Related papers: Incorporating a Volatility Smile into the Markov-F…
In this paper we present a novel approach to the determination of fat tails in financial data by studying the information contained in the limit order book. In an order-driven market buyers and sellers may submit limit orders, which 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…
Over the last decade, hidden Markov models (HMMs) have become increasingly popular in statistical ecology, where they constitute natural tools for studying animal behavior based on complex sensor data. Corresponding analyses sometimes…
We introduce a perturbative formalism to solve the backward-looking futures pricing problem. The formalism is based on a time-ordered exponential series which allows to derive the functional form of the integral kernel associated to the…
This paper advances interest rate modeling in the post-LIBOR era by introducing rough stochastic volatility into the Forward Market Model (FMM). We establish a rigorous asymptotic expansion of swaption implied volatility, connecting the FMM…
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…
In this chapter we first briefly review the existing approaches to hedging in rough volatility models. Next, we present a simple but general result which shows that in a one-factor rough stochastic volatility model, any option may be…
Given the importance of continuous-time stochastic volatility models to describe the dynamics of interest rates, we propose a goodness-of-fit test for the parametric form of the drift and diffusion functions, based on a marked empirical…
Stochastic volatility models are the backbone of financial engineering. We study both continuous time diffusions as well as discrete time models. We propose two novel approaches to estimating stochastic volatility diffusions, one using…
Risk management is an important part of financial practice, essential for protecting assets and investments in modern-day volatile markets. This paper proposes a mixture of mirrored Weibull (MMW) distribution for modelling stock returns and…
We review the nature of some well-known phenomena such as volatility smiles, convexity adjustments and parallel derivative markets. We propose that the market is incomplete and postulate the existence of intrinsic risks in every contingent…
We investigate the pricing of financial options under the 2-hypergeometric stochastic volatility model. This is an analytically tractable model that reproduces the volatility smile and skew effects observed in empirical market data. Using a…
In this article, we apply the forward variance modeling approach by L.Bergomi to the co-terminal swap market model. We build an interest rate model for which all the market price changes of hedging instruments, interest rate swaps and…
We consider the at-the-money strike derivative of implied volatility as the maturity tends to zero. Our main results quantify the behavior of the slope for infinite activity exponential L\'evy models including a Brownian component. As…
Earnings announcements (EADs) are corporate events that provide investors with fundamentally important information. The prospect of stock price rises may also contribute to EADs increased volatility. Using data on extremely short term…
In this paper we study the valuation problem of an insurance company by maximizing the expected discounted future dividend payments in a model with partial information that allows for a changing economic environment. The surplus process is…
We study here the large-time behaviour of all continuous affine stochastic volatility models (in the sense of Keller-Ressel) and deduce a closed-form formula for the large-maturity implied volatility smile. Based on refinements of the…
Implied volatility is at the very core of modern finance, notwithstanding standard option pricing models continue to derive option prices starting from the joint dynamics of the underlying asset price and the spot volatility. These models…
The effects of a "diffusing diffusivity" (DD), a stochastically time-varying diffusion coefficient, are explored within the frameworks of three different forms of fractional Brownian motion (FBM): (i) the Langevin equation driven by…
The lifetime behaviour of loans is notoriously difficult to model, which can compromise a bank's financial reserves against future losses, if modelled poorly. Therefore, we present a data-driven comparative study amongst three techniques in…