Book Image

Python for Finance - Second Edition

By : Yuxing Yan
5 (1)
Book Image

Python for Finance - Second Edition

5 (1)
By: Yuxing Yan

Overview of this book

This book uses Python as its computational tool. Since Python is free, any school or organization can download and use it. This book is organized according to various finance subjects. In other words, the first edition focuses more on Python, while the second edition is truly trying to apply Python to finance. The book starts by explaining topics exclusively related to Python. Then we deal with critical parts of Python, explaining concepts such as time value of money stock and bond evaluations, capital asset pricing model, multi-factor models, time series analysis, portfolio theory, options and futures. This book will help us to learn or review the basics of quantitative finance and apply Python to solve various problems, such as estimating IBM’s market risk, running a Fama-French 3-factor, 5-factor, or Fama-French-Carhart 4 factor model, estimating the VaR of a 5-stock portfolio, estimating the optimal portfolio, and constructing the efficient frontier for a 20-stock portfolio with real-world stock, and with Monte Carlo Simulation. Later, we will also learn how to replicate the famous Black-Scholes-Merton option model and how to price exotic options such as the average price call option.
Table of Contents (23 chapters)
Python for Finance Second Edition
Credits
About the Author
About the Reviewers
www.PacktPub.com
Customer Feedback
Preface
Index

Simulation and VaR


In the previous sections, we have learned that there are two ways to estimate VaR for an individual stock or for a portfolio. The first method depends on the assumption that stock returns follow a normal distribution. The second one uses the sorted historical returns. What is the link between those two methods? Actually, Monte Carlo simulation could be served as a link. First, let's look at the first method based on the normality assumption. We have 500 Walmart shares on the last day of 2016. What is the VaR tomorrow if the confidence level is 99%?

#
position=n_shares*x.close[0] 
mean=np.mean(ret)
std=np.std(ret)
#
VaR=position*(mean+z*std)
print("Holding=",position, "VaR=", round(VaR,4), "tomorrow")
('Holding=', 26503.070499999998, 'VaR=', -641.2911, 'tomorrow')

The VaR is $641.29 for tomorrow with a confidence level of 99%. Here is how Monte Carlo simulation works. First, we calculate the mean and standard deviation based on daily returns. Since stock returns are assumed...