Quantitative Finance

www.peaks2tails.com
www.peaks2tails.com Satyapriya Ojha
Quant Finance Math Primer

Math Primer

www.peaks2tails.com Satyapriya Ojha 2

Quant Finance Math Primer

Quadratic approximation of 𝑒 𝑥 using Maclaurin series

Quadratic approximation of 𝑒 𝑥 at x=2 using Taylor Series

www.peaks2tails.com Satyapriya Ojha 3

Quant Finance Math Primer

Numerical Integration

(16 steps)

(100 steps)

www.peaks2tails.com Satyapriya Ojha 4

Quant Finance Math Primer

Gradient Descent ( stuck at local minima )

Gradient Descent ( reaching global minima )

www.peaks2tails.com Satyapriya Ojha 5

Quant Finance Math Primer

Gradient Descent in 2D

(iteration 0)

(iteration 10)

www.peaks2tails.com Satyapriya Ojha 6

Quant Finance Math Primer

Root finding procedure ( Bisection Method )

(after step 1)

(after step 4)

www.peaks2tails.com Satyapriya Ojha 7

Quant Finance Math Primer

Root finding procedure ( Newton Raphson)

(Initial)

(after step 1)

www.peaks2tails.com Satyapriya Ojha 8

Quant Finance Math Primer

Rotation Matrix

www.peaks2tails.com Satyapriya Ojha 9

Quant Finance Math Primer

Shear Matrix

www.peaks2tails.com Satyapriya Ojha 10

Quant Finance Math Primer

Stretching Matrix

www.peaks2tails.com Satyapriya Ojha 11

Quant Finance Math Primer

Poisson Distribution approaching Normal Distribution for high 𝜆

www.peaks2tails.com Satyapriya Ojha 12

Quant Finance Math Primer

Line density (univariate) vs Area density (bivariate)

www.peaks2tails.com Satyapriya Ojha 13

Quant Finance Math Primer

Independence Copula

www.peaks2tails.com Satyapriya Ojha 14

Quant Finance Math Primer

Co-monotonic copula

www.peaks2tails.com Satyapriya Ojha 15

Quant Finance Math Primer

Counter monotonic copula

www.peaks2tails.com Satyapriya Ojha 16

Quant Finance Math Primer

Gaussian Copula

(No
correlation)

(+ve
correlation)

www.peaks2tails.com Satyapriya Ojha 17

Quant Finance Math Primer

T Copula

(No correlation)

(+ve correlation)

www.peaks2tails.com Satyapriya Ojha 18

Quant Finance Math Primer

Clayton Copula

Strong Lower Tail Dependence

Less Upper Tail Dependence
Good fit for modeling dependence in lower extremes

www.peaks2tails.com Satyapriya Ojha 19

Quant Finance Math Primer

Frank Copula

Symmetric Upper and Lower Tail Dependence

www.peaks2tails.com Satyapriya Ojha 20

Quant Finance Math Primer

Monte Carlo Convergence

www.peaks2tails.com Satyapriya Ojha 21

Quant Finance Math Primer

Monte Carlo – Acceptance Rejection Sampling

www.peaks2tails.com Satyapriya Ojha 22

Quant Finance Math Primer

Monte Carlo – Box Muller for Normal Random

www.peaks2tails.com Satyapriya Ojha 23

Quant Finance Math Primer

Monte Carlo – Polar method for Normal Random

www.peaks2tails.com Satyapriya Ojha 24

Quant Finance Math Primer

Monte Carlo – Linear Congruence Generators ( LCG )

www.peaks2tails.com Satyapriya Ojha 25

Quant Finance Math Primer

Monte Carlo – naïve Vs stratified

www.peaks2tails.com Satyapriya Ojha 26

Quant Finance Math Primer

Monte Carlo – naïve Vs Importance Sampling

www.peaks2tails.com Satyapriya Ojha 27

Quant Finance Math Primer

Stochastics

www.peaks2tails.com Satyapriya Ojha 28

Quant Finance Math Primer

Simple Symmetric Random Walk

(10 steps)

(100 steps)

www.peaks2tails.com Satyapriya Ojha 29

Quant Finance Math Primer

Scaled Symmetric Random Walk

(50 steps)

(200 steps)

www.peaks2tails.com Satyapriya Ojha 30

Quant Finance Math Primer

Standard Brownian Motion

(T=0.1)

