (Option Based Portfolio Insurance), DPE (Dynamic Protected Envelope) and DPAA (Dynamic Protected Asset Allocation) Download at: http://www.quantcode.com/modules/mydownloads/ visitwad.php?cid=9&lid=508 The underlying risky asset (can be equity or fixed income instruments) are simulated via general innovation processes with specification of stochastic volatility. Note: 1. This is purely quant asset allocation strategy, it can be combined with factor and fundamental analysis for more specific low-frequency trading strategies. Or it can be combined with statistical data mining techniques for high-frequency trading strategies. 2. Explainations and some related VBA code will be published in: http://www.weizhenstanford.com/blog Tags - strategy

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283

Feedforward neural networks package
Some call it "probably the best feedforward neural networks package", I can't gurantee it, however, as I know almost nothing about neural network. Please help me write a review if you can, cheers. The Netlab toolbox is designed to provide the central tools necessary for the simulation of theoretically well founded neural network algorithms and related models for use in teaching, research and applications development. It consists of a toolbox of Matlab® functions and scripts based on the approach and techniques described in Neural Networks for Pattern Recognition by Christopher M. Bishop, (Oxford University Press, 1995) Download, overview and example are at http://www.ncrg.aston.ac.uk/ netlab/index.php. Tags - neural-network

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284

Efficient maximum-likelihood estimation
% Fastfit Toolbox. Efficient maximum-likelihood estimation using generalized % Newton iterations. % Version 1.2 19-May-04 % By Thomas P. Minka % % Dirichlet % dirichlet_sample - Sample from Dirichlet distribution. % dirichlet_logprob - Evaluate a Dirichlet distribution. % dirichlet_fit - Maximum-likelihood Dirichlet distribution. % dirichlet_fit_simple - Maximum-likelihood Dirichlet distribution. % dirichlet_fit_newton - Maximum-likelihood Dirichlet distribution. % dirichlet_fit_m - Maximum-likelihood Dirichlet mean. % dirichlet_fit_s - Maximum-likelihood Dirichlet precision. % % Polya, a.k.a. Dirichlet-multinomial % polya_sample - Sample from Dirichlet-multinomial (Polya) distribution. % polya_logprob - Evaluate a Dirichlet-multinomial (Polya) distribution. % polya_fit - Maximum-likelihood Polya distribution. % polya_fit_ms - Maximum-likelihood Polya distribution. % polya_fit_simple - Maximum-likelihood Polya distribution. % polya_fit_s - Maximum-likelihood Polya precision. % polya_fit_m - Maximum-likelihood Polya mean. % % Other % gamma_fit - Maximum-likelihood Gamma distribution. % negbin_fit - Maximum-likelihood Negative Binomial. % inv_digamma - Inverse of the digamma function. % % test_dirichlet_fit,... Test scripts for above routines. http://research.microsoft.com/en-us/um/people/minka/software/ fastfit/ Tags - mle

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285

Maximum likelihood estimation in R
Maximum likelihood estimation can be implemented like Quasimaximum likelihood in Matlab, You can also write an R function which computes out the likelihood function. As always in R, this can be done in several different ways. One issue is that of restrictions upon parameters. When the search algorithm is running, it may stumble upon nonsensical values - such as a sigma below 0 - and you do need to think about this. One traditional way to deal with this is to "transform the parameter space". As an example, for all positive values of sigma, log(sigma) ranges from infinity to +infinity. So it's safe to do an unconstrained search using log(sigma) as the free parameter. For detail about methodology and sample codes see http://www.mayin.org/ajayshah/KB/R/documents/mle/mle.html. Tags - mle

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286

Merry Christmas
Merry Christmas to you all and happy 2009 new year. Blog will take several days off.

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287

Newmat C++ matrix library
This C++ library is intended for scientists and engineers who need to manipulate a variety of types of matrices using standard matrix operations. Emphasis is on the kind of operations needed in statistical calculations such as least squares, linear equation solve and eigenvalues. It supports matrix types: Matrix (rectangular matrix); UpperTriangularMatrix; LowerTriangularMatrix; DiagonalMatrix; SymmetricMatrix; BandMatrix; UpperBandMatrix; LowerBandMatrix; SymmetricBandMatrix; IdentityMatrix; RowVector; ColumnVector. Only one element type (float or double) is supported. The library includes the operations *, +, -, *=, +=, -=, Kronecker product, Schur product, concatenation, inverse, transpose, conversion between types, submatrix, determinant, Cholesky decomposition, QR triangularisation, singular value decomposition, eigenvalues of a symmetric matrix, sorting, fast Fourier and trig. transforms, printing and an interface with Numerical Recipes in C. Introduction and package downloading: http://www.robertnz.net/ nm_intro.htm http://www.robertnz.net/download.html Tags - matrix , library

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288

Free Mathematica Software for Stable Analysis
Stable densities in four different parameterizations: S(α,β,γ,δ;0) parameterization (top left), the "standard" S(α,β,γ,δ;1) parameterization (top right), S(α,β,γ,δ;2) parameterization (bottom left), S(α,β,γ,δ;3) parameterization (bottom right). The values of α are indicated on the plots, skewness is indicated by color: β=0 (black), β=0.25 (red), β=0.5 (green), β=0.75 (yellow), β=1 (blue). In all cases, scale γ=1 and location δ=0. Note the discontinuity in the standard 1-parameterization near alpha=1. download stable distribution software at http://www.mathestate.com/ tools/Financial/sw/Software.html Tags - stable , distribution

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289

Extra moments measure
The following functions are intended to replicate calculations for taking higher moments of hedge fund returns into account in analyzing particular investments. Most of the formulae are taken from various EDHEC research papers. # All returns are assumed to be on a monthly scale! functions including: # moment.third # moment.fourth # CoSkewness # CoKurtosis # BetaCoVariance # BetaCoV (wrapper for BetaCoVariance) # SystematicBeta (wrapper for BetaCoVariance) # BetaCoSkewness # BetaCoS (wrapper for BetaCoSkewness) # SystematicSkewness (wrapper for BetaCoSkewness) # BetaCoKurtosis # BetaCoK (wrapper for BetaCoKurtosis) # SystematicKurtosis (wrapper for BetaCoKurtosis) # VaR # VaR.Beyond # VaR.column # VaR.CornishFisher # VaR.Marginal # modifiedVaR (wrapper for VaR.CornishFisher) http://braverock.com/brian/R/extra_moments.R Tags - moment , portfolio

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290

Implementation of Skew Normal/Student t distributions
SKEW is a Gauss library for computing pdf, cdf and inverse of the cdf and simulating random numbers for the SN, ST, MSN and MST distribution functions described in Azzalini, A. and Capitanio A.[2003], Distributions generated by perturbation of symmetry with emphasis on a multivariate skew t distribution, JRSS B, 65, 367-389. Check A Gauss implementation of Skew Normal/Student distributions at http://www.thierry-roncalli.com/#gauss Tags - distribution , skew

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291

Functions for portfolio analysis
Functions include: 1. efficient.portfolio compute minimum variance portfolio subject to target return 2. globalMin.portfolio compute global minimum variance portfolio 3. tangency.portfolio compute tangency portfolio 4. efficient.frontier computer Markowitz bullet http://faculty.washington.edu/ezivot/econ483/portfolio.ssc

Tags - markowitz , splus

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292

Convert Splus to R
Suppose you have got used to Splus and want to switch to R software (why bother to change? R is free while Splus is not, fair enough?), what can you do? since there are many functions in S-PLUS that are missing in R, one way is to understand the functions and write your owns, working N hours without sleep (N>?). however, you can avoid doing like that if you are as headche as me whenever you think of this solution. There is a package named Splus2R, which is to facilitate the conversion of S-PLUS packages to R packages, this package provides some missing S-PLUS functionality in R. I have not tested the package, though, will update later. Here is downloading link: http://cran.r-project.org/web/packages/splus2R/ index.html. Tags - splus , r

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293

Extract Market Expectations from Financial Instruments
A Choosy review of recently techniques to extract information about market expectations from asset values for monetary policy uses. Traditionally, interest rates and forward exchange rates have been applied to extract expected returns of future interest rates, exchange rates and inflation. More lately, these ways have been polished to rely on implied forward interest rates, and then to extract expected future timepaths. Very recently, methods have been studied to extract not only the mean returns but the whole (risk neutral) probability distribution from a set of option prices. Matlab files: http://home.datacomm.ch/paulsoderlind/Software/ Software.html#MatLabScripts Tags - distribution

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294

Grouped T copula simulation and estimation
Copula is widely applied to model the dependence of multivariate variable, two popula implicit copulas are Gaussian copula and T copula, however, tail dependence under Gaussian copula is asymptotically equal to zero, which is unrealistic and under-estimate the co-movement of variables, especially in extreme market situation nowdays; T copula, on the other hand, has a global degree of freedom to decide largely the dependence structure, which is over-simple, for instance, risk manager might want to define different degree of freedom for different markets due to their special risk profile. Grouped-T copula was created to overcome this problem, where seperated degree of freedom can be set for each subgroup. sample code is here: http://economia.unipv.it/ pagp/pagine_personali/dean/programs/gruped_t_copula_simul_est Tags - copula

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295

Mean-variance portfolio optimization
Quotation We seek to try out ga and patternsearch functions of the Genetic Algorithm and Direct Search Toolbox. We consider the unconstrained mean-variance portfolio optimization problem, handled by portopt and portalloc of the Financial Toolbox - note that in absence of constraints other than sum(w) = 1, the problem admits a simple closed-form analytic solution - and see whether ga and patternsearch succeed at locating the optimal portfolio identified by portalloc.

http://www.mathworks.com/matlabcentral/fileexchange/16884

Tags - optimization , markowitz

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296

Asymmetric Power Distribution
Asymmetric Power Distribution (APD) family of densities extends the Generalized Power Distribution to cases where the data exhibits asymmetry. It contains the asymmetric Gaussian and Laplace densities as special cases. In the paper entitled "Asymmetric Power Distribution: Theory and Applications to Risk Measurement", the author provide a detailed description of the properties of an APD random variable, such as its quantiles and expected shortfalls. http://econ.ucsd.edu/~ikomunje/code.htm to download "Asymmetric Power Distribution: Theory and Applications to Risk Measurement" and Matlab code files. Tags - distribution , asymmetric

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297

Spatial Statistics Toolbox for Matlab
Historically, it has been difficult to apply spatial statistics to large datasets (e.g., more than 10,000 observations). This site contains public domain spatial software written in Matlab (Matlab Spatial Statistics Toolbox 2.0) capable of estimating very large spatial autoregressions (e.g., one example involves 1,000,000 observations). The spatial software uses sparse matrix methods to compute the matrix determinants employed in the maximum likelihood estimation of the spatial autoregressions. Specifically, the software can estimate simultaneous spatial autoregressions (SAR), conditional spatial autoregressions (CAR), mixed regressive spatially autoregressive (MRSA) estimates as well as other lattice models which are the mainstay of spatial econometrics. Version 1.1 contained routines for specifying dependence via nearest neighbors or contiguity, exact log-determinant computations, and closed form maximum likelihood estimation of closest neighbor dependence. Check http://www.spatial-statistics.com/ for downloading. Tags - matlab , statistics

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298

Generate random numbers of stable distribution
A deluging section of the research in financial markets is established on the presumption that financial markets are forced by a gaussian process. This presumption has been largely debated, and it has often been demonstrated than it's untrue for equity, forex, and commodities markets. Stable distributions have been advised as a better model instead. Nevertheless, stable distributions are not applied much in the industry due to a lack of proper interpreting and usable software package. The lack of analytical formulas for the probability density and cumulative distribution functions is also a reason. For codes and research results of stable http://dimacs.rutgers.edu/~graham/code.html Tags - stable , distribution distribution click

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299

A Simple Trick to Avoid Oscillation in Binomial Trees
Derivative price can be calculated either by analytic formula like Black Scholes model, or by numerical solution, for instance, solving paritial difference equation, Monte carlo simulation, binomial tree, etc. A lot of people are not aware of this simple trick to avoid oscillation in binomial trees. Oscillation might become dangerous when calculating Greeks via numerical differentiation. Here's the trick. E.g., for American options, just replace the last step in the binomial tree with the closed-form BlackScholes formula. http://leippold.googlepages.com/matlab for details. Tags - tree , binomial

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300

Kernel density estimation
One of widely applied non-parametric density estimation methods. Fast and accurate state-of-the-art bivariate kernel density estimator with diagonal bandwidth matrix. The kernel is assumed to be Gaussian. The two bandwidth parameters are chosen optimally without ever using/ assuming a parametric model for the data or any "rules of thumb". Unlike many other procedures, this one is immune to accuracy failures in the estimation of multimodal densities with widely separated modes. http://www.mathworks.com/matlabcentral/fileexchange/17204 Tags - kernel , density

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301

OptionCity Calculator
Key Benefits of the OptionCity Calculator * Flexible models with stochastic volatility and stock price jumps * Option prices with Greeks (sensitivity to parameters) * Realistic Smile charts * Fast evaluations * Self-validating results. (You validate calculations by selecting a different numerical method: Lattice, Series, or Monte Carlo) The program is a downloadable executable for MS Windows systems: http://www.optioncity.net/calculator.htm Tags - calculator , option

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302

Simulation of Heston model
Generates Heston stochastic volatility process at various frequencies, % ds = mu dt Vt^1/2 dW_1t % dVt = b(a-Vt) dt sig Vt^1/2 dW_2t % Corr( dW_1t, dW_2t )=rho % S0 is starting value of price proces % NbD corresponds to numbers of days http://www.hec.unil.ch/matlabcodes/option_pricing.html Tags - heston

