My Finance

We still need to make changes to our simulator in light of our very recent research:

1. Replace volatility in the autoregression with its Box-Cox transform. This will model the volatility as the classic autoregression of order 1 with Gaussian IID innovations.
2. Edit total returns of 10-year zero-coupon bonds to update equations and account for noise. This will not improve much, but it is important for completeness and intellectual honesty. We will have 9 equations with 9 noise series.
3. Add the intercept to the regression of (modified) corporate bond returns vs changes in the rate (which shows duration); this will help to make it classic simple linear regression. Regression residuals are still IID Gaussian. I think we did not include the intercept imply to stress the meaning of the duration.
4. Update the covariance and the correlation matrix of residuals. They will both be of size 9.
5. Add the Bayesian-full (not Bayesian-lite) option to the classic (frequentist) option. We did not add Bayesian-lite because we found there is not much difference between the two Bayesian versions.
6. Later we add the following options: Instead of this full version, remove dependence of all three stock returns upon bond duration, valuation measure, and risk spread. Or pick any combination of 3 factors for each stocks.
7. In the above item, check that each version has Gaussian IID residuals, and add Bayesian-full version.

Total 8 versions in item 6, times 2 in item 7, so 16 versions. We could have more options, but let us keep it simple for now. And do not forget to add explicit initial values of the four market factors. Do not write a separate advanced version of the simulator. Fix the current values of these market factors as default ones. But users must see them explicitly and be able to change them.