(T=0.5)

www.peaks2tails.com Satyapriya Ojha 31

Quant Finance Math Primer

Arithmetic Brownian Motion

(T=0.2)

(T=0.5)

www.peaks2tails.com Satyapriya Ojha 32

Quant Finance Math Primer

Geometric Brownian Motion

(T=0.2)

(T=1.5)

www.peaks2tails.com Satyapriya Ojha 33

Quant Finance Math Primer

Exponential Martingale

www.peaks2tails.com Satyapriya Ojha 34

Quant Finance Math Primer

Log normal diffusion of Stock Price

www.peaks2tails.com Satyapriya Ojha 35

Quant Finance Math Primer

Short rate dynamics under Vasicek

www.peaks2tails.com Satyapriya Ojha 36

Quant Finance Math Primer

Radon Nikodym Derivative

www.peaks2tails.com Satyapriya Ojha 37

Quant Finance Math Primer

Change of Measure

www.peaks2tails.com Satyapriya Ojha 38

Quant Finance Math Primer

Girsanov Theorem

www.peaks2tails.com Satyapriya Ojha 39

Quant Finance Math Primer

Option Pricing

www.peaks2tails.com Satyapriya Ojha 40

Quant Finance Math Primer

Delta

www.peaks2tails.com Satyapriya Ojha 41

Quant Finance Math Primer

Gamma

www.peaks2tails.com Satyapriya Ojha 42

Quant Finance Math Primer

Theta ( Call )

www.peaks2tails.com Satyapriya Ojha 43

Quant Finance Math Primer

Theta (Put)

www.peaks2tails.com Satyapriya Ojha 44

Quant Finance Math Primer

Vega

www.peaks2tails.com Satyapriya Ojha 45

Quant Finance Math Primer

European Call ( Euler Maruyama Scheme )

www.peaks2tails.com Satyapriya Ojha 46

Quant Finance Math Primer

European Call ( Log Euler Maruyama Scheme )

www.peaks2tails.com Satyapriya Ojha 47

Quant Finance Math Primer

European Call ( Milstein Scheme )

www.peaks2tails.com Satyapriya Ojha 48

Quant Finance Math Primer

European Digital Call

www.peaks2tails.com Satyapriya Ojha 49

Quant Finance Math Primer

Up and out Call (Barrier)

www.peaks2tails.com Satyapriya Ojha 50

Quant Finance Math Primer

Up and In Call (Barrier)

www.peaks2tails.com Satyapriya Ojha 51

Quant Finance Math Primer

Bermudan Option

www.peaks2tails.com Satyapriya Ojha 52

Quant Finance Math Primer

Bermudan Option (binning)

www.peaks2tails.com Satyapriya Ojha 53

Quant Finance Math Primer

Least Square Monte Carlo ( Longstaff Schwartz )

www.peaks2tails.com Satyapriya Ojha 54

Quant Finance Math Primer

Finite Difference Method

www.peaks2tails.com Satyapriya Ojha 55

Quant Finance Math Primer

Markov Models

www.peaks2tails.com Satyapriya Ojha 56

Quant Finance Math Primer

Stationary Probability Distribution

www.peaks2tails.com Satyapriya Ojha 57

Quant Finance Math Primer

Markov Simulation

www.peaks2tails.com Satyapriya Ojha 58

Quant Finance Math Primer

Chi-Sq test for Markov Chain

www.peaks2tails.com Satyapriya Ojha 59

Quant Finance Math Primer

Kolmogorov Equations (Analytical)

www.peaks2tails.com Satyapriya Ojha 60

Quant Finance Math Primer

Kolmogorov Equations (Taylor Series)

