Related papers: Option Pricing, Historical Volatility and Tail Ris…
This article is the second one in a series on the use of scaling invariance in finance. In the first article (cond-mat/9906048), we introduced a new formalism for the pricing of derivative securities, which focusses on tradable objects…
We suggest an intermediate currency approach that allows us to price options on all FX markets simultaneously under the same risk-neutral measure which ensures consistency of FX option prices across all markets. In particular, it is…
We investigate the (functional) convex order of for various continuous martingale processes, either with respect to their diffusions coefficients for L\'evy-driven SDEs or their integrands for stochastic integrals. Main results are bordered…
We provide explicit small-time formulae for the at-the-money implied volatility, skew and curvature in a large class of models, including rough volatility models and their multi-factor versions. Our general setup encompasses both European…
We present a neural-network valuation of financial derivatives in the case of fat-tailed underlying asset returns. A two-layer perceptron is trained on simulated prices taking into account the well-known effect of volatility smile. The…
We consider the randomness of market trade as the origin of price and return stochasticity. We look at time series of trade values and volumes as random variables during the averaging interval {\Delta} and describe the dependences of…
We consider the pricing of derivatives in a setting with trading restrictions, but without any probabilistic assumptions on the underlying model, in discrete and continuous time. In particular, we assume that European put or call options…
The article's aim is to provide a solution to the equity premium puzzle with a derived model. The derived model which depends on Consumption Capital Asset Pricing Model gives a solution to the puzzle with the values of coefficient of…
Reliable calculations of financial risk require that the fat-tailed nature of prices changes is included in risk measures. To this end, a non-Gaussian approach to financial risk management is presented, modeling the power-law tails of the…
In this paper we study the short-time behavior of the at-the-money implied volatility for arithmetic Asian options with fixed strike price. The asset price is assumed to follow the Black-Scholes model with a general stochastic volatility…
Low-frequency historical data, high-frequency historical data and option data are three major sources, which can be used to forecast the underlying security's volatility. In this paper, we propose two econometric models, which integrate…
The rough Bergomi model introduced by Bayer, Friz and Gatheral has been outperforming conventional Markovian stochastic volatility models by reproducing implied volatility smiles in a very realistic manner, in particular for short…
This study develops an integrated stochastic modeling framework for pricing short and medium-maturity equity options and assessing interest-rate risk using the Heston (1993), Bates (1996), and CIR (1985) models. We calibrate the Heston…
We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two…
This paper investigates a novel behavioral feature of recursive preferences: aversion to risks that persist over time, or simply \textit{correlation aversion}. Greater persistence provides information about future consumption but reduces…
This paper considers the pricing of equity-linked life insurance contracts with death and survival benefits in a general model with multiple stochastic risk factors: interest rate, equity, volatility, unsystematic and systematic mortality.…
In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as anomalies the theory of rational finance cannot explain: Predictability of asset returns, The Equity Premium, (The…
We consider a collection of derivatives that depend on the price of an underlying asset at expiration or maturity. The absence of arbitrage is equivalent to the existence of a risk-neutral probability distribution on the price; in…
The risk premium is one of main concepts in mathematical finance. It is a measure of the trade-offs investors make between return and risk and is defined by the excess return relative to the risk-free interest rate that is earned from an…
In this paper we solve the discrete time mean-variance hedging problem when asset returns follow a multivariate autoregressive hidden Markov model. Time dependent volatility and serial dependence are well established properties of financial…