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303

Uniform Random Number Generator
Uniform Random number is crucial for Monte Carlo simulation, some famous uniform random number generators are Halton sequence and Sobol sequence. Normal random number can be simulated then by inverse normal cumulative function, for instance, Peter J Acklam inverse normal cumulative distribution or Beasley-Springer-Moro inverse normal. UNIFORM is a Mathematica library which return a sequence of uniformly distributed pseudorandom numbers. The fundamental underlying random number generator in UNIFORM is based on a simple, old, and limited linear congruential random number generator originally used in the IBM System 360. For detail and several language version pls click http://people.scs.fsu.edu/~burkardt/math_src/uniform/uniform.html. Tags - simulation , monte carlo

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304

Feedforward Neural Networks and Lyapunov Exponents Estimation
This program, NETLE.EXE, estimates feedforward neural network models and computes Lyapunov exponents (LE). Neural networks are estimated by the method of nonlinear least squares (NLS) (Kuan and Liu (1995)); Lyapunov exponents are calculated from the derivative matrices of estimated network models (Gencay and Dechert (1992)). Note that a positive Lyapunov exponent indicates that the underlying series is chaotic. REFERENCES: Kuan, Chung-Ming and Tung Liu (1995). "Forecasting exchange rates using feedforward and recurrent networks", Journal of Applied Econometrics, forthcoming. Gencay, Ramazan and W. D. Dechert (1992). "An algorithm for the n Lyapunov exponents of an n-dimensional unknown dynamical system", Physica D, 59, 142-157. http://www.sfu.ca/~rgencay/lyap.html

Tags - neural-network

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305

Estimation of parameters and eigenmodes of multivariate autoregressive models
ARfit is a collection of Matlab modules for * estimating parameters of multivariate autoregressive (AR) models, * diagnostic checking of fitted AR models, and * analyzing eigenmodes of fitted AR models. the package is based on the following two paper: A. Neumaier and T. Schneider, 2001: Estimation of parameters and eigenmodes of multivariate autoregressive models. ACM Trans. Math. Softw., 27, 27–57. T. Schneider and A. Neumaier, 2001: Algorithm 808: ARfit - A Matlab package for the estimation of parameters and eigenmodes of multivariate autoregressive models. ACM Trans. Math. Softw., 27, 58–65. Paper and Package are at http://www.gps.caltech.edu/~tapio/arfit/ #files. Tags - autoregressive

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306

Interest Rate Modeling in Excel
Interest Rate Modeling including: Nelson Siegel Yield Curve Model Nelson Siegel Yield Curve Model with Svensson 1994 Extension One-Factor Interest Rate Models (Vasicek. Cox, Ingersoll & Ross) Interest Rate Trinomial Tree - Hull & White Method http://www.mngt.waikato.ac.nz/kurt/frontpage/modelmainpages/ InterestRateModels.htm Tags - yield

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307

Multivariate dependence with copulas
Classes (S4) of commonly used copulas including elliptical (normal and t), Archimedean (Clayton, Gumbel, Frank, and Ali-Mikhail-Haq), extreme value (Husler-Reiss and Galambos), and other families (Plackett and Farlie-Gumbel-Morgenstern). Methods for density, distribution, random number generation, bivariate dependence measures, perspective and contour plots. Functions for fitting copula models. Independence tests among random variables and random vectors. Serial independence tests for univariate and multivariate continuous time series. Goodnessof-fit tests for copulas based on multipliers and on the parametric bootstrap. R package can be downloaded at http://cran.r-project.org/web/ packages/copula/index.html Tags - copula

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308

Extreme Value Analysis in Matlab
EVIM: A Software Package for Extreme Value Analysis in MATLAB Quotation From the practitioners’ point of view, one of the most interesting questions that tail studies can answer is what are the extreme movements that can be expected in financial markets? Have we already seen the largest ones or are we going to experience even larger movements? Are there theoretical processes that can model the type of fat tails which come out of our empirical analysis? Answers to such questions are essential for sound risk management of financial exposures. It turns out that we can answer these questions within the framework of the extreme value theory. This paper provides a step-bystep guideline for extreme value analysis in the MATLAB environment with several examples.

paper and code can be downloaded at http://www.sfu.ca/~rgencay/ evim.html. Tags - extreme

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309

Primitive polynomials for Sobol sequences
Quasi monte carlo method is popular for derivative pricing, Sobol sequences is among the most widely-used low-discrepancy sequences, and most efficient one I have ever used. The biggest challenge for generating sobol sequences is to construct primitive polynomials, here is a Mathematic file showing the algorithm to construct primitive polynomials for multi-dimensional Sobol sequences , have fun. http://leippold.googlepages.com/matlab Tags - sobol , simulation

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310

Modeling Financial Time Series with S-PLUS
Although S-plus is the most terrible language I have ever used in terms of debugging (I have to say that, no offense to S-plus fans, as my colleagues said, it is hard to understand it is still existed in 21 centuary), I found the S-plus scripts accompanying the book Modeling Financial Time Series with S-PLUS, covering: Time Series Manipulation, Time Series Concepts, Unit Root Tests, Modeling Extreme Values, Time Series Regression, Univariate GARCH, Long Memory, Rolling Analysis, Systems of Regression Eqations, VAR Models, Cointegration, Factor Models, Term Structure, Copulas, Generalized Method of Moments, etc. For detail please download at http://faculty.washington.edu/ezivot/ MFTS2ndEditionScripts.htm Tags - s-plus

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311

Yield Curve Modelling
Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada, where the authors used Cubic-spline, B-spline and MLES spline curve to model interest rate curve, including a penalty in the generalized least-squares objective function. Interested ppl can refer to the PDF document and Matlab codes are at appendix. http://www.bankofcanada.ca/en/res/wp/2002/ wp02-29.html Tags - matlab , yield

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312

Online derivative calculator
An online derivative calculator covers: Bond Price Volatility: duration(s), convexity, immunization; Term Structure: yield curve, spot rate, forward rate, term structure theories Option Pricing: Black-Scholes, binomial, European, American Numerical Greeks (& Some Latin): delta, gamma, vega, theta Option Applications & Exotic Options: Corporate securities, barrier, Asian, lookback, Parisian option,compound, exchange, etc. futures, forward, futures option, swap Monte Carlo & Quasi-random: variance reduction, Brownian bridge, Halton-, Sobel-, Faure-sequences GARCH option pricing model:multinomial tree, Monte Carlo Interest Rate Models: lognormal, Vasicek, CIR, BDT, Hull-White, HJM Mortgage-backed Securities: prepayment, PSA, CPR, SMM, passthrough, CMO, stripped MBS, ARM, prepayment model, seq. CMO, PO/ IO, PAC, option-adjusted spread, cash flow, duration convertible bond, callable & put bond, option-adjusted spread ... http://www.csie.ntu.edu.tw/~lyuu/Capitals/capitals.htm Tags - calculator , derivative

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313

VaR and Expected shortfall under Generalized Student t
Value at risk (VaR) is the expected maximum loss an asset or a portfolio can incur over a target horizon within a given confidence level; Expected Shortfall (ES), also called Conditional tail expectation (CTE), is the expectation of the losses bigger (that is, worse) than VaR over a target horizon within a given confidence level. There are several methods in calculating VaR, including Historical simulation, Monte Carlo simulation, and parametric method, dozens of underlying distributions are ready for choice when using Monte Carlo simulation and Parametric method, among which Gaussian distribution is, undoubtedly the most popular one, t-distribution is also widely used due to its ability to capture fat-tail. A sample Matlab code to construct the Generalized Student t over a given support then compute quantiles and numerical expected shortfall is http://www.hec.unil.ch/matlabcodes/Econometrics/TestGTdens.m. Tags - var , es , t

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314

Quantitative Risk Management R package
I shared an Econometric tools for performance and risk analysis package in R, today I introduce another Quantitative Risk Management R package, which is accompanying the book Quantitative Risk Management: Concepts, Techniques and Tools by Alexander J. McNeil, Rudiger Frey and Paul Embrechts, a nice book written by one of my professors. In this book special care is given to Copula analysis, Extreme value thoey, credit risk analysis, etc. Given the fact it was ranked by one of the top 10 most technical books of the year 2007, i bet you will learn a lot from it. R-language version can be downloaded at http://cran.r-project.org/ web/packages/QRMlib/index.html and S-PLUS library to accompany book is at http://www.ma.hw.ac.uk/~mcneil/book/index.html. Tags - risk

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315

Levenberg-Marquardt nonlinear least squares algorithms
In mathematics and computing, the Levenberg–Marquardt algorithm (or LMA) provides a numerical solution to the problem of minimizing a function, generally nonlinear, over a space of parameters of the function. These minimization problems arise especially in least squares curve fitting and nonlinear programming. The Levenberg-Marquardt algorithm has proved to be an effective and popular way to solve nonlinear least squares problems. MINPACK-1 contains Levenberg-Marquardt codes in which the Jacobian matrix may be either supplied by the user or calculated by using finite differences. IMSL , MATLAB , ODRPACK , and PROC NLP also contain LevenbergMarquardt routines. The algorithms in ODRPACK solve unconstrained nonlinear least squares problems and orthogonal distance regression problems, including those with implicit models and multiresponse data. For detail about Levenberg-Marquardt nonlinear least squares algorithms introduction and code pls click http://www.ics.forth.gr/ ~lourakis/levmar/ Tags - levenberg-marquardt , optimization

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316

Newey and West Covariance Matrix Estimator
Covariance matrix is vital for pricing and risk analysis, before I shares a Matlab code on weighted covariance matrix computation, here is another method named Newey & West covariance matrix, which calculates the covariance matrix with a non-parametrical method. Choices of kernels include Bartlett, Truncated and Quadratic Spectral. An example program also demonstrates how to use of these procedures. For detail please refer to http://kafuwong.econ.hku.hk/research/gausscode/cov1.htm. Tags - covariance

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317

Calibrating the Ornstein-Uhlenbeck model
Ornstein-Uhlenbeck model is widely used to model interest rate, two popular types are Vasicek and CIR, here the author describes two methods for calibrating the model parameters of an Ornstein-Uhlenbeck process to a given dataset. * The least squares regression method * maximum likelihood method methdology applied and sample matlab code http://www.sitmo.com/doc/Calibrating_the_OrnsteinUhlenbeck_model. Tags - yield , calibration are at

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318

Econometrics Software
Dozens of Matlab code for Econometrics study, including: Brock, Dechert& Scheinkman (1986) test for independence based on the correlation dimension Significance level of the BDS statistic in small samples Geweke &Porter-Hudak (1983) estimation of fractional differencing parameter Heteroskedasticity-consistent variance-ratio evaluationfor any q spacing Engle's(1982) test for ARCH Box-Pierce(1970) Q test using Ljung & Box's (1978) finite-sample correction Phillips-Perron test of the unit-root hypothesis in a Dickey-Fuller regression Durbin h statistic and significance of the hypothesis of no serial correlation Durbin-Watson d-statistic and significance level for the null hypothesis: DW = 2 http://ww61.tiki.ne.jp/~kanzler/ index.htm#L.%20Kanzler:%20Software Tags - econometrics

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319

Black Litterman Portfolio Allocation
Quotation The Black Litterman model was first published by Fischer Black and Robert Litterman of Goldman Sachs in an internal Goldman Sachs Fixed Income document in 1990. This paper was then published in the Journal of Fixed Income in 1991. A longer and richer paper was published in 1992 in the Financial Analysts Journal (FAJ). The latter article was then republished by FAJ in the mid 1990's. Copies of the FAJ article are widely available on the Internet. It provides the rationale for the methodology, and some information on the derivation, but does not show all the formulas or a full derivation. It also includes a rather complex worked example, which is difficult to reproduce due to the number of assets and use of currency hedging. The Black Litterman model makes two significant contributions to the problem of asset allocation. First, it provides an intuitive prior, the CAPM equilibrium market portfolio, as a starting point for estimation of asset returns. Previous similar work started either with the uninformative uniform prior distribution or with the global minimum variance portfolio. The latter method, described by Frost and Savarino (1986) and Jorion (1986), took a shrinkage approach to improve the final asset allocation. Neither of these methods has an intuitive connection back to the market,. The idea that one could use 'reverse optimization' to generate a stable distribution of returns from the CAPM market portfolio as a starting point is a significant improvement to the process of return estimation. Second, the BlackLitterman model provides a clear way to specify investors views and to blend the investors views with prior information. The investor's views are allowed to be partial or complete, and the views can span arbitrary and overlapping sets of assets. The model estimates expected excessreturns and covariances which can be used as input to an optimizer. Prior to their paper, nothing similar had been published. The mixing process had been studied, but nobody had applied it to the problem of estimating returns. No research linked the process of specifying views to the blending of the prior and the investors views. The BlackLitterman model provides a quantitative framework for specifying the investor's views, and a clear way to combine those

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320

investor's views with an intuitive prior to arrive at a new combined distribution.