www.peaks2tails.com Satyapriya Ojha 61

Quant Finance Math Primer

Transition Matrix Estimator

www.peaks2tails.com Satyapriya Ojha 62

Quant Finance Math Primer

Machine Learning

www.peaks2tails.com Satyapriya Ojha 63

Quant Finance Math Primer

Bias, Consistency, efficiency

www.peaks2tails.com Satyapriya Ojha 64

Quant Finance Math Primer

Forward Selection

www.peaks2tails.com Satyapriya Ojha 65

Quant Finance Math Primer

Forward Stagewise Selection

www.peaks2tails.com Satyapriya Ojha 66

Quant Finance Math Primer

LARS

www.peaks2tails.com Satyapriya Ojha 67

Quant Finance Math Primer

Multinomial Logit

www.peaks2tails.com Satyapriya Ojha 68

Quant Finance Math Primer

Multi ordinal Logit

www.peaks2tails.com Satyapriya Ojha 69

Quant Finance Math Primer

Principal Component Analysis

www.peaks2tails.com Satyapriya Ojha 70

Quant Finance Math Primer

Partial Least Square Regression

www.peaks2tails.com Satyapriya Ojha 71

Quant Finance Math Primer

Cluster Analysis – Single Linkage

www.peaks2tails.com Satyapriya Ojha 72

Quant Finance Math Primer

Cluster Analysis – Complete Linkage

www.peaks2tails.com Satyapriya Ojha 73

Quant Finance Math Primer

Cluster Analysis – K-Means

www.peaks2tails.com Satyapriya Ojha 74

Quant Finance Math Primer

Linear Discriminant Analysis

www.peaks2tails.com Satyapriya Ojha 75

Quant Finance Math Primer

Support Vector Machines

www.peaks2tails.com Satyapriya Ojha 76

Quant Finance Math Primer

Support Vector Machines (Polynomial Kernel – 2D )

www.peaks2tails.com Satyapriya Ojha 77

Quant Finance Math Primer

Support Vector Machines (Polynomial Kernel – 3D)

www.peaks2tails.com Satyapriya Ojha 78

Quant Finance Math Primer

Support Vector Machines (radial basis RBF)

www.peaks2tails.com Satyapriya Ojha 79

Quant Finance Math Primer

Logistic Regression

www.peaks2tails.com Satyapriya Ojha 80

Quant Finance Math Primer

K-Nearest Neighbor

www.peaks2tails.com Satyapriya Ojha 81

Quant Finance Math Primer

Artificial Neural Network (ANN)

www.peaks2tails.com Satyapriya Ojha 82

Quant Finance Math Primer

ANN for Option Price

www.peaks2tails.com Satyapriya Ojha 83

Quant Finance Math Primer

LSTM

www.peaks2tails.com Satyapriya Ojha 84

Quant Finance Math Primer

Fuzzy Logic

www.peaks2tails.com Satyapriya Ojha 85

Quant Finance Math Primer

Bayesian Estimation - Poisson

www.peaks2tails.com Satyapriya Ojha 86

Quant Finance Math Primer

Bayesian Estimation – Spike Slab prior

www.peaks2tails.com Satyapriya Ojha 87

Quant Finance Math Primer

MCMC – Gibbs Sampler

www.peaks2tails.com Satyapriya Ojha 88

Quant Finance Math Primer

MCMC – Metropolis Hastings

www.peaks2tails.com Satyapriya Ojha 89

Quant Finance Math Primer

Expectation Maximization (EM)

www.peaks2tails.com Satyapriya Ojha 90

Quant Finance Math Primer

Kalman Filter

www.peaks2tails.com Satyapriya Ojha 91

Quant Finance Math Primer

Kalman Smoother

www.peaks2tails.com Satyapriya Ojha 92

Quant Finance Math Primer

Kalman Regression

www.peaks2tails.com Satyapriya Ojha 93

Quant Finance Math Primer

Time Series – AR(1)

www.peaks2tails.com Satyapriya Ojha 94

Quant Finance Math Primer

Time Series – AR(2)

www.peaks2tails.com Satyapriya Ojha 95

Quant Finance Math Primer

Time Series – MA(2)

