Related papers: Variance dispersion and correlation swaps
This paper considers the case of pricing discretely-sampled variance swaps under the class of equity-interest rate hybridization. Our modeling framework consists of the equity which follows the dynamics of the Heston stochastic volatility…
The third moment variation of a financial asset return process is defined by the quadratic covariation between the return and square return processes. The skew and fat tail risk of an underlying asset can be hedged using a third moment…
In a seminal paper in 1973, Black and Scholes argued how expected distributions of stock prices can be used to price options. Their model assumed a directed random motion for the returns and consequently a lognormal distribution of asset…
The value of an asset in a financial market is given in terms of another asset known as numeraire. The dynamics of the value is non-stationary and hence, to quantify the relationships between different assets, one requires convenient…
For the past two decades investors have observed long memory and highly correlated behavior of asset classes that does not fit into the framework of Modern Portfolio Theory. Custom correlation and standard deviation estimators consider…
Time variation and persistence are crucial properties of volatility that are often studied separately in energy volatility forecasting models. Here, we propose a novel approach that allows shocks with heterogeneous persistence to vary…
The stability of the financial system is associated with systemic risk factors such as the concurrent default of numerous small obligors. Hence it is of utmost importance to study the mutual dependence of losses for different creditors in…
We show that the frequent claim that the implied tree prices exotic options consistently with the market is untrue if the local volatilities are subject to change and the market is arbitrage-free. In the process, we analyse -- in the most…
Volatility measures the amplitude of price fluctuations. Despite it is one of the most important quantities in finance, volatility is not directly observable. Here we apply a maximum likelihood method which assumes that price and volatility…
We study the problem of option replication under constant proportional transaction costs in models where stochastic volatility and jumps are combined to capture the market's important features. Assuming some mild condition on the jump size…
We discovered that past changes in the market correlation structure are significantly related with future changes in the market volatility. By using correlation-based information filtering networks we device a new tool for forecasting the…
Realised pay-offs for discretisation-invariant swaps are those which satisfy a restricted `aggregation property' of Neuberger [2012] for twice continuously differentiable deterministic functions of a multivariate martingale. They are…
The paper demonstrates that a pure-diffusion 3/2 model is able to capture the observed upward-sloping implied volatility skew in VIX options. This observation contradicts a common perception in the literature that jumps are required for the…
We empirically investigate the functional link between the variance swap rate and the spot variance. Using S\&P500 data over the period 2006-2018, we find overwhelming empirical evidence supporting the affine link analytically found by…
Label spreading is a general technique for semi-supervised learning with point cloud or network data, which can be interpreted as a diffusion of labels on a graph. While there are many variants of label spreading, nearly all of them are…
Weighted reciprocity between two agents can be defined as the minimum of sending and receiving value in their bilateral relationship. In financial networks, such reciprocity characterizes the importance of individual banks as both liquidity…
The growth of the exhange-traded fund (ETF) industry has given rise to the trading of options written on ETFs and their leveraged counterparts {(LETFs)}. We study the relationship between the ETF and LETF implied volatility surfaces when…
We introduce a new stochastic duration model for transaction times in asset markets. We argue that widely accepted rules for aggregating seemingly related trades mislead inference pertaining to durations between unrelated trades: while any…
We present an explicit hedging strategy, which enables to prove arbitrageness of market incorporating at least two assets depending on the same random factor. The implied Black-Scholes volatility, computed taking into account the form of…
We detect and quantify asymmetries in volatility spillovers using the realized semivariances of petroleum commodities: crude oil, gasoline, and heating oil. During the 1987--2014 period we document increasing spillovers from volatility…