For a collection of reference paper and an online application please see http://www.blacklitterman.org/blapplet.html Tags - allocation , black-litterman

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321

Hull-White Term Structure Model
Accompanying Excel of "Implementation of Hull White's No-Arbitrage Term Structure Model" by Eugen Puschkarski, including: HEDGE.XLS: Calculation of hedge parameters CALIBRAT.XLS: Calibration of the model to market data, calculation of optimal volatility parameters AMERICAN.XLS: Valuation of American style option CALLABLE.XLS: Valuation of callable, putable bonds CAP.XLS: Valuation of Caps and Floors, comparison of analytical and numerical solution COUPON.XLS: Pricing of an option on a coupon bond BINARY.XLS: Valuation of binary options of an accrual swap CONVERG2.XLS: Analysis of convergence behaviour of the numerical solution CONVERG3.XLS: Analysis of convergence behaviour if cash flows between nodes do occur FLOATER1.XLS: Valuation of standard and non-standard floater NUM.XLS: Numerical valuation of zero coupon bond options SWAP.XLS: Calculation of swaptions Paper and Excel file can be found at http://www.angelfire.com/ny/ financeinfo/research.html wiki(Hull-White model) Tags - hull-white , yield

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322

Fourier Space Time-stepping (FST) option calculator
Online Fourier Space Time-stepping (FST) option calculator where options class includes European, American, Barrier, Shout and Spread option; underlying stock process follows Black Scholes Merton, Merton Jump Diffusion, Kou Jump Diffusion, Variance Gamma, Normal Inverse Gaussian and CGMY. For more information on the Fourier Space Time-stepping (FST) method, stock price models and options refer to the papers below at the site http://128.100.73.155/fst/. Papers: * Option Pricing with Regime Switching Levy Processes Using Fourier Space Time-stepping * Fourier Space Time-stepping for Option Pricing with Levy Models. Related Matlab codes can also be downloaded http://www.cs.toronto.edu/~vsurkov/fst_matlab.html Tags - calculator , derivative , option at

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323

Nearest correlation matrix
Correlation matrix exists almost everywhere for derivative pricing and risk management, especially when Monte Carlo simulation is applied, for instance, to simulate correlated random numbers via Cholesky decomposition of correlation matrix. However, one strong requirement of Cholseky decomposition on correlation matrix is positive semidefinite, in other words, eigenvalues must be positive. Another example of positive semi-definite correlation matrix requirement is for risk management measurement, otherwise the volatility calculated might be negative, which is non-acceptable. In practice, sometimes we need to change correlation matrix to our forecasting values, even minor change might lead to invalid matrix, for this problem, http://www.maths.manchester.ac.uk/~nareports/ narep369.pdf details the way to overcome it, accompanying Matlab code can also be found at http://www.maths.manchester.ac.uk/~clucas/ near_cor.m and http://www.maths.manchester.ac.uk/~clucas/ eig_mex.c. Tags - correlation , cholesky

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324

MySQL and Matlab
The MySQL database server is very popular for its openness, robustness, and speed. Matlab is a wonderful commercial product for scientific and technical computing. Using them together is a great tool for quantitative data analysis. You can do this using the Matlab Database Toolbox, but it is more efficient to connect directly using the APIs for both products. This code implements that connection, with a fairly rich framework for handling data conversion, especially dates and times. http://cims.nyu.edu/~almgren/mysql/ Tags - matlab , sql

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325

Rmetrics - Basics of Option Valuation
Open Source Software for Financial Engineering and Computational Finance Rmetrics is the premier open source solution for teaching financial market analysis and valuation of financial instruments. With hundreds of functions build on modern methods Rmetrics combines explorative data analysis, statistical modeling and rapid model prototyping. The Rmetrics Packages are embedded in R building an environment which creates for students a first class system for applications in statistics and finance. Download at http://cran.cnr.berkeley.edu/web/packages/fOptions/ index.html Tags - r , option

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326

Singular Value Decomposition
In linear algebra, the singular value decomposition (SVD) is an important factorization of a rectangular real or complex matrix, with several applications in signal processing and statistics. Applications which employ the SVD include computing the pseudoinverse, least squares fitting of data, matrix approximation, and determining the rank, range and null space of a matrix. Singular Value Decomposition to solve ill conditioned square matrices. Excel, C++ Add-in and Demo Spreadsheet with application manual and on-line help are at http://www.financial-risk-manager.com/risks/ analytics/multivar/an_mv_t.html#svd wiki(Singular value decomposition) Tags - svd , matrix

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327

Heston model pricing and calibration
Quotation The Heston Model is one of the most widely used stochastic volatility (SV) models today. Its attractiveness lies in the powerful duality of its tractability and robustness relative to other SV models. This project initially begun as one that addressed the calibration problem of this model. Attempting to solve such a problem was an impossible task due to the lack of exposure to such ‘advanced’ models. I, therefore, decided to take a slight digression into the world of Heston and stochastic volatility. Enroute I realised that fundamental information that one would require to gain an intuitive understanding of such a model was very disjoint and hence incomplete. This project, therefore, evolved into something that could fill this gap. A practical approach has been adopted since the focus of calibration is quite practical itself. All the relevant tools are provided to facilitate this calibration process, including MATLAB code. This code has been confined to the appendix to keep the main body clutter free and ‘quickto-read’.

paper and code can be downloaded at http://web.wits.ac.za/NR/ rdonlyres/98E22C37-FA41-4C5B-8F11-F44BED5FF4C7/0/ nimalinmoodley.zip Tags - heston

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328

MATLABroutines for risk and portfolio management
These routines support the book "Risk and Asset Allocation" Springer Finance, by A. Meucci. The routines include many new features: - more uni-, multi- and matrix-variate distributions - more copulas - more graphical representations - more analyses in terms of the location-dispersion ellipsoid. - best replication / best factor selection - FFT-based projection of a distribution to the investment horizon - caveats about delta/gamma pricing - step-by-step evaluation of a generic estimator - non-parametric estimators - multivariate elliptical maximum-likelihood estimators - shrinkage estimators: Stein and Ledoit-Wolf, Bayesian classical equivalent - robust estimators: Hubert M, high-breakdown minimum volume ellipsoid - missing-data techniques: EM algorithm, uneven-series conditional estimation - stochastic dominance - extreme value theory for VaR - Cornish-Fisher approximation for VaR - kernel-based contribution to VaR and expected shortfall from different risk-factors - mean-variance analysis and pitfalls (different horizons, compounded vs. linear returns, etc...) - Bayesian estimation (multivariate analytical, Monte Carlo Markov Chains, priors for correlation matrices) - estimation risk evaluation: opportunity cost of estimation-based allocations - Black Litterman allocation - robust optimization (calls SeDuMi to perform cone programming) - robust Bayesian allocation - more... sample chapter and codes can be downloaded http://www.symmys.com/AttilioMeucci/Book/Downloads/ at

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329

Downloads Tags - allocation

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330

Code search portal
Share two code search portal today, one is search Quant code, where people can search code relative to quantitative finance, for instance, Code Search example: Black Scholes matlab; the other one is R-project search engine, specifically for R language programming users. Enjoy. http://www.finmath.cn/ http://www.rseek.org/

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331

Bayesian Copula Selection
Matlab implementation of a method to select the 'best' copula among a subset of copula families. Based on theory published in : Huard, D., G. Évin, A.-C. Favre (2006), Bayesian Copula Selection, Computational Statistics and Data Analysis, COMSTA3137, vol. 51 (2), 809-822. http://code.google.com/p/copula/ Tags - copula

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332

Multidimensional numerical integration
Most derivative pricing problems have finally come to solve integration numerically, by Simpson, Monte Carlo simulation, etc., however, multidimensional integration is time-consuming and prone to error, here I share a Cuba library which offers a choice of four independent routines for multidimensional numerical integration: Vegas, Suave, Divonne, and Cuhre. Quotation Vegas is the simplest of the four. It uses importance sampling for variance reduction, but is only in some cases competitive in terms of the number of samples needed to reach a prescribed accuracy. Nevertheless, it has a few improvements over the original algorithm and comes in handy for cross-checking the results of other methods. Suave is a new algorithm which combines the advantages of two popular methods: importance sampling as done by Vegas and subregion sampling in a manner similar to Miser. By dividing into subregions, Suave manages to a certain extent to get around Vegas' difficulty to adapt its weight function to structures not aligned with the coordinate axes. Divonne is a further development of the CERNLIB routine D151. Divonne works by stratified sampling, where the partitioning of the integration region is aided by methods from numerical optimization. A number of improvements have been added to this algorithm, the most significant being the possibility to supply knowledge about the integrand. Narrow peaks in particular are difficult to find without sampling very many points, especially in high dimensions. Often the exact or approximate location of such peaks is known from analytic considerations, however, and with such hints the desired accuracy can be reached with far fewer points. Cuhre employs a cubature rule for subregion estimation in a globally adaptive subdivision scheme. It is hence a deterministic, not a Monte Carlo method. In each iteration, the subregion with the largest error is halved along the axis where the integrand has the largest fourth difference. Cuhre is quite powerful in moderate dimensions, and is usually the only viable method to obtain high precision, say relative accuracies much below 1e-3.

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333

http://www.feynarts.de/cuba/ Tags - integration

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334

Econometric tools for performance and risk analysis
Quotation Library of econometric functions for performance and risk analysis of financial portfolios. This library aims to aid practitioners and researchers in using the latest research in analysis of both normal and non-normal return streams. We created this library to include functionality that has been appearing in the academic literature on performance analysis and risk over the past several years, but had no functional equivalent in R. In doing so, we also found it valuable to have wrapper functions for functionality easily replicated in R, so that we could access that functionality using a function with defaults and naming consistent with common usage in the finance literature. The following sections cover Performance Analysis, Risk Analysis (with a separate treatment of VaR), Summary Tables of related statistics, Charts and Graphs, a variety of Wrappers and Utility functions, and some thoughts on work yet to be done.

http://braverock.com/brian/R/PerformanceAnalytics/html/ PerformanceAnalytics-package.html Tags - econometrics , performance , r

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335

Decomposing rating transition matrices
Spreadsheet for the calculation of: - the diagonal decomposition MDM^-1 - the generating matrix A of the ratings process - the time-dependent transition matrix P(t) http://www.schonbucher.de/risk/index.html spreadsheet http://www.schonbucher.de/risk/rating_case.xls Tags - rating

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336

Collection of R codes
R-Cookbook.com is a collection of "recipes"--problems, solutions, and working examples--contributed by the R community in order to share code, promote the use of R, and make the learning process more efficient for new users. http://www.r-cookbook.com/

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337

OLS Regression with missing values
Excel provides a handy function called LINEST that allows the user to make OLS regressions in an very quick and simple fashion. Unfortunately, the function fails if some values are missing in the data. Here is a small program that addresss this shortcoming. After installing this add-in, you can simply say LINESTNA(...) instead of LINEST(...) and the problem with the missing values is gone. The program first extracts the rows that do not contain any missing values, and then calls Excel's LINEST to perform the estimation with the cleaned data. The data have to be organized column-wise. http://www.wwz.unibas.ch/ds/abt/wirtschaftstheorie/personen/ yvan/software/#c6714 Tags - regression

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338

Crank-Nicholson finite difference solution of American option
Crank-Nicolson for a European put was introduced before, to better master this technique, i share another sample code using CrankNicholson finite difference for American option. BLSPRICEFDAM Black-Scholes put and call pricing for American Options using the Crank-Nicholson finite difference solution of BlackScholes Partial differential equation. Note that this function returns an approximate solution unlike the analytical solution (BLSPRICE) SO is the current asset price, X is the exercise price, R is the risk-free interest rate, T is the time to maturity of the option in years, SIG is the standard deviation of the annualized continuously compounded rate of return of the asset (also known as volatility), and Q is the dividend rate of the asset. The default Q is 0. N denotes the number of discretization points in the stock price domain, and M denotes the number of discretization points in time domain used for the PDE solution.Try increasing either of M or N to achieve greater efficiency. lecture notes can be downloaded at http://www.cs.cornell.edu/Info/ Courses/Spring-98/CS522/home.html and matlab file http://www.cs.cornell.edu/Info/Courses/Spring-98/CS522/content/ blspricefdam.m. Tags - american , pde , option

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339

Career change
Arrived in London today, new job will start from tomorrow, the first few weeks will be busy as i need to get used to the new life here. I will try to update new code link as possible as i can. thx for your support.