www.peaks2tails.com Satyapriya Ojha 96

Quant Finance Math Primer

Time Series – MA Forecast

www.peaks2tails.com Satyapriya Ojha 97

Quant Finance Math Primer

Time Series – ARMA model

www.peaks2tails.com Satyapriya Ojha 98

Quant Finance Math Primer

TAR model

www.peaks2tails.com Satyapriya Ojha 99

Quant Finance Math Primer

Trend Stationary Time Series

www.peaks2tails.com Satyapriya Ojha 100

Quant Finance Math Primer

Seasonal Model

www.peaks2tails.com Satyapriya Ojha 101

Quant Finance Math Primer

Cointegration Models

www.peaks2tails.com Satyapriya Ojha 102

Quant Finance Math Primer

Vector Auto Regressive Model

www.peaks2tails.com Satyapriya Ojha 103

Quant Finance Math Primer

Impulse Response Function

www.peaks2tails.com Satyapriya Ojha 104

Quant Finance Math Primer

Survival Models – Cox PH

www.peaks2tails.com Satyapriya Ojha 105

Quant Finance Math Primer

Risk & Exposure Models

www.peaks2tails.com Satyapriya Ojha 106

Quant Finance Math Primer

Portfolio Optimization

www.peaks2tails.com Satyapriya Ojha 107

Quant Finance Math Primer

Value at Risk (1 stock) – Historical & Parametric

www.peaks2tails.com Satyapriya Ojha 108

Quant Finance Math Primer

Value at Risk (1 stock) – Monte Carlo

www.peaks2tails.com Satyapriya Ojha 109

Quant Finance Math Primer

Rolling Volatility

www.peaks2tails.com Satyapriya Ojha 110

Quant Finance Math Primer

Conditional Vs Unconditional Models

www.peaks2tails.com Satyapriya Ojha 111

Quant Finance Math Primer

Equally weighted Vs Exponentially Weighted (EWMA)

www.peaks2tails.com Satyapriya Ojha 112

Quant Finance Math Primer

ARCH (2)

www.peaks2tails.com Satyapriya Ojha 113

Quant Finance Math Primer

GARCH(1,1)

www.peaks2tails.com Satyapriya Ojha 114

Quant Finance Math Primer

Bivariate EWMA

www.peaks2tails.com Satyapriya Ojha 115

Quant Finance Math Primer

Univariate GARCH (symmetric)

www.peaks2tails.com Satyapriya Ojha 116

Quant Finance Math Primer

Univariate AGARCH (Asymmetric)

www.peaks2tails.com Satyapriya Ojha 117

Quant Finance Math Primer

Factor GARCH

www.peaks2tails.com Satyapriya Ojha 118

Quant Finance Math Primer

Normal Mixture Models

www.peaks2tails.com Satyapriya Ojha 119

Quant Finance Math Primer

Regime Switching Markov Model

www.peaks2tails.com Satyapriya Ojha 120

Quant Finance Math Primer

MGARCH – Diagonal VECH

www.peaks2tails.com Satyapriya Ojha 121

Quant Finance Math Primer

MGARCH – CCC

www.peaks2tails.com Satyapriya Ojha 122

Quant Finance Math Primer

MGARCH – DCC ( Step 1 )

www.peaks2tails.com Satyapriya Ojha 123

Quant Finance Math Primer

MGARCH – DCC ( Step 2 )

www.peaks2tails.com Satyapriya Ojha 124

Quant Finance Math Primer

Kernel Density Estimator

www.peaks2tails.com Satyapriya Ojha 125

Quant Finance Math Primer

Bivariate - Kernel Density Estimator

www.peaks2tails.com Satyapriya Ojha 126

Quant Finance Math Primer

Extreme Value Theory (EVT)

www.peaks2tails.com Satyapriya Ojha 127

Quant Finance Math Primer

GEV estimator

www.peaks2tails.com Satyapriya Ojha 128

Quant Finance Math Primer

Peaks over Threshold (PoT)

www.peaks2tails.com Satyapriya Ojha 129

Quant Finance Math Primer

Properties of Risk Measures ( Sub-Additivity , Convexity )

www.peaks2tails.com Satyapriya Ojha 130

Quant Finance Math Primer

Interest Term Structure with PCA

www.peaks2tails.com Satyapriya Ojha 131

Quant Finance Math Primer

Value-at-Risk with PCA (Application)

www.peaks2tails.com Satyapriya Ojha 132

Quant Finance Math Primer

Type I and Type II error : VaR Backtesting

www.peaks2tails.com Satyapriya Ojha 133

Quant Finance Math Primer

Breeden-Litzenberger ( Risk neutral density extraction)

www.peaks2tails.com Satyapriya Ojha 134

Quant Finance Math Primer

Dupire Local Volatility ( From price to local vol )

www.peaks2tails.com Satyapriya Ojha 135

Quant Finance Math Primer

Piecewise Linear Interpolation of volatility

www.peaks2tails.com Satyapriya Ojha 136

Quant Finance Math Primer

Cubic Spline Interpolation of volatility

www.peaks2tails.com Satyapriya Ojha 137

Quant Finance Math Primer

No Arbitrage Interpolation of volatility

www.peaks2tails.com Satyapriya Ojha 138

Quant Finance Math Primer

Ho Lee Calibration

www.peaks2tails.com Satyapriya Ojha 139

Quant Finance Math Primer

Exposure Profiles

(ZCB)

(Coupon
Bond)

(swap)

(FRA)

www.peaks2tails.com Satyapriya Ojha 140