Formulae Sheet

Statistics
sample α-percentile [ n ×α ] th sample of sorted ascending data if n × α is not an integer where
[ ] means “round up to next integer”; average of (n × α )th and
(n × α +1)th samples of sorted ascending data if n × α is an integer
sample interquartile range sample 75% percentile minus sample 25% percentile
n
sample mean absolute deviation
1
n ∑i=1 |x i−sample median|
n
s = n−1 ∑i =1 ( x i − x̄ )
2 1 2
sample variance
sample standard deviation s

sample coefficient of variation s/ x̄

n
sample skewness
1
n−2 ∑i=1 ( xi − x̄ )3 / s 3
n
sample covariance
1
n−1 ∑i=1 ( x i − x̄ )( y i− ȳ )
n
1
n−1 ∑i=1 ( x i− x̄ )( y i − ȳ )
√
n n
sample correlation
1
n−1 ∑i=1 ( x i− x̄ )2 n−1
1
∑i=1 ( y i− ȳ )2

∑ sign ( ( x i −x j )( y i− y j ) ) /( n2 )
sample Kendall’s tau i< j

Rank ( x i ) Rank ( y i )
sample Spearman’s rho sample correlation between and
Bernoulli Distribution

notation X ~ Ber ( p ) ; 0< p< 1

probability mass function Pr ( X =x )=p x ( 1−p )1− x ; x=0 , 1

mean Ε ( X )=p

variance Var ( X )= p ( 1− p )
Binomial Distribution

notation X ~ Bi ( n , p ) ; n is a positive integer 0< p< 1

probability mass function

()
Pr ( X =x )= n p x ( 1−p )n− x
x ; x=0 , 1 , 2, . .. , n

mean Ε ( X )=n p

variance Var ( X )=n p ( 1− p )

Multinomial Distribution
⃗ ~ M ( n , ⃗p )
X
notation k ; n is a positive integer
k
⃗p= p 1 , p2 ,. .. , pk ; 0< p i <1 ∑i=1 pi=1
n! x x x
Pr ( X 1=x 1 , X 2 =x 2 , .. . , X k =x k ) = p1 1 p2 2 ¿⋅¿ pk k
probability mass function x 1 ! x 2 !⋅¿⋅x k ! ;
k
x i=0 ,1 , 2 ,. .. , n , ∑i=1 x i=n
Ε ( X i )=n× pi
mean
Var ( X i ) =n× p i×( 1−p i )
variance

Poisson Distribution

notation X ~ Poisson ( λ ) ; λ> 0

e−λ λ x
Pr ( X =x )=
probability mass function x! ; x=0 , 1 , 2, . ..

mean Ε ( X )=λ

variance Var ( X )=λ

Poisson Process

notation X ( t ) ~ Poisson ( λ t ) ; λ> 0 t >0

e− λ t ( λ t ) x
Pr ( X ( t )=x )=
probability mass function x! ; x=0 , 1 , 2, . ..

mean Ε ( X ( t ) )=λ t

variance Var ( X ( t ) )= λ t
Discrete Uniform Distribution

notation X ~ U ( m ,n ) ; m≤ n (both are integers)

1
Pr ( X =x )=
probability mass function n−m+1 ; x=m ,m+1, ... , n
1
Ε ( X )= ( m+ n )
mean 2
1
Var ( X )= ( n−m) ( n−m+ 2 )
variance 12

Option Payoff
max ( S t −X , 0 )
exercising a call at time t payoff =
max ( X−S t , 0 )
exercising a put at time t payoff =

Binomial Option Pricing Model

European option on non-dividend-paying share:
e r dt −d
p=
u=e σ √ dt d=e−σ √ dt u−d
where dt is the time period of one-step in the binomial model
f time t ; any node =[ p f time t+1; upper node connected + ( 1− p ) f time t+1; lower node connected ] e−r dt
American option on non-dividend-paying share:
option price at each node = max(backward calculated value, early exercise payoff)

Greek letters:
f 22−f 21 f −f 20
− 21
∂f f 11−f 10 ∂ f f 21−f 00 Γ=
∂Δ
≈
2
S0 u −S 0 S 0− S 0 d
2