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340

Up-and-out call option by Monte Carlo
Another sample code of the book An Introduction to Financial Option Valuation: Mathematics, Stochastics and Computation, read CrankNicolson for put. This sample calculates a up-and-out call barrier option via Monte Carlo simulation with antithetic variates. An up and out call is a regular call option that ceases to exist if the asset price reaches a barrier level, H, that is higher than the current asset price, when H is less than or equal to K, the value of the up and out call is zero. Code can be accessed here http://www.maths.strath.ac.uk/~aas96106/ ch21.m. Tags - barrier , option

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341

Trinomial tree class for short rate model
This page comprises the code and items of a C++ class that could be applied to construct a trinomial tree for the short rate. The tree matches to the yield curve but not to the volatility. curve. The programming code is grounded on the book "Implementing Derivatives Models", page 260, Clewlow and Strickland, the code specifies a C++ implementation of a tree object. By input a set of parameters the class will form an array of nodes, each one corresponding to a node on the tree. Currently the tree is matched to the underlying interest rate curve, but not a vol. curve. http://www.phineas.pwp.blueyonder.co.uk/TreeClass.htm Tags - yield

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342

Variance swap hedging under Heston volatility
Calculate variance swap hedging portfolio under Heston vol model using MC simulation. The strategy is discussed in Gatheral p.136 and http://www.ederman.com/new/docs/gs-volatility_swaps.pdf. The strategy works by exploiting the difference between percentage differences and log differences. A percentage difference is expressed as (S’ – S)/S or S’/S - 1. A log difference is log(S’) – log(S) or log(S’/S). Fore more detail refer to http://math.nyu.edu/~atm262/files/fall06/ casestudies/a7/hestonvarswap.m and the above mentioned paper. Tags - heston

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343

Vasicek Model calibration and simulation
Entries Vasicek estimation and Vasicek model in binomial tree introduced how to estimate Vasicek model parameters, how to implement Vasicek interest rate model in binomial tree, which can be further used to price option on bonds, for instance. Here i share another two excel files demonstrating how to calibrate a Vasicek model to a given term structure and simulate Vasicek zero bond prices and the path of the short rate. Download at http://www.mathematik.uni-kl.de/~korn/korn2b.htm, besides Vasicek short rate model, CIR, Dothan and Exponential Vasicek are also included in one file. Tags - vasicek

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344

Solving PDE implicit / explicit methods
Basically there are two types of finite difference methods: explicit finite difference method and implicit finite difference method. Other types are just the derivation of these two types, for example, Crank-Nicolson method is an average of the explicit method and implicit method. Two sample Matlab files to compare the performance of solving PDE via implicit and explicit method. http://frontera.bu.edu/MathFn.html wiki(Finite difference method) Tags - pde

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345

Unified Asian Option Pricing
Asian options are securities with payoff which depends on the average of the underlying stock price over certain time interval. Since no general analytical solution for the price of the Asian option is known, a variety of techniques have been developed to analyze arithmetic average Asian options. A simple and numerically stable 2-term partial differential equation characterizing the price of any type of arithmetically averaged Asian option is given. The approach includes both continuously and discretely sampled options and it is easily extended to handle continuous or discrete dividend yields. The paper "Unified Asian Pricing", Risk, Vol. 15, No. 6, 113-116 and its Mathematica nb file can be downloaded at http://www.stat.columbia.edu/~vecer/. Tags - asian , option

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346

Nearest Neighbour Algorithm to forecast Stock Prices
This is the algorithm involved on the use of the non-linear forecast of asset's prices based on the nearest neighbour method. The basic idea of the NN algorithm is that the time series copies it's own past behavior, and such fact can be used for forecasting purposes. On the zip file there are two functions: one is the univariate version of NN (nn.m) and the other is the multivariate approach, also called simultaneous NN (snn.m). Quotation The nearest neighbor method is defined as a non-parametric class of regression. Its main idea is that the series copies its own behavior along the time. In other words, past pieces of information on the series have symmetry with the last information available before the observation on t+1. Such way of capturing the pattern on the times series behavior is the main argument for the similarity between NN algorithm and the graphical part of technical analysis, charting. The way the NN works is very different than the popular ARIMA model. The ARIMA modeling philosophy is to capture a statistical pattern between the locations of the observations in time. For the NN, such location is not important, since the objective of the algorithm is to locate similar pieces of information, independently of their location in time. Behind all the mathematical formality, the main idea of the NN approach is to capture a nonlinear dynamic of selfsimilarity on the series, which is similar to the fractal dynamic of a chaotic time series.

http://www.mathworks.com/matlabcentral/fileexchange/ loadFile.do?objectId=9396&objectType=file Tags - forecast

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347

FFT computation of option prices
The Black-Scholes formula, one of the major breakthroughs of modern finance, allows for an easy and fast computation of option prices. But some of its assumptions, like constant volatility or log-normal distribution of asset prices, do not find justification in the markets. More complex models, which take into account the empirical facts, often lead to more computations and this time burden can become a severe problem when computation of many option prices is required, e.g. in calibration of the implied volatility surface. To overcome this problem Carr and Madan (1999) developed a fast method to compute option prices for a whole range of strikes. Fast Fourier transform (FFT) is applied for this purpose, the use of the FFT is motivated by two reasons. On the one hand, the algorithm offers a speed advantage. This effect is even boosted by the possibility of the pricing algorithm to calculate prices for a whole range of strikes. On the other hand, the cf of the log price is known and has a simple form for many models considered in literature, while the density is often not known in closed form. Here is an sample Matlab file for FFT computation of option prices, http://www.theponytail.net/CCFEA/lect01/lect01fftoptionnormal.m. wiki(Fast Fourier transform) Tags - fft , option

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348

Rank reduction of correlation matrices by majorization
Rank reduction is useful for multi-factor derivative pricing and risk analysis, for instance, for a Bermudan swaption, Major, MajorW and MajorPower are MATLAB templates that may be used to find a low-rank correlation matrix locally nearest to a given correlation matrix, by means of majorization. Major implements equal weights on the entries of the correlation matrix. MajorW implements non-constant weights. For an introductory of Rank reduction of correlation matrices by majorization paper can be downloaded at http://www.pietersz.org/ majorization.pdf, with Matlab codes http://www.pietersz.org/major.htm Tags - correlation

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349

Option greeks analysis
A useful tool built to help the user gain an intuitive feel for option pricing and the greeks. Allows the user to create a portfolio of options (and thus straddles, strangles, butterflies and anything else you fancy can be easily created using the GUI). Once this is done, the user can plot the option price, delta, gamma, vega and variance vega in 3D and examine how they vary with time to maturity, volatility, interest rates and carry. It also allows you to perturb a 4th dimension also allowing you to create an animation. Type PlotMeTheGreeks() on the matlab command line to start the GUI. http://www.mathworks.com/matlabcentral/fileexchange/ loadFile.do?objectId=10428&objectType=FILE Tags - greeks , option

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350

Real option case study
Nth much to say, for those of you interested into applying real option valuation model in real situation. Doc file and Excel sheet can be downloaded here http://faculty.fuqua.duke.edu/~charvey/Teaching/BA456_2002/ LogiTech/. Tags - real-option , option

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351

Peter J Acklam inverse normal cumulative distribution
Random number generation is essential for Monte Carlo simulation, among random numbers, normal distributed numbers are undoubtedly the most widely used ones, here comes the problem, for a given uniform random numbers series, how do you compute the inverse normal cumulative distribution function? I once introduced Moro inverse normal function for this purpose, here is another power function named Peter J Acklam inverse normal cumulative distribution, for my study and work i have tried both but couldnot decide which one is better, here i quote the sentence from the book "Monte carlo methos in finance" by Peter Jackel: Equally, for the inverse cumulative normal function z = N'(p), there are several numerical implementations providing different degrees of accuracy and efficiency. A very fast and accurate approximation is the one given by Boris Moro in [Mor95]. The most accurate whilst still highly efficient implementation currently freely available, however, is probably the algorithm by Peter Acklam. when allowing for an additional evaluation of a machine-accurate cumulative normal distribution function, Acklam’s procedure is able to produce the inverse cumulative normal function to full machine accuracy by applying a second stage refinement using Halley’s method. Good, here is the page for Peter J Acklam inverse normal cumulative distribution codes in several languages, http://home.online.no/ ~pjacklam/notes/invnorm/index.html#The_algorithm, enjoy. Tags - random , normal

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352

Numerical valuation of convertible bonds
A Convertible Bond (CB) is a hybrid derivative with complex embedded features, it allows the holder to convert the bond to a certain shares (conversion ratio) of stock issued by the same company at a prescribed stock price (conversion price), besides this feature, CB normally has embedded American call (put) option which allows the bond issuer (holder) to call (sell) back the CB from holder (to issuer) at a pre-decided call (put) price once the underlying stock price is above (below) strike price for a certain prescribed, consecutive time, hereafter called Parisian option; in Asian markets, CB also has a refix clause which allows the bond issuer to reset the conversion price, under several stock price scenarios; as a hybrid product with equity and fixed income characteristics, CB is under default risk, both stochastic interest rate and stochastic volatility play a role for its valuation; etc,. The convertible bond calculator uses a binomial lattice with the stock price as the only state variable to analyse convertible bonds with call and put features. The software does not use the warrant valuation approach which requires the volatility of equity (stocks plus warrants). Instead, it ignores the dilution effect and uses stock price volatility which is more readily available. download at http://www.iimahd.ernet.in/~jrvarma/software/ecb.zip online convertible bonds calculator http://www.iimahd.ernet.in/ ~jrvarma/software/convertible.php, more are at http://www.iimahd.ernet.in/~jrvarma/software.php.

Tags - convertible bond

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353

Spread option valuation
Spread option derives its value from the difference between the prices of two or more assets, it can be considered as a type of rainbow option in that it's payoff depends on 2 or 3 underlying assets. for instance, for a 2 underlying assets call spread option, the payoff is like max(S1 - S2 - K, 0), where K is the strike price betting on the spread (or difference) of these two stock prices. Spread option is widely used in energy industry, especially in oil industry. In previous entry how to price spread option with Monte Carlo simulation was introduced, here is another valuation method of spread options follwing the article Low-Fat Spreads by K. Ravindran, RISK, Oct 1993. for detail check http://www.mathfinance.org/FF/cpplib.php。 Tags - spread , option

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354

Cliquet option with Jump-Diffusion Bates Model
Cliquet option, also called ratchet option, is an extended roll-down option, with strikes set at the barriers, which never knock out completely. It is a series of at the money options, with periodic settlement, resetting the strike value at the then current price level, at which time, the option locks in the difference between the old and new strike and pays that out as the profit. The profit can be accumulated until final maturity, or paid out at each reset date. The Bates Model is a type of Jump-Difussion model that is able to improve calibration results for short term options. The Bates Model consists of Jumps processes built on top a Heston model. http://www.javaquant.net/finalgo/BatesModel.html lists the C++ code to price Cliquet options using the Log-Jump variant of the Bates model with stochastic volatility. wiki(Cliquet option) Tags - cliquet , heston , option

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355

Arithmetic Game
One of my friends sent me an interesting site: Arithmetic game, (please help us develop by submitting a site in your favorites), The Arithmetic Game is a speed drill where you are given two minutes to solve as many arithmetic problems as you can, problems including addition, subtraction, multiplication, and division, for each problem answered correctly you will get score, test how many scores you can achieve. The highest score so far is 137, amazing... http://zetamac.com/arithmetic/ This game helps me recall the exam I took for a quantitative trader position several months ago, i failed Tags - game

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356

Monte Carlo arithmetic average price Asian option
Today is the Chinese traditional Mid-Autumn Festival, also known as the Moon Festival, which is used to celebrate the end of the summer harvesting season, first of all, wish you happy everyday and achieve what you want. A pic of Mooncake

Asian options are options where the payoff depends on the average price of the underlying asset during at least some part of the life of the option. The payoff from an average price call is max(Save - K, 0) where Save is the average value of the underlying asset calculated over a predetermined averaging period. Average price options are less expensive than regular options. Besides anti-thetic sampling method, control variate is another popular way for variance reduction, given the condition we can find a good proxy product, whose pricing formula is easy to get, in our case, geometric average asian option is used as control variate for arithemetic average asian option, here is a M file demonstrating Monte Carlo simulation on an arithmetic average price Asian option using a geometric average price Asian as control variate. http://personal.strath.ac.uk/d.j.higham/ch22.m. Tags - asian , option

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357

Constant Maturity Swap (CMS) option pricing
Constant maturity swap is a type of interest rate swap where the rate of interest of any single leg is readjusted in a periodic manner in case of market swap rate but not with the LIBOR (London Interbank Offered Rate) or any other floating reference index rate. In other words, it may also be said that the constant maturity swap actually allows the purchasers to fix the duration of the received flows on a swap. Constant maturity swap is also known as CMS. The Constant Maturity Swaps may be of two types - Single Currency Swaps or Cross Currency Swaps. Pricing of cms option and a cms floor using the generalized BlackScholes formula with a convexity adjustment Excel sample file: http://www.finmath.net/spreadsheets/CMS%20Option.zip, at the same page http://www.finmath.net/spreadsheets/ you can also find pricing of swaption using the generalized Black-Scholes formula. wiki(Constant maturity swap) Tags - cms , option

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358

Normal Inverse Gaussian option pricer
Quotation To price and model of the most famous model, which underlying. hedge derivative securities, it is crucial to have a good probability distribution of the underlying product. The continuous-time model is the celebrated Black Scholes uses the Normal distribution to fit the log returns of the

As we know from empirical research, one of the main problems with the Black–Scholes model is that the data suggest that the log returns of stocks/indices are not Normally distributed as in the Black–Scholes model. The log returns of most financial assets do not follow a Normal law. They are skewed and have an actual kurtosis higher than that of the Normal distribution. Other more flexible distributions are needed. Moreover, not only do we need a more flexible static distribution, but in order to model the behaviour through time we need more flexible stochastic processes (which generalize Brownian motion). Looking at the definition of Brownian motion, we would like to have a similar,i.e. with independent and stationary increments, process, based on a more general distribution than the normal. However, in order to define such a stochastic process with independent and stationary increments, the distribution has to be infinitely divisible, such processes are called Lévy processes, one example of such process is normal inverse gaussian (NIG).

Normal Inverse Gauss option pricer (with Esscher transform correction), Excel + DLL, and a Maple worksheet with short explanations can be downloaded at http://www.axelvogt.de/axalom/ NIG_tiny_withDLL.zip, more are at the main page of author http://www.axelvogt.de/axalom/index.html.

