Interest Rates
From Ratings to Historical Default Probabilities
A credit rating — AAA, BBB, and so on — is a compact measure of relative credit risk. It shows how risky one debtor is compared with another. […]
EON Investment Insights
Understand stock price as a forecast
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines” - Charlie Munger
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Derivatives
The Dynamics of Diversification
Standard diversification models have a fundamental weakness: during periods of large market fluctuations and crises, historical relationships stop working. This happens because correlations between assets tend to increase, […]
DCF Valuation
Tao of Corporate Finance
The value formula from Valuation: Measuring and Managing the Value of Companies by McKinsey & Company (also referred to as the Tao of Corporate Finance) is: Value=NOPAT×(1−g/ROIC)WACC−gValue = […]
Derivatives
Using GARCH to Forecast Volatility
🎯 GARCH is not just a descriptive model — its purpose is to forecast the volatility of future returns on invested capital. In previous posts, we: Now we […]
Investor Psychology
The 20 ideas from The Most Important Thing
1. Second-Level Thinking Successful investing begins where obvious thinking ends. It is not enough to say that an asset, company, or market is good. The real question is […]
Derivatives
Validation of Volatility Clustering
Models of return volatility such as EWMA and GARCH aim to explain volatility clustering. In real markets, calm periods tend to be followed by calm periods, while turbulent […]
Derivatives
Maximum Likelihood Method
The maximum likelihood method is used in modeling to estimate the parameters that make historical events most probable. Suppose an event has occurred. If we assume that this […]
Derivatives
GARCH Model
GARCH (1,1) and Volatility Clustering Financial markets exhibit an important property: volatility clustering and reversion toward a long-run average. In other words, large movements tend to be followed […]
Derivatives
EWMA vs Moving Average Volatility
Volatility is such an overused term that we may forget how important the assumptions are that lead to the final number. Let us start with the basics. When […]
Investor Psychology
Zero to One
📘 რატომ არის საინტერესო საკითხავი: 📖 ავტორი: პიტერ თილი💳 PayPal-ის თანადამფუძნებელი📱 Facebook-ის ერთ-ერთი პირველი ინვესტორი💼 სილიკონ ველის ერთ-ერთი ყველაზე გავლენიანი ვენჩურული კაპიტალისტი ეს არ არის სამოტივაციო ლიტერატურა, უფრო […]
Derivatives
VaR – Advanced Issues
In previous posts, I covered the calculation of portfolio Value at Risk (VaR) and Expected Shortfall using the historical simulation and linear modeling methods. Now, in order to […]
Derivatives
VaR – Linear Model
In the previous note about VaR, I discussed and showed how it is calculated using simulation of historical data. Now I will demonstrate how it is calculated using […]
Derivatives
Value at Risk
While the Greek letters view portfolio risk from multiple angles and generate numerous risk measures, the VaR (Value at Risk) metric is an attempt to express portfolio risk […]
Derivatives
Finite Difference Methods
The finite difference method, beyond finance, is actively used in physics and engineering fields, such as: The method involves breaking down a continuous differential equation into a system […]
Derivatives
Monte Carlo in Option Pricing
The main advantage of the Monte Carlo simulation method over binomial trees is that it can be used to price options whose payoff depends not only on the […]
Derivatives
American Options – Binomial Trees
One method used to value an American option is the construction of a binomial tree. I have written about this before (Binomial Trees), so here I will focus […]
Derivatives
Volatility Smile
It turns out that the option price calculated using the Black–Scholes–Merton (BSM) model differs from the price formed in the real market. The reason is that the market […]
Derivatives
Portfolio Insurance with Synthetic PUTs
The presence of a risk-free asset portion in a portfolio can insure its value with almost the same precision as purchasing put options. The value of a diversified […]