Δ= ≈ θ= ≈ ∂S 2
S 0 u + S 0 S 0 + S0 d
2

∂ S S0 u−S0 d ∂t 2 dt 2
−
2
¿ ¿
∂f f 00 −f 00 ∂ f f 00−f 00
ν= ≈ ρ= ≈
∂σ dσ ∂r dr

Put-call parity on non-dividend-paying share:

c + X e−r T = p+ S 0
Normal Distribution

notation X ~ Ν ( μ , σ2 ); −∞< μ<∞ σ > 0

( x −μ )2
−
1 2σ 2
f ( x )= e
probability density function σ √2 π ; −∞< x <∞

cumulative distribution function

F ( x )=Φ ( x−μ
σ )

mean Ε ( X )=μ

variance Var ( X )=σ 2

t Distribution

notation
X ~ tn; n is a positive integer
1 Γ( 2 )
n+ 1
1
f ( x )=
√ nπ Γ ( n2 ) 1+ x2
( )
n+1
2

probability density function n ;

∞
−∞< x <∞
Γ ( r ) =∫0 e−s sr−1 ds

mean Ε ( X )=0
n
Var ( X )=
variance n−2 ; n> 2

Exponential Distribution

notation X ~ exp ( λ ) ; λ> 0

probability density function f ( x )= λ e−λ x ; x >0

cumulative distribution function F ( x )=1−e−λ x

1
Ε ( X )=
mean λ
1
Var ( X )=
variance λ2
Gamma Distribution

notation X ~ γ (c , λ ); c >0 , λ> 0

λ c x c−1 e−λ x
f ( x )=
probability density function Γ (c ) ; x >0
c−1
(λ x)j
F ( x )=1−e −λ x
∑ j!
cumulative distribution function j=0 ; if c is an integer
c
Ε ( X )=
mean λ
c
Var ( X )=
variance λ2

Lognormal Distribution

notation X ~ LN ( μ , σ ) ; −∞< μ<∞ σ > 0

(ln x− μ )2
−
1 2 σ2
f ( x )= e
probability density function xσ √ 2 π ; x >0

cumulative distribution function

F ( x )=Φ ( ln x−μ
σ )
1
μ+ 2 σ 2
mean Ε ( X )=e

Var ( X )=e 2 μ+σ ( e −1 )

2 2
σ
variance

Generalised Extreme Value Distribution

notation X ~ GEV ( μ , σ , ξ ) ; −∞< μ<∞ , σ > 0 , −∞< ξ<∞

1

(
x− μ
)
−
1

( )
ξ
1 x −μ − −1 − 1+ξ σ
f ( x )= 1+ ξ ξ e
probability density function σ σ
1

( x− μ
)
−
− 1+ξ ξ
σ
cumulative distribution function F ( x )=e
Gumbel Distribution

notation X ~ GEV ( μ , σ , ξ ) ; −∞< μ<∞ , σ > 0 , ξ=0

x −μ −
x−μ
1 − σ −e σ
f ( x )= e e
probability density function σ ; −∞< x <∞
x−μ
−
σ
−e
cumulative distribution function F ( x )=e

mean Ε ( X )=μ+0 .5772 σ

σ2 π2
Var ( X )=
variance 6

Fréchet Distribution

notation X ~ GEV ( μ , σ , ξ ) ; −∞< μ<∞ , σ > 0 , ξ >0

1

(
x− μ
)
−
1

( )
ξ
1 x −μ − −1 − 1+ξ σ σ
f ( x )= 1+ ξ ξ e μ− < x <∞
probability density function σ σ ; ξ
1

( x− μ
)
−
− 1+ξ ξ
σ
cumulative distribution function F ( x )=e
Γ ( 1−ξ )−1
Ε ( X )=μ+σ
mean ξ ; ξ <1
σ 2 ( Γ ( 1−2 ξ ) −Γ ( 1−ξ )2 ) 1
Var ( X )= 2 ξ<
variance ξ ; 2

Reversed Weibull Distribution

notation X ~ GEV ( μ , σ , ξ ) ; −∞< μ<∞ , σ > 0 , ξ <0

1

(
x− μ
)
−
1

( )
ξ
1 x −μ − −1 − 1+ξ σ σ
f ( x )= 1+ ξ ξ e −∞< x < μ−
probability density function σ σ ; ξ
1