Tags - nig , option

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359

Mixed Integer Linear Programming (MILP) solver
Are you fed up with "linprog" or "fmincon" command in Matlab? do you sometimes find the results violate your providing constraints while Matlab says "condition satisfied", or sometimes you get a weird solution while Matlab tells you "convergence successful", etc. (I am not saying bad words about Matlab, I AM a fan of it, but if there is a better solution for the given problem, why not at least try it?) Optimization packages are widelyspread, here is a site i introduced, optimization package. Several days ago a friend of mine sent me a link about lp-solver, which is a Mixed Integer Linear Programming (MILP) solver, convenient to use and highly efficient, cannot help sharing with you all. (please submit your favorite code site if you happen to find one and help others, thanx.) The name itself tells you this package is for linear programming problem, What is Linear Programming then? A Linear Program (LP) is a problem that can be expressed as follows: minimize cx subject to Ax = b x >= 0 where x is the vector of variables to be solved for, A is a matrix of known coefficients, and c and b are vectors of known coefficients. The expression "cx" is called the objective function, and the equations "Ax=b" are called the constraints. LP is widely used for portfolio optimization, for instance, to mimic the performance of an index, to minimize tracking error of your portfolio, etc. Don't hesitate to try it yourself. PS: lp-solver can be called as a library from different languages like C, VB, .NET, Delphi, Excel, Java, ...It can also be called from AMPL, MATLAB, O-Matrix, Scilab, Octave, R via a driver program. you will find a way. Download at http://lpsolve.sourceforge.net/5.5/. Tags - optimization

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360

Pricing American Options
American options can be computed by several ways, to name a few: binomial tree, Least square Monte Carlo simulation, numerically solving PDE. Previously I share a PSOR code to calculate Linear Complementarity Formulation problem when applying finite difference or finite element for american option, here is a file including: * GUI for pricing through CRR binormial tree * Script for pricing with Finitie differences * GUI for pricing via the Monte Carlo method of Longstaff and Schwartz * Functions to implement all three methods you'll have a clear picture in mind how to deal with American-type options, enjoy. http://www.mathworks.com/matlabcentral/fileexchange/ loadFile.do?objectId=16476&objectType=file. Tags - american , lsm , option

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361

Bootstrapping interest rate curve
Bootstrapping is a technique for building a zero-coupon yield curve from the prices of a set of coupon bonds through forward replacement. Using these zero-coupon bonds we can deduce forward and spot rates for all time to maturities by making a couple of assumptions (including linear interpolation). The term structure of spot rates is recovered from the bond yields by solving for them recursively, this iterative process is called the BootStrap Method. http://janroman.dhis.org/stud/Bootstrap_2006.xls shows how to implement Boostrapping method in Excel, more can be found at his website http://janroman.dhis.org/index_eng2.html. Tags - bootstrapping , yield

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362

Variance reduction by antithetic variable
Had a small party with friends yesterday and drank until 5 o'clock in the morning, hangover is still here after 6 hours sleep. All feasts must come to an end, we have to accept this fact, going to leave soon the country i have stayed over one year, leave friends accompanying me when i was sad and joyful, specially a girl i favor. Back to code, Whenever we price a derivative via Monte Carlo simulation, for instance use Gaussian variates to simulate Brownian motion by constructing sample paths of standard Wiener processes, we can make use of the fact that for any one drawn path its mirror image has equal probability. In other words, if a single evaluation driven by a Gaussian variate vector draw zi is given by vi = v(zi), we also use vvi = v(−zi), which is called antithetic sampling and widely used for variance reduction because of its simplicity to add to your code. Run the sample code to check the variance reduction effect if you wish http://www.ma.ic.ac.uk/~becherer/Course07MS15/ antitheticexample.m. Tags - variance-reduction

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363

Term Structure Lattice to Price Bermudan swaption
The modelling philosophy for term-structure models is somewhat different to the modelling philosophy for equity models. In the latter case, stock price dynamics are usually specified under the physical probability measure, P, before their dynamics under an EMM, Q, are determined. For example, in the binomial Black-Scholes framework a unique Q is easily determined after the P-dynamics of the stock-price are given. Moreover, it is easy to check that the model does not allow any arbitrage: we just need d < R < u. In contrast, with term-structure models we often assume that zerocoupon bonds of every maturity exists and it is not always easy to directly specify their P-dynamics in an arbitrage-free manner that it is economically satisfactory. For example, in a T-period binomial model there are O(T) zero-coupon bond prices that we need to specify at each node. Checking that the model is arbitrage-free and that bond price processes have suitable properties (e.g. implied interest rates are always non-negative) can be a cumbersome task. As a result, we usually work with term structure models where we directly specify an EMM, Q, and price all securities using this EMM. By construction, such a model is arbitrage free. Moreover, by leaving some parameters initially unspecified (e.g. short-rate values at nodes or Q-probabilities along branches in a lattice model) we can then calibrate them so that security prices in the model coincide with security prices observed in the market. In the lecture notes of Term Structure Models-Spring 2005 professor Martin Haugh introduces how to price a Bermudan swaption with term structure lattice, precisely speaking, binomial tree, there he cailibrates both Ho-Lee and Black Derman Toy Model and use the calibrated interested rate model to price a Bermudan swaption as an example. lecture notes about this topic is http://www.columbia.edu/~mh2078/ TS05/lattice_models.pdf and sample spreedsheet is http://www.columbia.edu/~mh2078/TS05/ Term_Structure_Lattices.xls wiki(Bermudan swaption) Tags - swaption , bermudan

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364

Crank-Nicolson for a European put
A PDE can be solved by Finite Difference or Finite Element method, both methods require space discretization, therefore, explicit or implicit finite difference is applied for this problem. The advantage of explicit finite difference is it does not require matrix inversion, however, to satisfy CFL condition, dt (time interval) can not be too small to prevent from nonconvergece result, Crank-Nicolson is supposed to balance between explicit and implicit finite difference by choosing theta=1/2, which means taking average of explicit and implicit method. A sample code to show the performance of Crank Nicolson for a Europen put can be downloaded at http://www.maths.strath.ac.uk/ ~aas96106/ch24.m, it is from chapter 24 of the book An Introduction to Financial Option Valuation: Mathematics, Stochastics and Computation, more codes are at the homepage http://www.maths.strath.ac.uk/~aas96106/option_book.html wiki(Crank Nicolson) Tags - pde

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365

evolutionary algorithm optimization
In the post Optimization packages dozens of optimization routines can be downloaded, here I am going to share a special optimization method: evolutionary algorithm. Evolutionary algorithms (EAs) are search methods that take their inspiration from natural selection and survival of the fittest in the biological world. EAs differ from more traditional optimization techniques in that they involve a search from a "population" of solutions, not from a single point. Each iteration of an EA involves a competitive selection that weeds out poor solutions. The solutions with high "fitness" are "recombined" with other solutions by swaping parts of a solution with another. Solutions are also "mutated" by making a small change to a single element of the solution. Recombination and mutation are used to generate new solutions that are biased towards regions of the space for which good solutions have already been seen. This R package provides the DEoptim function which performs Differential Evolution Optimization (evolutionary algorithm), for detail check http://cran.r-project.org/web/packages/DEoptim/index.html. wiki(Evolutionary algorithm) Tags - optimization

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366

Finite Element package
Recently I have been working on pricing a high dimensional (4 dimension, actually) derivative via partial differencial equation (PDE), which can be solved numerically by Finite Element or Finite Difference method. Indeed Matlab has a PDE toolbox to use, however, as I know, this PDE toolbox can only calculate two dimensional problem, for instance, stock and time dimension as Black Scholes model does. For your attention, I found an excellent Finite Element package named Getfem++ written in C++, as its webpage says, "The Getfem++ project focuses on the development of a generic and efficient C++ library for finite element methods. The goal is to provide a library allowing the computation of any elementary matrix (even for mixed finite element methods) on the largest class of methods and elements, and for arbitrary dimension (i.e. not only 2D and 3D problems). " what's more interesting is this library can be linked easily to Matlab. We know Finite Element method is an alternative to Finite Difference discretization of the BS and other equations in the price resp. the logprice space variable. The advantage of FE is that it gives convergent deterministic approximations of the option price under realistic, low smoothness assumptions on the payoff function, as e.g. for binary contracts and in particular allow a higher rate of convergence that that achievable with Monte Carlo simulations. To get a deeper insight on and download open source Getfem++ please be at http://home.gna.org/getfem/ wiki(Finite element) Tags - finite-element , pde

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367

Vasicek model in binomial tree
At previous post I shared a site using R language for Vasicek estimation, as we know, Vasicek model is a term structure model describing the stochastic process of interest rates. It is a type of "one-factor model" with negative interest rate possible, despite this shortcoming, it is still applied for fixed income research and application due to its mean-reversion characteristics. Here is another Vasicek application implemented with binomial tree in C++, the tree construction procedure is outlined in Tuckman famous book Fixed Income Securities. By providing input parameters like the initial short rate, speed of mean reversion, long-run average rate and volatility, interest rate following Vasicek evolution is constructed. For detail check this page http://math.nyu.edu/~atm262/spring06/ ircm/vasicek/. Tags - vasicek , binomial

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368

Code for Quantitative Macroeconomics
I am not a fan of Quantitative Macroeconomics, which uses standard neoclassical theory to explain business cycle fluctuations and tries to answer the following questions, to name a few, What are the empirical characteristics of business cycles? What brings business cycles about? What propagates them? Who is most affected and how large would be the welfare gains of eliminating them? What can economic policy, both fiscal and monetary policy do in order to soften or eliminate business cycles? Should the government try to do so? ...... Sounds boring? I found this site when I searched "Kalman filter", click the following link for codes in Quant economics of different programming languages. http://ideas.repec.org/s/dge/qmrbcd.html Tags - economics

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369

Libor Market Model: Theory and Implementation source code
Libor Market Model is a term structure model applied to value and hedge exotic interest rate derivatives. The model is recognized and employed largely because of its consistency with the popular market model, Black's formula. This consistency makes the calibration process easy as the Black's market prices for vanilla interest rate Options can be instantly used as an input. The purpose of this book -Libor Market Model: Theory and Implementation is to analyze the Libor Market Model in theory and implement it practically to the evaluation of normal caps, barriers, European swaptions and ratchets, etc. The dynamic of the Libor Market Model will be derived and the whole steps of its implementation applying Monte Carlo simulation will be introduced. Implementation is accomplished via several volatility and correlation formulation. Special attention should be given when it comes to calibrate the Libor Market Model and model the forward rate volatilities and correlations since they could impact prices of interest rate derivatives substantially. you can download the free c course code by leaving your email at http://www.irina-goetsch.com/libor-market-model/app#order wiki(LIBOR Market Model) Tags - libor

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370

European Exchage Options
Options to exchange one asset for another arise in various contexts. An option to buy yen with Australian dollars is, from the point of view of a US investor, an option to exchange one foreign currency asset for another foreign currency asset. A stock lender offer is an option to exchange shares in one stock for shares in another stock. Consider a European option to give up an asset worth ST at time T and receive in return an asset worth VT, the payoff from the option is max(VT-ST,0) A formula for valuing this option was first produced by Margrabe at his paper “The value of an option to exchange one asset for another”, Journal of Finance, a sample Matlab file can be downloaded here http://www.global-derivatives.com/code/matlab/ EuropeanExchange.m http://www.global-derivatives.com/ index.php?option=com_content&task=view&id=184 wiki(Foreign exchange option) Tags - exchange , derivative , option

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371

brownian bridge simulation
Quotation Similar to the spectral path construction method, the Brownian bridge is a way to construct a discretised Wiener process path by using the first Gaussian variates in a vector draw z to shape the overall features of the path, and then add more and more of the fine structure. The very first variate z1 is used to determine the realisation of theWiener path at the final time tn of our n-point discretisation of the path by setting Wtn = sqrt(tn)z1. The next variate is then used to determine the value of the Wiener process as it was realised at an intermediate timestep tj conditional on the realisation at tn (and at t0 = 0 which is, of course, zero). The procedure is then repeated to gradually fill in all of the realisations of the Wiener process at all intermediate points, in an ever refining algorithm.

here is a simulation of Brownian paths, brownian-bridge type simulation. Click to download Tags - brownian-bridge

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372

Swaption valuation
A swaption is an over-the-counter derivative on a swap. Normally, the underlying swap is a vanilla interest rate swap. Nevertheless, "swaption" could be applied to relate to a derivative about whatever kind of swap. Swaptions could be European, American, or even Bermudan type. They can be physically settled, in which case a derivative is really participated into at exercise date. They can be cash settled as well, in which example the market price of the underlying swap is cleared at maturity. it is frequently more handy to address in terms of two common kinds of swaption: A payer swaption is a call option on a pay-fixed swap, the swaption holder has the right to pay fixed rate on a swap. A receiver swaption is a call option on a receive fixed swap, the swaption holder has the right to receive fixed rate on a swap. a spreedsheet showing how to price a swaption in a tree can be downloaded at: http://www.anassabri.info/ValuingSwaptions.xls wiki(Swaption) Tags - swaption

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373

principal component analysis
Principal component analysis (PCA) is widely used for data research, for instance, interest rate analysis, VaR calculation of porfolio, etc. What is PCA? It is a method of discovering patterns in data, and conveying the data in such a manner to spotlight their similarities and divergences. Because patterns in data can be difficult to detect in data of high dimension, where the luxury of graphical representation is not available, PCA is a potent tool for analysing data. The additional major benefit of PCA is that after you have obtained these patterns in the data, and you compact the data, ie. by reducing the number of dimensions, without much loss of information.

http://www.theponytail.net/CCFEA/ http://www.theponytail.net/CCFEA/lect04/lect04pc.m wiki(principal component analysis) Tags - pca

