Related papers: Pricing Using a Homogeneously Saturated Equation
A new framework for asset price dynamics is introduced in which the concept of noisy information about future cash flows is used to derive the price processes. In this framework an asset is defined by its cash-flow structure. Each cash flow…
In this paper, we consider option pricing in a framework of the fractional Heston-type model with $H>1/2$. As it is impossible to obtain an explicit formula for the expectation $\mathbb E f(S_T)$ in this case, where $S_T$ is the asset price…
This paper proposes a theory of stock market predictability patterns based on a model of heterogeneous beliefs. In a discrete finite time framework, some agents receive news about an asset's fundamental value through a noisy signal. The…
It is well known how to determine the price of perpetual American options if the underlying stock price is a time-homogeneous diffusion. In the present paper we consider the inverse problem, that is, given prices of perpetual American…
We study the problem of optimal pricing and hedging of a European option written on an illiquid asset $Z$ using a set of proxies: a liquid asset $S$, and $N$ liquid European options $P_i$, each written on a liquid asset $Y_i, i=1,N$. We…
In this paper, we price European Call three different option pricing models, where the volatility is dynamically changing i.e. non constant. In stochastic volatility (SV) models for option pricing a closed form approximation technique is…
We consider approximate pricing formulas for European options based on approximating the logarithmic return's density of the underlying by a linear combination of rescaled Hermite polynomials. The resulting models, that can be seen as…
We study the pricing problem for a European call option when the volatility of the underlying asset is random and follows the exponential Ornstein-Uhlenbeck model. The random diffusion model proposed is a two-dimensional market process that…
We solve the superhedging problem for European options in an illiquid extension of the Black-Scholes model, in which transactions have transient price impact and the costs and the strategies for hedging are affected by physical or cash…
Presented is an analytic microeconomic model of the temporal price dispersion of homogeneous goods in polypoly markets. This new approach is based on the idea that the price dispersion has its origin in the dynamics of the purchase process.…
We study the pricing and hedging of European spread options on correlated assets when, in contrast to the standard framework and consistent with imperfect liquidity markets, the trading in the stock market has a direct impact on stocks…
This paper presents the solution to a European option pricing problem by considering a regime-switching jump diffusion model of the underlying financial asset price dynamics. The regimes are assumed to be the results of an observed pure…
We propose a model for price formation in financial markets based on clearing of a standard call auction with random orders, and verify its validity for prediction of the daily closing price distribution statistically. The model considers…
We propose a heterogeneous agent market model (HAM) in continuous time. The market is populated by fundamental traders and chartists, who both use simple linear trading rules. Most of the related literature explores stability, price…
Paper is based on "The cost of illiquidity and its effects on hedging", L. C. G. Rogers and Surbjeet Singh, 2010. We generalize its thesis to constant elasticity model, which own previously used Black-Schoels model as a special case. The…
We introduce a stochastic heterogeneous interacting-agent model for the short-time non-equilibrium evolution of excess demand and price in a stylized asset market. We consider a combination of social interaction within peer groups and…
Mathematical models for financial asset prices which include, for example, stochastic volatility or jumps are incomplete in that derivative securities are generally not replicable by trading in the underlying. In earlier work (2004) the…
Our goal here is to discuss the pricing problem of European and American options in discrete time using elementary calculus so as to be an easy reference for first year undergraduate students. Using the binomial model we compute the fair…
European options can be priced by solving parabolic partial(-integro) differential equations under stochastic volatility and jump-diffusion models like Heston, Merton, and Bates models. American option prices can be obtained by solving…
In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the…