WILMOTT Magazine: January 2024 issue

Volume 2024, Issue 129. Pages 1-84

Every issue we bring you original material from some of the best columnists, educators and cutting-edge researchers. Subscribe here.

In this issue:

  • D. Tudball, “Contents,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Contents
    @article{WILM:WILM11999,
    title = {{Contents}},
    author = {Tudball, Daniel},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.11999},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11999},
    abstract = {Contents}
    }
  • D. Tudball, ,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex]
    @article{WILM:WILM12000,
    title = {{}},
    author = {Tudball, Daniel},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12000},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12000},
    abstract = {}
    }
  • U. Wystup, “The Pedigree of Exotics – Or Derivatives Lego ,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    In enumerating how many exotic options there are, should we exclude all that are replications of other building blocks?
    @article{WILM:WILM12001,
    title = {{The Pedigree of Exotics – Or Derivatives Lego }},
    author = {Wystup, Uwe},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12001},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12001},
    abstract = {In enumerating how many exotic options there are, should we exclude all that are replications of other building blocks?}
    }
  • A. Brown, “The Mathematics of Scratch Seven,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Analyzing a novel card game introduced in a science fiction novel.
    @article{WILM:WILM12002,
    title = {{The Mathematics of Scratch Seven}},
    author = {Brown, Aaron},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12002},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12002},
    abstract = {Analyzing a novel card game introduced in a science fiction novel.}
    }
  • L. Ballabio, “Holidays in Quantlib,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    The season’s upon us.
    @article{WILM:WILM12003,
    title = {{Holidays in Quantlib}},
    author = {Ballabio, Luigi},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12003},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12003},
    abstract = {The season’s upon us.}
    }
  • D. Orrell, “Is Non-Quantum Finance too Much of a Stretch?,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    A considered response to people who believe quantum economics/finance is too much of a stretch.
    @article{WILM:WILM12004,
    title = {{Is Non-Quantum Finance too Much of a Stretch?}},
    author = {Orrell, David},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12004},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12004},
    abstract = {A considered response to people who believe quantum economics/finance is too much of a stretch.}
    }
  • P. Benda, “Finding Safe Harbor in the Supply Chain: Covid Impact on Market Performance and Market Risk Up and Down the Supply Chain,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Being downstream may offer a safer haven for agile companies to weather supply chain disruptions. Vertically integrated industries may have the highest exposure to supply chain risks.
    @article{WILM:WILM12005,
    title = {{Finding Safe Harbor in the Supply Chain: Covid Impact on Market Performance and Market Risk Up and Down the Supply Chain}},
    author = {Benda, Peter},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12005},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12005},
    abstract = {Being downstream may offer a safer haven for agile companies to weather supply chain disruptions. Vertically integrated industries may have the highest exposure to supply chain risks.}
    }
  • J. Guerard, D. D. Thomakos, F. Kyriazi, and K. Mamais, “On the Predictability of the DJIA and S&P500 Indexes,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    We obtained from Standard and Poor’s Corporation the complete 126-year history of the Dow Jones Industrial Average (DJIA) daily closing prices. We are applying rolling window averaging and adaptive learning methodologies, coupled with robust estimation methods, to examine which are the best forecasting models over a broad range of economic and financial conditions during the life of the index, based on daily and monthly stock index prices, and daily, monthly, and semi-annual stock returns. Why is an AR(1) model a reasonable benchmark of stock prices? Why do we have it? What should be our forecasting benchmarks? Do we find forecasting improvements from the Hendry-Castle-Doornik-Clements approach using robust forecasting methodologies and saturation variables in the prices of the index? Given that the DJIA fell over 15% during the first half of 2022, is this one of the worst six-month periods ever? What has happened to the Dow, historically, during such periods in the past with regard to six-month, one-year, and three-year-ahead stock returns? Is capitalism dead or doomed? We report statistically significant forecasting improvement from saturation and robust forecasting techniques during the 1896–June 2022 period. We report forecast stock returns for the next six months and three years that are bullish. In the King’s English, June 30, 2022, was another excellent common stock buying opportunity and Capitalism is not dead.
    @article{WILM:WILM12006,
    title = {{On the Predictability of the DJIA and S&P500 Indexes}},
    author = {Guerard, John and Thomakos, Dimitrios D and Kyriazi, Foteini and Mamais, Konstantinos},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12006},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12006},
    abstract = {We obtained from Standard and Poor’s Corporation the complete 126-year history of the Dow Jones Industrial Average (DJIA) daily closing prices. We are applying rolling window averaging and adaptive learning methodologies, coupled with robust estimation methods, to examine which are the best forecasting models over a broad range of economic and financial conditions during the life of the index, based on daily and monthly stock index prices, and daily, monthly, and semi-annual stock returns. Why is an AR(1) model a reasonable benchmark of stock prices? Why do we have it? What should be our forecasting benchmarks? Do we find forecasting improvements from the Hendry-Castle-Doornik-Clements approach using robust forecasting methodologies and saturation variables in the prices of the index? Given that the DJIA fell over 15% during the first half of 2022, is this one of the worst six-month periods ever? What has happened to the Dow, historically, during such periods in the past with regard to six-month, one-year, and three-year-ahead stock returns? Is capitalism dead or doomed? We report statistically significant forecasting improvement from saturation and robust forecasting techniques during the 1896–June 2022 period. We report forecast stock returns for the next six months and three years that are bullish. In the King’s English, June 30, 2022, was another excellent common stock buying opportunity and Capitalism is not dead.}
    }
  • I. Lai, “Sentiment Analysis Is Virtually Useless in Financial Forecasting,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    The practical utility of sentiment analysis as applied in financial forecasting is limited, and often exaggerated in a potentially misleading way.