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374

Nelson Siegel interest rate model calibration
Often we need to model the yield curve for bond pricing and risk analysis purpose, for instance, The valuation of products requires the modelling of the entire covariance structure. Historical estimation of such large covariance matrices is statistically not tractable anymore. Need strong structure to be imposed on the co-movements of financial quantities of interest. Specify the dynamics of a small number of variables (e.g. PCA). Correlation structure among observable quantities can now be obtained analytically or numerically. Simultaneous pricing of dierent options and hedging instruments in a consistent framework. There are dozens of interest rate models used by practioners, NelsonSiegel term structure model is one of them gained popularity. here is a spreedsheet showing how to fit Extended Nelson Siegel Spot Rate with Solver.

http://janroman.dhis.org/ http://janroman.dhis.org/finance/Excel/ NelsonSiegelYieldCurveModel.xls wiki(Nelson-Siegel) Tags - yield , nelson-siegel

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375

Combinatorica mathematica package
Oops, first post on Mathematica, simply because I dont use it for research, I simply love Matlab and C++, due to their popularity and easy-to-use. However, good news for Mathematica fans, here I found an excellent Mathematica package named "The Combinatorica Project", which is a package written in 1989 by Steve Skiena for exercising computational discrete mathematics. here is the introductory page and downloading link, have fun and enjoy new week. http://www.cs.uiowa.edu/~sriram/Combinatorica/ Tags - mathematica

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376

PSOR for American option
We often have to price the American Option with Linear Complementarity Formulation when using finite difference method. One of methods for solving linear complementarity problem is Projected Successive Over Relaxation (PSOR), which is iterative and tries to solve the following formulation: x'(Ax - b) = 0 x >= 0 Ax - b >= 0 using the projected SOR algorithm. Here is a sample Matlab code showing the basic algorithem of PSOR, function [x] = psor(A,b,x0) omega = 1.5; tol = 1e-9; jmax = 1e+3; n = length(b); x = x0; j = 1; for i = 1:n x(i) = max(0,x(i)+omega*(b(i)-A(i,:)*x)/A(i,i)); end while (norm(x-x0) > tol) && (j < jmax) j = j + 1; x0 = x; for i = 1:n x(i) = max(0,x(i)+omega*(b(i)-A(i,:)*x)/A(i,i)); end end return A problem with this sample code is slow computation speed, Should you are happy with C++, the following C++ code which can be called directly in Matlab.

Click to download wiki(Linear complementarity problem) Tags - psor , american , option

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377

Finance IQ test
Weekend Time! interested into doing a short test on your finance IQ? Finance IQ is designed to test your knowledge in finance. The questions database includes various categories to choose, for instance, you can choose to test your Risk IQ or Options IQ, level could be from as easy as the definition of European option, black scholes to FRM test or even more advanced. Take a rest & have fun. Kind reminding: today is the last day of Beijing Olimpic and closing ceremony will be staging. http://www.fintools.com/docs/FinanceIQ.xls Tags - iq

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378

Floating Strike Lookback Option
The payoffs from lookback options depend on the maximum or minimum asset price reached during the life of the option. The payoff from a European-style lookback call is the amount that the final asset price exceeds the minimum asset price achieved during the life of the option. The payoff from a European-style lookback put is the amount by which the maximumasset price achieved during the life of the option exceeds the final asset price. Floating Strike Lookback Options means the strike is given as the optimal(maximum or minimum) value of the underlying asset. Matlab code for pricing it is here: http://www.global-derivatives.com/code/matlab/LookbackFloatingStrike.m Tags - lookback , exotic , option

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379

Markowitz Efficient Frontier stock portfolio
The efficient frontier was initiative specified by Markowitz in his innovative report . The theory deals an amounts of risky products and searches an optimal portfolio based on those possible investments. Given a time interval, we could impute expected returns and volatilities. We could also specify a correlation of returns. The "optimal" portfolio can be formed in two methods: first: for a certain level of volatility, count all portfolios that equal this volatility. amongst them all, choose the one with highest expected return. second: for a given expected return, count all portfolios having this expected return. Choose the one which has the lowest volatility. often numerical calculation is applied for optimization as we have additional constraints on the optimal portfolio, for instance, weight limits, etc. below is an Excel file demonstrating many assets Efficient Portfolio can be generated by solver. http://www.essex.ac.uk/ccfea/Teaching/Archive/200304/Quant/ 3%20Portfolio%20Analysis/Efficient%20Portfolio.xls wiki(Capital asset pricing model) Tags - markowitz , optimization

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380

Visualize Copulas
In those Copula codes you can get a rough idea what copula is, how to estimate and simulate it, how to test its performance, etc., to help you visualize what on earth the copula should look like, below R code draws plots of some widely used copulas. PS: I just finished my Copuls exam one hour ago, performance...um.... Fighting... http://www.fam.tuwien.ac.at/~mkeller/R-progs/copula.R Tags - copula

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381

Java Quantlib
Many people know QuantLib, which is a free/open-source library for quantitative finance for modeling, trading, and risk management in reallife written in C++, for those people prefer Java language, they have to read & understand C++ codes and transfer them to Java code. JQuantLib is aiming at these Java-fans group, Quotation JQuantLib is a free, open-source, comprehensive framework for quantitative finance, written in Java. It provides "quants" and Java application developers several mathematical and statistical tools needed for the valuation of financial instruments, among other features.

Is there MQuantLib for Matlab fans? Tags - quantlib , java

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382

SABR stochastic volatility model
A suitable characteristic of any local and stochastic volatility model is that the model can yield the same prices of the vanilla options that were applied as inputs to the calibration of the model. failure to do so will clearly cause the model not arbitrage free and generate it nearly useless. A substantial point of the SABR model is that the prices of vanilla options can be computed in almost closed form (Subject to the precise of a series expansion). Basically it has been shown that the price of a vanilla option under the SABR model is yielded by the suitable Black model, given that the correct implied volatility is employed.

SABR code in VBA and C is available together with a PDF: http://www.axelvogt.de/axalom/SABR.pdf http://www.axelvogt.de/axalom/SABR_Code_VB_and_C.txt wiki(SABR Volatility Model) Tags - stochastic , volatility

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383

Copula simulation and estimation
Copula is widely used for multi-variate modeling, especially when the underlying marginal distributions are not the same, generally speaking, Copula has at least the following application: • Copulas provide us with a deeper understanding of dependence as such. • Many dependence concepts, orderings and measures of association depend on H only through C and are in other words margin-free. • Copulas allow us to easily construct (and simulate from) multivariate distributions with given univariate margins. This fact is particularly useful for stress testing. • Multivariate data can be modeled in two separate stages: The univariate marginals can be handled first and their dependence structure thereafter. This comes in especially handy when we either already have some information about the margins (e.g. in the bottom-up approach in risk management) or if finding appropriate marginal distributions is difficult. In the latter case, we can model the margins nonparametricaly and use a parametric copula model to describe their dependence. ...... Below is the matlab file for Copula simulation and estimation, enjoy. http://www.mathworks.com/matlabcentral/fileexchange/ loadFile.do?objectId=15449 wiki(Copula) Tags - copula

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384

Perl Option Pricing Project
Derivatives can be valued applying a mixture of statistical models. A former version of the Perl module was utilized to produce market analysis software package. The code comprises of a Perl module incorporating routines to do option pricing and related computations. Software documentation For a fantabulous reference on derivative pricing, confer with Espen Gaarder Haug (1998) Option Pricing Formulas, McGraw-Hill. The routines were all deduced from the pseudocode there. http://www.kmri.com/software/popp.html Tags - perl , option

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385

GEV distribution and density function
The role of the generalized extreme value (GEV) distribution in the theory of extremes is analogous to that of the normal distribution (and more generally the stable laws) in the central limit thoory for sums of random varibles. The df of the GEV distribution is given by a threeparameter family: shapre, location and scale, where shape parameter decides the distribution is Frechet, Weibull or Gumbel. A matlab code for plot the GEV distribution and density function http://www.essex.ac.uk/ccfea/Teaching/Archive/200405/CF901/ weeks3and4/plot_GEV_densities.txt wiki(Generalized extreme value distribution) Tags - gev , extreme

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386

Multivariate normal CDF
As a generalization of the normal or Gauss distribution to many dimensions we define the multinormal distribution. In statistics, the multivariate normal (mvn) is a widely-used distribution, for instance, basket option pricing, portfolio VaR analysis. Unluckily, its cumulative distribution function (cdf) doesn't take a closed form. There are, nevertheless, amounts of techniques that numerically approximate the value of the cdf. Here is one of such methods in M file. http://alex.strashny.org/a/Multivariate-normal-cumulativedistribution-function-(cdf)-in-MATLAB.html wiki(Multivariate normal distribution) Tags - cdf

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387

Equity linked notes
An Equity-Linked Note (ELN) is a debt tool that differs from a normal fixed-income security due to the coupon is depend on the return of a single stock, basket of stocks or equity index. An ELN is a principal secured instrument Commonly configured to generate 100% of the original investment at due date, but differs from a standard fixedcoupon bond because its coupon is decided by the performance of the underlying equity. This spreadsheet calculates the price and embedded option value of equity linked notes, together with other option, Robeco-Reverse convertible, for example. http://www.ulb.ac.be/cours/solvay/farber/exceltips.htm http://www.ulb.ac.be/cours/solvay/farber/VUB/ 08%20Lecture%202.xls wiki(Equity linked note) Tags - eln

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388

Process Simulation in R
Simple demonstration codes for process simulation in R, including Brownian motion simulation, Poisson process simulatio, Euler scheme simulation for Geometric Brownian motion, the mean-reverting process, and the process with two 'attractors', etc. http://www.math.ku.dk/~rolf/teaching/mfe04/MiscInfo.html#Code Tags - simulation

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389

Optimization packages
Optimization models play an increasingly important role in financial decisions. Many computational nance problems ranging from asset allocation to risk management, from option pricing to model calibration can be solved efficiently using modern optimization techniques. Several classes of optimization problems including linear, quadratic, integer, dynamic, stochastic, conic, and robust programming are often encountered in financial models. This site collects dozens of optimization packages in different programming languages, you will find one for you.

http://www.rpi.edu/~mitchj/pack.html#abacus wiki(Optimization) Tags - optimization

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390

Real Option Models in Valuation
Real Option good example in Corporate Finance This example approximates the economic value of the option to extend in an investing project. it can also be used to appraise the value of strategic options. This example calculates the value of the option to postpone an investment project. This example estimates the value of fiscal tractability, i.e, the sustenance of extra debt capability or back-up funding. This example estimates the value of the option to give up a project or investment. Real Option Models in Valuation A example that applies option pricing to measure the equity in a company; most well suitable for largely levered firms in trouble. A model that applies option pricing to evaluate a natural resource firm; useful for measuring oil or mining companies. A model that applies option pricing to appraise a product patent or option; useful for valuing the patents that a company may declare.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ spreadsh.htm#optincf wiki(Real option) Tags - real-option , option

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391

Brinson performance attribution
Performance attribution is used as a way to check the relative performance of portfolio against selected Benchmark, the difference of which is called active return. Brinson method decomposes active return to asset selection effect and industry selection effect, helping investor realize where the active return is from, which asset or industry has a biggest contribution to the active return of portfolio, ect.

http://www.barra.com/products/spreadsheets/stockselection.xls wiki(Performance attribution) Tags - performance

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392

R-code for Vasicek estimation
A short-rate model is usually calibrated to some initial structures in the market, typically the initial yield curve, the caps volatility surface, the swaptions volatility surface, and possibly other products, thus determining the model parameters. Vasicek, Cox Ingersoll Ross (CIR), Dothan, for instance, are among the frequently-used short-rate models. The strength of Vasicek model is analytical bond prices and analytical option prices can be obtained and easily calculatied, however, negative short rates are also possible with positive probability.

