Related papers: Rationality parameter for exercising American put
Perpetual American options are financial instruments that can be readily exercised and do not mature. In this paper we study in detail the problem of pricing this kind of derivatives, for the most popular flavour, within a framework in…
In this paper we study pricing of American put options on the Black and Scholes market with a stochastic interest rate and finite-time maturity. We prove that the option value is a $C^1$ function of the initial time, interest rate and stock…
The standard criterion of rationality in economics is the maximization of a utility function that is stable across multiple observations of an agent's choice behavior. In this paper, we discuss two notions of the money pump that…
In this paper, we present an implicit finite difference method for the numerical solution of the Black-Scholes model of American put options without dividend payments. We combine the proposed numerical method by using a front fixing…
This paper studies whether rationality can be computed. Rationality is defined as the use of complete information, which is processed with a perfect biological or physical brain, in an optimized fashion. To compute rationality one needs to…
Option contracts can be valued by using the Black-Scholes equation, a partial differential equation with initial conditions. An exact solution for European style options is known. The computation time and the error need to be minimized…
Consider a discrete finite-dimensional, Markovian market model. In this setting, discretely sampled American options can be priced using the so-called ``non-recombining'' tree algorithm. By successively increasing the number of exercise…
This paper deals with the numerical approximation of American-style option values governed by partial differential complementarity problems. For a variety of one- and two-asset American options we investigate by ample numerical experiments…
In this article we propose a novel approach to reduce the computational complexity of various approximation methods for pricing discrete time American options. Given a sequence of continuation values estimates corresponding to different…
In high-dimensional and/or non-parametric regression problems, regularization (or penalization) is used to control model complexity and induce desired structure. Each penalty has a weight parameter that indicates how strongly the structure…
We propose a numerical procedure for computing the prices of European options, in which the underlying asset price is a Markovian strict local martingale. If the underlying process is a strict local martingale and the payoff is of linear…
In this work, we give a generalized formulation of the Black-Scholes model. The novelty resides in considering the Black-Scholes model to be valid on 'average', but such that the pointwise option price dynamics depends on a measure…
Recent developments in linear system identification have proposed the use of non-parameteric methods, relying on regularization strategies, to handle the so-called bias/variance trade-off. This paper introduces an impulse response estimator…
Proof that under simple assumptions, such as constraints of Put-Call Parity, the probability measure for the valuation of a European option has the mean derived from the forward price which can, but does not have to be the risk-neutral one,…
Valuation and parity formulas for both European-style and American-style exchange options are presented in a general financial model allowing for jumps, possibility of default and "bubbles" in asset prices. The formulas are given via…
We consider the P1/P1 or P1b/P1 finite element approximations to the Stokes equations in a bounded smooth domain subject to the slip boundary condition. A penalty method is applied to address the essential boundary condition $u\cdot n = g$…
Common computational problems, such as parameter estimation in dynamic models and PDE constrained optimization, require data fitting over a set of auxiliary parameters subject to physical constraints over an underlying state. Naive…
We derive behavioral finance option pricing formulas consistent with the rational dynamic asset pricing theory. In the existing behavioral finance option pricing formulas, the price process of the representative agent is not a…
We propose a stochastic first-order algorithm to learn the rationality parameters of simultaneous and non-cooperative potential games, i.e., the parameters of the agents' optimization problems. Our technique combines (i.) an active-set step…
A rational behavior of a consumer is analyzed when the user participates in a Peak Time Rebate (PTR) mechanism, which is a demand response (DR) incentive program based on a baseline. A multi-stage stochastic programming is proposed from the…