( x− μ
)
−
− 1+ξ ξ
σ
cumulative distribution function F ( x )=e
Γ ( 1−ξ )−1
Ε ( X )=μ+σ
mean ξ
σ 2 ( Γ ( 1−2 ξ ) −Γ ( 1−ξ )2 )
Var ( X )=
variance ξ2
Generalised Pareto Distribution
notation X ~ GPD ( μ , σ , ξ ) ; −∞< μ<∞ , σ > 0 , −∞< ξ<∞

( )
1
1 x −μ − −1
f ( x )= 1+ξ ξ
probability density function σ σ ;
x≥μ , ξ=0
x≥μ , ξ >0
σ
μ≤x ≤μ−
ξ, ξ <0

( )
1
x −μ −
F ( x )=1− 1+ξ ξ
cumulative distribution function σ
x −μ
1 − σ
f ( x )= e
probability density function* σ ; ξ=0
x −μ
−
cumulative distribution function* F ( x )=1−e σ
; ξ=0
σ
Ε ( X )=μ+
mean 1−ξ ; ξ <1
σ2 1
Var ( X )= ξ<
variance (1−ξ )2 ( 1−2 ξ ) ; 2

Multivariate Normal Distribution

⃗ ~ Ν ( ⃗μ , D
X ⃗) ⃗μ=μ 1 , μ 2 ,. . ., μk , −∞< μi < ∞
notation k ;

[ ]
σ 21 σ 1, 2 … σ1 ,k
2
⃗ = σ2 ,1
D σ2 ⋮
⋮ ⋱
σk ,1 ⋯ σ 2k σ i >0 , −∞< σ i, j <∞
;
σ i, j =ρi , j σ i σ j ; −1≤ ρi, j≤1

1 T ⃗ −1 (⃗x−⃗μ )
1 − ( ⃗x −⃗μ ) D
f ( x1 , x 2 , .. . , x k ) = e 2
joint probability density function √|D⃗ |( 2 π ) k
;
−∞< x i <∞
X i ~ Ν ( μ i , σ 2i )
marginal probability distributions
w 1 X 1 + w2 X 2 +. ..+ wn X n ~ Ν ( μoverall , σ 2overall ) n≤k
portfolio return ;
μoverall =w1 μ1 +w 2 μ 2 +. ..+wn μn
σ 2overall=w 21 σ 21 +w 22 σ 22 +. . .+ w2n σ 2n + ∑ w i w j σ i , j
i≠ j
Multivariate t Distribution
⃗ ~ t ( ⃗μ , D
X ⃗) ⃗μ=μ 1 , μ 2 ,. . ., μk , −∞< μi < ∞
notation ν ,k ;

[ ]
σ 21 σ 1, 2 … σ1 ,k
2
⃗ = σ2 ,1
D σ2 ⋮
⋮ ⋱
σk ,1 ⋯ σ 2k σ i >0 , −∞< σ i, j <∞
;

Γ( )
ν +k

( )
ν +k
2 ⃗ −1 ( ⃗x −⃗μ )
( ⃗x −⃗μ )T D −
f ( x1 , x 2 , .. . , x k ) = ν 1+ 2

Γ ( 2 ) √|D
⃗ |( πν )k ν
joint probability density function ;
−∞< x i <∞
X i −μ i
~ tν
marginal probability distributions σi

( )
X i−μi
Ε =0
σi Ε ( X i )=μ i
mean ;

( )
X i−μi ν
Var = ⇒ Var ( X i ) = ν σ 2i
σi ν −2 ν−2 ; ν> 2
variance
ν
Cov ( X i , X j ) = σ
covariance ν−2 i, j ; ν> 2

portfolio return
w 1 X 1 +w2 X 2 +. ..+wn X n for n≤k is not t distributed

Ε ( w1 X 1 +w 2 X 2 +. ..+ wn X n ) =w 1 μ1 + w2 μ2 +. . .+ w n μ n
Var ( w1 X 1 +w 2 X 2 +. . .+ w n X n )

ν
=
ν−2 (
w21 σ 21 +w22 σ 22 +.. .+w 2n σ 2n + ∑ wi w j σ i, j
i≠ j )
Gaussian Copula
F ( x , y )=C ( G ( x ) , H ( y ) )=Φ 2 ( Φ−1 ( G ( x ) ) ,Φ−1 ( H ( y ) ) )

Φ 2 = joint cumulative distribution function of Ν 2 ( ⃗0 , R

⃗)