R code can be downloaded at http://www.math.ku.dk/~rolf/teaching/ mfe04/MiscInfo.html#Code wiki(Vasicek model) Tags - vasicek , cox ingersoll ross

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393

Valuing Warrants under dilution
Usually, when a call option on a stock is exercised, the party with the short position acquires shares that have already been issued and sells them to the counterparty, however, warrants, executive stock options as well, are options that work slightly differently, they are written by a company on its own stock, when they are exercised, the company issues more of its own stock and sells them to the option holder for the strike price. the exercise of a warrant therefore leads to an increase in the number of shares of the company's stock that are outstanding, which has the dilution effect on the price of warrant as a result. often we ignore this dilution effect as it might be small, here is a spreedsheet model for valuing options that result in dilution of the underlying stock if you do want to consider it.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ spreadsh.htm#basicoption Tags - warrant

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394

halton and sobol sequences
I couldnot stop using Quasi Monte Carlo simulation for derivative pricing, especially when the problem to solve is a low dimensional one. Among low discrepancy random numbers, Halton sequences and sobol sequences are two of my favorites, although sometimes I compare other sequences like Faure, Haselgrove, and Niederreiter as well. Unlike pseudo-random numbers, low-discrepancy numbers aim not to be serially uncorrelated, but instead to take into account which points in the domain to be sampled have already been probed. Low-discrepancy numbers have become a popular tool for financial Monte Carlo calculations since the early 1990s.

http://www.math.uic.edu/~hanson/mcs507/cp4f04.html wiki(Low-discrepancy sequence)

Tags - halton , sobol

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395

Beasley-Springer-Moro inverse normal
Once you get uniform random numbers, how to inverse that to normal random numbers require numerical technique, Moro is one of such techniques, Quotation my favourite method for constructing standard normal variates is the highly sophisticated interpolation formula by Peter Acklam for the inverse cumulative normal distribution. A very crude way to quickly construct (approximately) normally distributed variates is to add up 12 uniform variates, and subtract 6. For any reasonable application, I would always use either Peter Acklam’s method, or Boris Moro’s interpolation formula.

http://www.mathworks.com/matlabcentral/fileexchange/ loadFile.do?objectId=14234&objectType=file Tags - normal , monte carlo

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396

Barrier Option Calculator
tran(This program can calculate values and greeks for plain vanilla options as well as single and double barrier options with or without rebate. Calculations are performed within the standard Black-Scholes model. For plain vanilla and single barrier options, the calculation is purely analytical. Double barrier options are approximated using a Fourier series approximation, unless volatility is low. For low volatility an alternative series expansion is used.)

http://www.neumann.nl/~dimitri/pricing.html wiki(barrier option) Tags - barrier , calculator , option

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397

Monte Carlo Chooser Option
Chooser option gives the holder the right to choose it is a call or put option at a prescriped strike price and date. here is a sample spreedsheet pricing chooser option with Monte Carlo simulation. http://fisher.utstat.toronto.edu/sjaimung/courses/2008-2009/sta2502/ main.htm

Tags - monte carlo , chooser , option

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398

State space model toolbox
Another MATLAB toolbox for time series analysis using state space models. Supports fully interactive model construction with MATLAB objects and efficient Kalman filter backend implemented in c.

http://sourceforge.net/projects/ssmodels/ wiki(kalman filter) Tags - filter

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399

Sobol and Generalised Faure sequences
Low discrepancy sequences are highly recommended for lowdimensional Monte Carlo simulation, they have been proved to be able to improve convergence speed, accuracy, etc. take a trial.

http://web.wits.ac.za/NR/rdonlyres/96ECC07EAE3C-4706-94F8-C1A53011AF38/0/searlecode.zip wiki(Low-discrepancy sequence) Tags - sobol , faure

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400

Entire Equity and Monetary Option Formulas
lots of equity and monetary option model available in VBA, for instance, Black Scholes 1973, you can download them or calculate the formula online. http://www.montegodata.co.uk/Consult/Derivative/Derivatives.html

Tags - derivative , calculator , option

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401

Code for Financial Distributions

Modeling

Under

Non-Gaussian

This site stores matlab codes accompanying the book Financial Modeling Under Non-Gaussian Distributions, a wonderful and easy to read book, which was used by my professor last semester, you can imagine how much this site has helped me, Cheers. http://www.hec.unil.ch/MatlabCodes/ Tags - matlab

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402

Black Scholes in Multiple Languages
Black Scholes formula is widely used for vanilla option pricing, which is also easy to code, but how many language can you use? I can do it in Matlab, C++, GAUSS, VBA, PHP. Guess what, this site collects more than 30 languages, have fun! http://www.espenhaug.com/black_scholes.html

wiki(black scholes) Tags - black scholes

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403

Calibration of a binomial tree to the volatility surface
How to calibrate a binomial tree to the volatility surface implied from market option prices. Code in Matlab. http://theponytail.net/CCFEA/ wiki(Volatility smile) Tags - volatility , smile , binomial

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404

Monte Carlo Pricer Black Derman Toy Model
Financial Quantitative Algorithms below you will find the some sources of the sources in C++ and Java.T

Table with C++ sources

Closed expressions and Approximate Models for various Financial Option on Equity Binary Tree method to Price Options on Equity Monte Carlo pricer of Exotics Monte Carlo Pricer of American Calls and Puts Monte Carlo Pricer of European Barrier, Knock in and out Options Monte Carlo Pricer European Spread Options Monte Carlo Pricer of Interest Rate Derivatives (One factor) Monte Carlo Pricer Ho Lee Model Monte Carlo Pricer Hull White Model Monte Carlo Pricer Black Derman Toy Model Monte Carlo Pricer Brace Gatarek Musiela / Jamishidian Model Monte Carlo pricer of exotics with constant Jump-Diffussion Monte Carlo Pricer of Barrier, Knock in and out Options with JumpDiffusion Monte Carlo Pricer European Spread Options with Jump-Diffusion

Table with Java sources

Closed expressions and Approximate Models for various Financial Option on Equity Binary Tree method to Price Options on Equity Monte Carlo pricer of Exotics Monte Carlo Pricer of American Calls and Puts Monte Carlo Pricer of European Barrier, Knock in and out Options Monte Carlo Pricer European Spread Options Monte Carlo Pricer of Interest Rate Derivatives (One factor) Monte Carlo Pricer Ho Lee Model

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405

Monte Carlo Pricer Hull White Model Monte Carlo Pricer Black Derman Toy Model Monte Carlo Pricer Brace Gatarek Musiela / Jamishidian Model Monte Carlo pricer of exotics with constant Jump-Diffussion Monte Carlo Pricer of Barrier, Knock in and out Options with JumpDiffusion Monte Carlo Pricer European Spread Options with Jump-Diffusion http://www.javaquant.net/downloads.html wiki(Black Derman Toy) Tags - bdt , monte carlo

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406

download option price data from Yahoo
This R program can be used to download option price data from Yahoo to a data frame and to plot the corresponding implied-volatility smiles. http://www.fam.tuwien.ac.at/~mkeller/ Tags - download , data , option

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407

Famas Return Decomposition
A sample spreedsheet demonstrating how to decompose Fama's return into several sources. http://clem.mscd.edu/~mayest/FIN4600/Files/famadcmp.xls

Tags - fama

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408

Receiver Swaption Price
Calcualtes the price of a receiver swaption (bp). http://www.vbnumericalmethods.com/finance/

wiki(Swaption) Tags - swaption

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409

Quantile Regression
Quantile regression is a statistical technique intended to estimate, and conduct inference about, conditional quantile functions. Just as classical linear regression methods based on minimizing sums of squared residuals enable one to estimate models for conditional mean functions, quantile regression methods offer a mechanism for estimating models for the conditional median function, and the full range of other conditional quantile functions. By supplementing the estimation of conditional mean functions with techniques for estimating an entire family of conditional quantile functions, quantile regression is capable of providing a more complete statistical analysis of the stochastic relationships among random variables.

http://www.econ.uiuc.edu/~roger/research/rq/rq.html wiki(Quantile regression) Tags - regression

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410

calibration of the Heston SV model
http://www.theponytail.net/CCFEA wiki(heston model) Tags - hestonvolatility , calibration

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411

CDO Pricing in Gaussian Copula
CDO prices with Monte Carlo simulation includes the creation of roads in the sample correlation preset times. This defect is sometimes used to calculate payments to fixed and floating legs and worth of each leg. more at http://math.nyu.edu/~atm262/spring06/ircm/cdo/index.html

wiki(Collateralized debt obligations) Tags - cdo , copula

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412

simulating a two-dimensional variance gamma process with Clayton dependence structure
Simulates two dependent variance gamma processes without drift, dependence is given by Clayton Levy copula with parameters theta and rho. http://people.math.jussieu.fr/~tankov/florence/

wiki(Variance-gamma distribution) Tags - copula , levy

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413

EWMA Volatility
VB function to calculate 'exponentially weighted moving average' volatilites (=RiskMetrics volatility forecasting) with or without assuming a zero mean return. http://www.andreassteiner.net/performanceanalysis/ ?Downloads:VBA

wiki(EWMA) Tags - volatility

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414

Black Scholes Implied Volatility
Calculates the implied volatility of an european option using bi-section method. This function uses the super black scholes function. http://www.vbnumericalmethods.com/finance/

wiki(Implied volatility) Tags - black scholes , volatility

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415

Monte Carlo Pricer Brace Gatarek Musiela / Jamishidian Model
Table with Java sources

Closed expressions and Approximate Models for various Financial Option on Equity Binary Tree method to Price Options on Equity Monte Carlo pricer of Exotics Monte Carlo Pricer of American Calls and Puts Monte Carlo Pricer of European Barrier, Knock in and out Options Monte Carlo Pricer European Spread Options Monte Carlo Pricer of Interest Rate Derivatives (One factor) Monte Carlo Pricer Ho Lee Model Monte Carlo Pricer Hull White Model Monte Carlo Pricer Black Derman Toy Model Monte Carlo Pricer Brace Gatarek Musiela / Jamishidian Model Monte Carlo pricer of exotics with constant Jump-Diffussion Monte Carlo Pricer of Barrier, Knock in and out Options with JumpDiffusion Monte Carlo Pricer European Spread Options with Jump-Diffusion

http://www.javaquant.net/downloads.html wiki(LIBOR Market Model) Tags - libor , bgm

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416

Monte Carlo Pricer of Barrier, Knock in and out Options with Jump-Diffusion
how to price barrier options with jump-diffusion by monte carlo simulations, codes are in Java language. http://www.javaquant.net/downloads.html

wiki(Barrier option) Tags - barrier , option

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417

Outperformance Options Price
Computes the price of an outperformance option. http://www.vbnumericalmethods.com/finance/ wiki(Exotic option) Tags - outperformance , option

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418

Rainbow Option Price
Calculates the price of a (two-coloured rainbow) option delivering the best of two risky assets or cash. http://www.vbnumericalmethods.com/finance/

wiki(Rainbow option) Tags - rainbow , option

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419

Kalman filter toolbox for Matlab
This toolbox supports filtering, smoothing and parameter estimation (using EM) for Linear Dynamical Systems. * Download toolbox * What is a Kalman filter? * Example of Kalman filtering and smoothing for tracking * What about non-linear and non-Gaussian systems? * Other software for Kalman filtering, etc. * Recommended reading more at http://www.cs.ubc.ca/~murphyk/Software/Kalman/ kalman.html wiki(Kalman filter) Tags - filter

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420

Stochastic simulation using MATLAB
This tutorial contains Matlab code and documentation for a seminar on stochastic simulation. The program package demonstrates basic techniques for effective simulation and visualization of various stochastic processes and random mechanisms. We try to emphasize methods that are natural given the matrix and vector oriented nature of Matlab. The goal is that users of this material find inspiration and ideas to prepare their own code for a particular application involving random dynamics. http://www.math.uu.se/research/telecom/software/ Tags - simulation

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421

CONVERTIBLE BOND PRICING MODEL
A simple spreadsheet to price convertible bond based on Espen Gaarder Haage's binomial tree model which was originally developed by Goldman-Sachs. http://www.yieldcurve.com/Mktsoftware/excelCB.htm wiki(Convertible bond) Tags - convertible bond

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422

matlab tips and tricks
Great site for anyone who wants to optimize his matlab file, speed up computer, have fun. http://www.ee.columbia.edu/~marios/matlab/matlab_tricks.html

wiki(matlab) Tags - matlab

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423

American Options via Monte Carlo Simulations
Sample code to price american put option with least square Monte Carlo simulation. http://www.quantcode.com/modules/mydownloads/ visit.php?cid=11&lid=54 Tags - monte carlo , option

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424

Risk Neutral Default Probability
A spreadsheet that demonstrates risk-neutral default probabilities when pricing bonds with embedded options. We illustrate the Martingale pricing process under certain assumptions. The user inputs the bond parameters and an assumed recovery rate for each bond. The spreadsheet computes the default probability. The accompanying spreadsheet illustrates in simple terms how the riskneutral probabilities are obtained.

http://www.yieldcurve.com/Mktsoftware/excelRN.htm wiki(risk neutral) Tags - default

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425

UK Gilt zero-coupon yield curve
This spreadsheet demonstrates constructing a zero-coupon yield curve from market gilt yields, using the basis spline methodology and approach. A technical description of the methodology appeared in the book "Capital Market Instruments" by Moorad Choudhry et al (FT Prentice Hall 2001).

http://www.yieldcurve.com/Mktsoftware/excelYC.htm wiki(yield curve) Tags - yield

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426

Asian Option Pricing
Here is the MATLAB implementation of the pricing of Asian options from the paper Unified Asian Pricing by Jan Vecer (2002), Risk, Vol. 15, No. 6, 113-116.

http://en.literateprograms.org/Asian_Option_Pricing_(Matlab) wiki(asian option) Tags - asian , option

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427

Matlab-GUI equity derivative calculator
This is simple Matlab-GUI files i wrote learning to code an equity derivative calculator, options include: European option American option Asian option Index future Cash-or-nothing option Asset-or-nothing option Lookback option Chooser option Compound option Exchange option Power option

Unzip the EquityDerivGUI file to a directory of your local computer, change the directory to be the current directory of your matlab, run main file DerivativeGui.m. tested under Matlab7.0.1. Click to download Tags - derivative , matlab , gui

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428

Mersenne Twister random number generator
SFMT is a new variant of Mersenne Twister (MT) introduced by Mutsuo Saito and Makoto Matsumoto in 2006. The algorithm was reported at MCQMC 2006. The article will apper in the proceedings of MCQMC2006. (see Prof. Matsumoto's Papers on random number generation.) SFMT is a Linear Feedbacked Shift Register (LFSR) generator that generates a 128-bit pseudorandom integer at one step. SFMT is designed with recent parallelism of modern CPUs, such as multi-stage pipelining and SIMD (e.g. 128-bit integer) instructions. It supports 32-bit and 64-bit integers, as well as double precision floating point as output.

http://www.math.sci.hiroshima-u.ac.jp/~m-mat/MT/SFMT/ index.html wiki(Mersenne Twister) Tags - random

