Related papers: Information-Based Asset Pricing
A statistical decision problem is hidden in the core of option pricing. A simple form for the price C of a European call option is obtained via the minimum Bayes risk, R_B, of a 2-parameter estimation problem, thus justifying calling C…
We explore a stochastic model that enables capturing external influences in two specific ways. The model allows for the expression of uncertainty in the parametrisation of the stochastic dynamics and incorporates patterns to account for…
In this paper, we propose and study a novel continuous-time model, based on the well-known constant elasticity of variance (CEV) model, to describe the asset price process. The basic idea is that the volatility elasticity of the CEV model…
We assume the market price to diffuse in a hierarchical comb of barriers, the heights of which represent the importance of new information entering the market. We find fat tails with the desired exponent for the price change distribution,…
In this paper we investigate general linear stochastic volatility models with correlated Brownian noises. In such models the asset price satisfies a linear SDE with coefficient of linearity being the volatility process. This class contains…
We introduce a minimal Agent Based Model for financial markets to understand the nature and Self-Organization of the Stylized Facts. The model is minimal in the sense that we try to identify the essential ingredients to reproduce the main…
In this paper we present a new multi-asset pricing model, which is built upon newly developed families of solvable multi-parameter single-asset diffusions with a nonlinear smile-shaped volatility and an affine drift. Our multi-asset pricing…
We show how inter-asset dependence information derived from market prices of options can lead to improved model-free price bounds for multi-asset derivatives. Depending on the type of the traded option, we either extract correlation…
We define and study a rather complex market model, inspired from the Santa Fe artificial market and the Minority Game. Agents have different strategies among which they can choose, according to their relative profitability, with the…
We present a novel framework for pricing waterfall structures by simulating the uncertainty of the cashflow generated by the underlying assets in terms of value, time, and confidence levels. Our approach incorporates various probability…
We consider a market of risky financial assets whose participants are an informed trader, a representative uninformed trader, and noisy liquidity providers. We prove the existence of a market-clearing equilibrium when the insider…
We develop a novel framework for costly information acquisition in which a decision-maker learns about an unobserved state by choosing a signal distribution, with the cost of information determined by the distribution of noise in the…
A stochastic model for pure-jump diffusion (the compound renewal process) can be used as a zero-order approximation and as a phenomenological description of tick-by-tick price fluctuations. This leads to an exact and explicit general…
We price European options in a class of models in which the volatility of the underlying risky asset depends on the short rate of interest. Our study results in an explicit pricing formula that depends on knowledge of a characteristic…
We consider a general local-stochastic volatility model and an investor with exponential utility. For a European-style contingent claim, whose payoff may depend on either a traded or non-traded asset, we derive an explicit approximation for…
In the classical model of stock prices which is assumed to be Geometric Brownian motion, the drift and the volatility of the prices are held constant. However, in reality, the volatility does vary. In quantitative finance, the Heston model…
We study the hedging and valuation of European and American claims on a non-traded asset $Y$, when a traded stock $S$ is available for hedging, with $S$ and $Y$ following correlated geometric Brownian motions. This is an incomplete market,…
The information dynamics in finance and insurance applications is usually modeled by a filtration. This paper looks at situations where information restrictions apply such that the information dynamics may become non-monotone. A fundamental…
In the present paper we present a finite element approach for option pricing in the framework of a well-known stochastic volatility model with jumps, the Bates model. In this model the asset log-returns are assumed to follow a…
We model an informed agent with information about the future value of an asset trying to maximize profits when subjected to a transaction cost as well as a market maker tasked with setting fair transaction prices. In a single auction model,…