    @article{WILM:WILM12007,
    title = {{Sentiment Analysis Is Virtually Useless in Financial Forecasting}},
    author = {Lai, Isabella},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12007},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12007},
    abstract = {The practical utility of sentiment analysis as applied in financial forecasting is limited, and often exaggerated in a potentially misleading way.}
    }
  • D. Pirjol, “The SABR Short-Maturity Expansion is Asymptotic,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Short-maturity expansions offer a convenient alternative to numerical methods for option pricing. We discuss how methods from the theory of asymptotic series can be used to inform their optimal use and understand their limits of applicability.
    @article{WILM:WILM12008,
    title = {{The SABR Short-Maturity Expansion is Asymptotic}},
    author = {Pirjol, Daniel},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12008},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12008},
    abstract = {Short-maturity expansions offer a convenient alternative to numerical methods for option pricing. We discuss how methods from the theory of asymptotic series can be used to inform their optimal use and understand their limits of applicability.}
    }
  • A. Swishchuk and J. McGilivray, “Covariance and Correlation Swaps in Energy Markets,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Many valuations of variance and volatility derivatives already exist, especially in discrete time, but continuous-time valuations of covariance and correlation swaps do not currently exist for assets following the Heston stochastic volatility model. Energy commodity markets contain some of the broadest and most liquid options markets. Thus, the development of covariance and correlation swap valuation will be of significant use to investors looking to hedge covariance or correlation. In this paper, we derive approximations for an arbitrage-free valuation of natural gas and crude oil covariance and correlation swaps in the Heston model using a continuous-time regime. The approximations are obtained through the use of successive Talyor approximations on otherwise intractable terms. We find that the first order approximations of covariance and correlation swap fair strikes are reasonably effective. When the approximations are taken to the second order, a significant problem with the ML-ARCH approximation of the GARCH(1,1) process creates a large error in the valuation and its error bounds. Leveraging the properties of the Lagrange error bound, we refine our approximation to avoid the use of a frequently miscalibrated parameter, leading to a better approximation of the fair strikes of the two swaps.
    @article{WILM:WILM12009,
    title = {{Covariance and Correlation Swaps in Energy Markets}},
    author = {Swishchuk, Anatoliy and McGilivray, Joshua},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12009},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12009},
    abstract = {Many valuations of variance and volatility derivatives already exist, especially in discrete time, but continuous-time valuations of covariance and correlation swaps do not currently exist for assets following the Heston stochastic volatility model. Energy commodity markets contain some of the broadest and most liquid options markets. Thus, the development of covariance and correlation swap valuation will be of significant use to investors looking to hedge covariance or correlation. In this paper, we derive approximations for an arbitrage-free valuation of natural gas and crude oil covariance and correlation swaps in the Heston model using a continuous-time regime. The approximations are obtained through the use of successive Talyor approximations on otherwise intractable terms. We find that the first order approximations of covariance and correlation swap fair strikes are reasonably effective. When the approximations are taken to the second order, a significant problem with the ML-ARCH approximation of the GARCH(1,1) process creates a large error in the valuation and its error bounds. Leveraging the properties of the Lagrange error bound, we refine our approximation to avoid the use of a frequently miscalibrated parameter, leading to a better approximation of the fair strikes of the two swaps.}
    }
  • A. Kumiega, G. Sterijevski, and B. Van Vliet, “Using “Greeks” from a Dynamic Program Real Option Framework to Quantitatively Manage an Innovation Project/Startup,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    In this paper, we extend the Dynamic Programming Real Option Framework via a numerical example (Kumiega, Sterijevski and Van Vliet, 2023). The numerical example details a new idea called control maps. The control maps are multi-state “Greek” that will allow management to make more robust decisions at project gate meetings. This framework will shift the decisions at each gate from a purely qualitative decision to quantitative decision. The qualitative decision will be based upon the change in the current project’s expected value and the additional projected cost to change state at a gate. Simulated costs and times to completion are generated by a continuous-time Markov chain with states.
    @article{WILM:WILM12010,
    title = {{Using “Greeks” from a Dynamic Program Real Option Framework to Quantitatively Manage an Innovation Project/Startup}},
    author = {Kumiega, Andrew and Sterijevski, Greg and Van Vliet, Ben},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12010},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12010},
    abstract = {In this paper, we extend the Dynamic Programming Real Option Framework via a numerical example (Kumiega, Sterijevski and Van Vliet, 2023). The numerical example details a new idea called control maps. The control maps are multi-state “Greek” that will allow management to make more robust decisions at project gate meetings. This framework will shift the decisions at each gate from a purely qualitative decision to quantitative decision. The qualitative decision will be based upon the change in the current project’s expected value and the additional projected cost to change state at a gate. Simulated costs and times to completion are generated by a continuous-time Markov chain with states.}
    }
  • M. Radley, “Birthday Bash, Last Blast,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Porsche 911 S/T/Lotus Emira i4
    @article{WILM:WILM12011,
    title = {{Birthday Bash, Last Blast}},
    author = {Radley, Milford},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12011},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12011},
    abstract = {Porsche 911 S/T/Lotus Emira i4}
    }
  • J. Darasz, “The Skewed World of Jan Darasz,” Wilmott, vol. 2024, iss. 129, 2024.
    [Bibtex] [Abstract]
    Cartoon
    @article{WILM:WILM12012,
    title = {{The Skewed World of Jan Darasz}},
    author = {Darasz, Jan},
    year = 2024,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2024,
    number = 129,
    doi = {10.54946/wilm.12012},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.12012},
    abstract = {Cartoon}
    }

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