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429

Singular value decomposition
The singular value decomposition of MxN matrix A is its representation as A = U W V T, where U is an orthogonal MxM matrix, V - orthogonal NxN matrix. The diagonal elements of matrix W are non-negative numbers in descending order, all off-diagonal elements are zeros. The matrix W consists mainly of zeros, so we only need the first min(M,N) columns (three, in the example above) of matrix U to obtain matrix A. Similarly, only the first min(M,N) rows of matrix V T affect the product. These columns and rows are called left and right singular vectors.

http://www.alglib.net/matrixops/general/svd.php wiki(Singular value decomposition) Tags - matrix

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430

Normal Inverse Gaussian(NIG) and other stochastical vol model
stochastic volatility / other models NIG_tiny_withDLL.zip Normal Inverse Gauss option pricer (with Esscher transform correction), Excel + DLL, and a Maple worksheet with short explanations, cf Schoutens book "Levy Proccess in Finance" VG_Pricer_short(Maple).pdf A 'brute' option pricer for the Variance Gamma model (Madan, Carr, Chang 1998) in Maple VG_small.zip Variance Gamma model in Excel + DLL; it uses a gamma distribution pdfGamma(a,x) which accepts large numerical arguments

http://www.axelvogt.de/axalom/ wiki(Normal-inverse Gaussian distribution) Tags - nig , volatility

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431

Online Option Calculator
Calculators * Asian, fixed strike * Asian, floating strike * Barrier * Barrier, double * Binary, asset-or-nothing * Binary, cash-or-nothing * Binary, gap * Double Binary * Chooser, simple * Chooser, complex * Compound * Correlation * Exchange * Extendible, holder * Extendible, writer * Forward start * Lookback, fixed strike * Lookback, floating strike * Power * Product * Quanto * Quotient * Rainbow * Range * Spread * StrikeReset * TimeSwitch * Vanilla http://www.sitmo.com/live/OptionVanilla.html Tags - calculator , option

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432

Monte Carlo Simulation Spread Options
an example of code used to price a spread option using Monte Carlo simulations (Haug). http://www.mathworks.com/matlabcentral/fileexchange/82

wiki(Spread option) Tags - spread , monte carlo , option

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433

Matlab code for 2-factor CIR in simulations
Jackknifing Bond Option Prices. Programs and data used in the paper: Swap and LIBOR Rates; Matlab code for 1-factor CIR in simulations; Matlab code for 1-factor CIR in applications; Matlab code for 2-factor CIR in simulations; Matlab code for 2-factor CIR in applications http://www.mysmu.edu/faculty/yujun/research.html http://www.mysmu.edu/faculty/yujun/Research/ jackknifecir1foption_sim.m Tags - cox ingersoll ross , cir

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434

CompEcon Toolbox for Matlab
CompEcon is a set of MATLAB functions for solving a variety of problems in economics and finance. The library functions include rootfinding and optimization solvers, a integrated set of routines for function approximation using polynomial, splines and other functional families, a set of numerical integration routines for general functions and for common probability distributions, general solvers for Ordinary Differential Equations (both initial and boundary value problems), routines for solving discrete and continuous time dynamic programming problems, and a general solver for financial derivatives (bonds, futures, options). http://www4.ncsu.edu/~pfackler/compecon/toolbox.html Tags - matlab

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435

Quasi-maximum likelihood
Quasi-maximum likelihood toolbox in matlab. http://www.mathtools.net/files/net/qmle.zip

wiki(maximum likelihood) Tags - mle

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436

A Matlab Toolbox for Univariate GARCH estimation
The primary feature that differentiates GARCHKIT from other GARCH implementations in Matlab is its ability to incorporate covariates into the second moment. The current version of GARCHKIT, 1.0b3, allows univariate ARMA(P,Q)-GARCH(R,S) estimation and simulation using maximum likelihood. The conditional distribution may be normal, student's t or a mixture of two normals. Version 1.1 now estimates and simulates FIGARCH and GARCH-inMean models. Code can be downloaded at http://www-agecon.ag.ohio-state.edu/ people/roberts.628/papers/research/garchkit/garchkit.html Tags - garch

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437

weighted covariance matrix
Computes a weighted covariance matrix and associated values http://www.stanford.edu/~wfsharpe/mat/mlfn.htm

wiki(Covariance) Tags - covariance

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438

On-Line Options Pricing Probability Calculators
Black-Scholes pricing analysis -- Ignoring dividends: Lets you examine graphically how changes in stock price, volatility, time to expiration and interest rate affect the option price, time value, the derived "Greeks" (delta, gamma, theta, vega, rho) and the probability of the option closing in the money. For simplicity, dividends are ignored so you just specify the time to expiration in days rather than entering specific dates. more at http://www.hoadley.net/options/calculators.htm Tags - black scholes , calculator , option

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439

Copula toolbox for Matlab
An aggregation of Matlab routines that for research on copulas for financial time series . A few elementary illustration code is given in "copula_example_code.m". A table of contents is given in "contents.xls". Shortly, the toolbox comprises CDFs, PDFs, log-likelihoods and random number generators for numerous basic bivariate copulas, including the Clayton, Gumbel, Normal, Student's t, Frank, Plackett and symmetrised Joe-Clayton (SJC) copulas. Simple codes for time-varying Normal, Gumbel and SJC copulas are included as well. http://econ.duke.edu/~ap172/code.html Tags - copula

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440

A lightweight applications

C++

library

for

quantitative

finance

What is Terreneuve? Simply: "A lightweight C++ library for quantitative finance applications." In more detail, Terreneuve is our team name for the project in the Fall 2005 Computing in Finance course at NYU's Courant Institute Masters in Math Finance. Working from this specification we hope to design a useable C++ library for some important quantitative finance applications. Our target audience (aside from our prof ;-)) is students in quantitative finance and those seeking a gentle introduction to financial computing. Obviously, we also intend to use the project as a learning opportunity. We refer those looking for a more comprehensive (and complex) library to the quantlib project. http://terreneuve.sourceforge.net/

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441

C++ Financial Algoritms (Financial Numerical Recipes)
Quotation In finance, there are areas where formulas tend to get involved. Sometimes it may be easier to follow an exact computer routine. I have made some C++ subroutines that implements common algoritms in finance. Typical examples are option/derivatives pricing, term structure calculations, mean variance analysis. These routines are presented together with a good deal of explanations and examples of use, but it is by no means a complete "book" with all the answers and explanations. I'm hoping to turn it into a book, but even in its incomplete state is should provide a good deal of useful algorithms for people working within the field of finance.

Book and Code are at http://finance-old.bi.no/~bernt/gcc_prog/ index.html Tags - finance

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442

Global Derivatives Option Pricing Matlab Code
a list of various derivatives related Matlab files grouped into categories. We have attempted to provide the simple models, as well as those which rely on simulation techniques or advanced modeling, more at http://www.global-derivatives.com/ index.php?option=com_content&task=view&id=184 Tags - derivative , option

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443

Archive of Finance Econometrics GAUSS Matlab Code
Procedures and necessary declaration files to calculate fitted option prices using Fourier Inversion methods as in Bates (RFS 1996). This allows for a variety of possible risk neutral diffusions which can accommodate stochastic volatility, jumps, as well as correlation between the volatility process and underlying asset. more at http://www.cameronrookley.com/gtoml/archive.html

Tags - gauss

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444

Fast Greeks by Simulation in Forward Libor Models
Fast Greeks by Simulation in Forward Libor Models by Prof. Glasserman, paper and code can be downloaded at: http://www.gsb.columbia.edu/faculty/pglasserman/Other/ grklibor.pdf http://www.gsb.columbia.edu/faculty/pglasserman/Other/ greeks_code.zip

wiki(libor) Tags - greeks , libor

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445

Design Patterns and Derivatives Pricing
Design patterns are the cutting-edge paradigm for programming in object-oriented languages. Here they are discussed, for the first time in a book, in the context of implementing financial models in C++. Assuming only a basic knowledge of C++ and mathematical finance, the reader is taught how to produce well-designed, structured, re-usable code via concrete examples. Each example is treated in depth, with the whys and wherefores of the chosen method of solution critically examined. Part of the book is devoted to designing re-usable components that are then put together to build a Monte Carlo pricer for path-dependent exotic options. Advanced topics treated include the factory pattern, the singleton pattern and the decorator pattern. Complete ANSI/ISO-compatible C++ source code is included on a CD for the reader to study and re-use and so develop the skills needed to implement financial models with objectoriented programs and become a working financial engineer. a copy of the c++ code is http://www.markjoshi.com/design/ Tags - derivative available to download at

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446

Heston Stochastic Volatility
Online Closed form and Monte Carlo simulation for option under Heston Stochastic Volatility. http://www.math.nyu.edu/ms_students/lw429/calculator.htm

wiki(Heston model) Tags - heston , volatility

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447

A Course in Derivative Securities: Introduction to Theory and Computation
A textbook for a second course in derivatives at the undergraduate or MBA level or for a first course in a financial engineering program. The option pricing functions in the book (including worksheet examples and the VBA source code) are available in this Excel workbook. http://www.kerryback.net/ Tags - derivative

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448

Spreadsheet Programs
To help you in finding the spreadsheet that you might want, I have categorized the spreadsheets into the following groups: 1. Corporate finance spreadsheets: These spreadsheets are most useful if you are interested in conventional corporate financial analysis. It includes spreadsheets to analyze a project's cashflows and viability, a company's risk profile, its optimal capital structure and debt type, andwhether it is paying out what it can afford to in dividends. 2. Valuation Inputs Spreadsheets: In this section, you will find spreadsheets that allow you to a. Estimate the right discount rate to use for your firm, starting with the risk premium in your cost of equity and concluding with the cost of capital for your firm. b. Convert R&D and operating leases into capitalized assets c. estimate the right capital expenditures and diagnose the terminal value assumptions to see if they are reasonable. 3. Valuation Model Reconciliation: In this section, you will find spreadsheets that reconcile different DCF approaches - FCFE versus Dividend Discount Model, FCFE versus FCFF model, EVA versus Cost of capital and Net Debt versus Gross Debt Approaches. 4 . Big-picture valuation spreadsheets: If you are looking for one spreadsheet to help you in valuing a company, I would recommend one of these 'ginzu' spreadsheets. While they require a large number of inputs, they are flexible enough to allow you to value just about any company. You do have to decide whether you want to use a dividend, FCFE or FCFF model spreadsheet. If you have no idea which one will work for you, I would suggest that you try the "right model" spreadsheet first. 5 . Focused valuation spreadsheets: If you have a clear choice in terms of models - stable growth dividend discount, 2-stage FCFE etc. - you can download a spreadsheet for the specific model in this section. ...... http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ spreadsh.htm Tags - excel

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449

SAS for Financial Engineers
SAS for Financial Engineers: 1 – Introduction 2 – Data Management 3 – Financial Modeling(Important PROCs and Advanced PROCs: IML, SQL) 4 – Advanced Techniques (SAS Macro and other programming techniques) http://faculty.haas.berkeley.edu/peliu/computing/

Tags - sas , finance

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450

MatLab for Financial Engineers
MatLab for Financial Engineers: 1-Basics 2–Statistical Analysis 3–Application to Finance I (Monte Carlo Simulations – Statistics Toolbox) 4–Application to Finance II(Portfolio Choice, Risk Management – Optimum Toolbox) 5--Application to Finance III (Binomial and Trinomial Tree Valuation) http://faculty.haas.berkeley.edu/peliu/computing/ Tags - matlab

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451

Pricing Derivatives Securities using MATLAB
A Zip file containing the examples that were used in the MathWorks webinar: "Pricing Derivatives Securities using MATLAB". Highlights: * Pricing a portfolio of vanilla options using Black-Scholes, a Binomial Tree and Monte Carlo simulation. * Pricing exotic options using the implied trinomial tree (ITT) method * Hedging using derivatives * Pricing interest rate derivatives using the BDT model http://www.mathworks.com/matlabcentral/fileexchange/ loadFile.do?objectId=14508 Tags - derivative , matlab

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452

Parameters estimation of GARCH model
Parameters estimation of GARCH model. http://w3.uniroma1.it/passalac/buffer/GARCH.xls

wiki(GARCH) Tags - garch

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453

Financial Model Library by Thomas Ho
Introduction: * "Financial Model Library" is a library of financial models in an Excel spreadsheet. The purpose of the library is to promote usage and better understanding of financial models. * All financial models in this section can be used free of charge and can be distributed. * We hope that you can also contribute to the library of financial models by submitting your Excel model spreadsheet in the format consistent with our models. The rules for submission are similar to that of a Journal. That is: o We maintain the right to reject your submission or suggest o revisions of the models o We reserve the copyright of the Excel spreadsheet model. * The site is not responsible for any errors in the models and copyright violation of any models submitted. http://www.thomasho.com/mainpages/analysoln.asp Tags - library

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454

Contact us
abiao: PhD candidate in finance, UK (2009 ~ present) MSc in quantitative finance, Switzerland (2007 ~ 2008) Quant researcher, UK, (2008~2009) Quant analyst, China, (2004~2007) Skills: Matlab, VBA, S+/R, C++ bo: MSc in computational finance, China Researcher, China Skills: VBA, Eview Please leave message here, follow my twitter or write to abiao @ mathfinance.cn (remove space) for any issue regarding suggestion, cooperation, ad on this blog, complaint, sharing quant code related site, project outsourcing, internship, part-time job, freelance, etc., thank you. Should you are interested into posting your articles on mathfinance.cn, please read our paid contributor and guest post policies.

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455

Review This Site Tags - blog

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456

www.feedbooks.com Food for the mind

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457

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