[ ]
⃗R = 1 r
r 1 ; −1≤r≤1 ,
r =sin
πτ
2
λ U =λ L=0

t Copula
F ( x , y )=C ( G ( x ) , H ( y ) )=t ν , 2 (t −1
ν ( G ( x ) ) ,t ν ( H ( y ) ) )
−1

t ν = cumulative distribution function of t ν

t ν ,2 = joint cumulative distribution function of t ν ,2 ( ⃗0 , ⃗R )

[ ]
⃗R = 1 r
r 1 ; −1≤r≤1 ,
r =sin
πτ
2

λ U =λ L=2−2 t ν +1 (√ ( ν+1 )( 1−r )

1+r )
Clayton Copula
1
−θ
F ( x , y )=C ( G ( x ) , H ( y ) )=ϕ−1 ( ϕ ( G ( x ) ) + ϕ ( H ( y ) ) ) =( ( G ( x ) )−θ + ( H ( y ) )−θ −1 )

t −θ −1 2τ
ϕ ( t )= θ=
θ ; θ> 0 , 1−τ
1
λ U =0 , λ L =2
−θ

Gumbel-Hougaard Copula
1

F ( x , y )=C ( G ( x ) , H ( y ) )=ϕ−1 ( ϕ ( G ( x ) ) + ϕ ( H ( y ) ) ) =e−( ( −lnG ( x )) + (−ln H ( y ))θ )

θ θ

1
θ θ=
ϕ ( t )=(−ln t ) θ≥1 1−τ
1

λ U =2−2 θ , λ L =0
Conditional Probability
Pr ( A∩B )
Pr ( A|B )=
conditional probability Pr ( B )

independence between A and B Pr ( A∩B )=Pr ( A ) Pr ( B ) Pr ( A|B )=Pr ( A )

Bayesian Theory
n
f posterior ( θ|⃗x ) ∝ ∏ f process ( x i|θ ) f prior ( θ )
posterior density function i =1

predictive density function

f predictive ( x¿|⃗x ) =∫ f process ( x¿|θ ) f posterior ( θ| ⃗x ) dθ

Simple Linear Regression

Y i =α + β x i +ε i i=1 , 2 ,. .. , n
ε i ~ Ν ( 0 , σ 2ε )
are independent and identically distributed
Ε ( Y i )=α + β x i Var ( Y i )=σ 2ε

Multivariate Linear Regression

Y i =β 0 +β 1 x 1, i +β 2 x 2, i +. . .+ β k x k , i +ε i i=1 , 2 ,. .. , n
ε i ~ Ν ( 0 , σ 2ε )
are independent and identically distributed
Ε ( Y i )=β 0 + β1 x 1 ,i + β 2 x 2 , i +.. .+ β k x k , i Var ( Y i )=σ 2ε

AR(1) Model
X t =α 0 +α 1 X t −1 + Z t
Z t ’s are independent with mean 0 and variance σ 2

α0 σ2 α 1k σ 2
Ε ( X t )= Var ( X t )= Cov ( X t −k , X t ) =
1−α 1 1−α 21 1−α 21

AR(p) Model
X t =α 0 +α 1 X t −1 + α 2 X t−2 + .. .+α p X t − p +Z t p=1,2,3 ,...
Z t ’s are independent with mean 0 and variance σ 2
α0
Ε ( X t )=
1−α 1 −α 2 −. ..−α p
MA(1) Model
X t =μ +Z t + β Z t −1
Z t ’s are independent with mean 0 and variance σ 2

Ε ( X t )=μ Var ( X t )=( 1+ β2 ) σ 2

Cov ( X t −1 , X t )=β σ 2 Cov ( X t −k , X t ) =0

for k > 1
MA(q) Model
X t =μ +Z t +β 1 Z t−1 + β 2 Z t−2 +.. .+β q Z t−q q=1 ,2,3 ,...
Z t ’s are independent with mean 0 and variance σ 2

Ε ( X t )=μ Var ( X t )=( 1+ β 21 + β 22 +. ..+ β 2q ) σ 2

Forwards
for non-dividend-paying share:

forward price F 0=S 0 e r T

−r ( T −t )
(long) contract value at t ( F t −F 0 ) e
−r ( T −t )
(short) contract value at t ( F 0 −F t ) e