Related papers: Recombining binomial tree for constant elasticity …
We study trade networks with a tree structure, where a seller with a single indivisible good is connected to buyers, each with some value for the good, via a unique path of intermediaries. Agents in the tree make multiplicative revenue…
In American options, the early exercise feature allows the option to be exercised at any time prior to expiration. However, this flexibility introduces a challenge: the pricing model must value the option while simultaneously determining an…
In this article we present a new approach to the numerical valuation of derivative securities. The method is based on our previous work where we formulated the theory of pricing in terms of tradables. The basic idea is to fit a finite…
The Constant Elasticity of Variance (CEV) model is mathematically presented and then used in a Credit-Equity hybrid framework. Next, we propose extensions to the CEV model with default: firstly by adding a stochastic volatility diffusion…
It is well documented from various empirical studies that the volatility process of an asset price dynamics is stochastic. This phenomenon called for a new approach to describing the random evolution of volatility through time with…
An accurate valuation of American call options is critical in most financial decision making environments. However, traditional models like the Barone-Adesi Whaley (B-AW) and Binomial Option Pricing (BOP) methods fall short in handling the…
We derive a recursive formula for arithmetic Asian option prices with finite observation times in semimartingale models. The method is based on the relationship between the risk-neutral expectation of the quadratic variation of the return…
Tree-based ensemble methods such as random forests, gradient-boosted trees, and Bayesianadditive regression trees have been successfully used for regression problems in many applicationsand research studies. In this paper, we study ensemble…
Motivated by the Corns-Satchell, continuous time, option pricing model, we develop a binary tree pricing model with underlying asset price dynamics following It\^o-Mckean skew Brownian motion. While the Corns-Satchell market model is…
Neural Networks and Decision Trees: two popular techniques for supervised learning that are seemingly disconnected in their formulation and optimization method, have recently been combined in a single construct. The connection pivots on…
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…
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…
We extend the application of the Cherny-Shiryaev-Yor invariance principle to a unified Bachelier-Black-Scholes-Merton (BBSM) dynamic pricing model. This extension incorporates the influence of the history of the dynamics (i.e., the path…
American put options are among the most frequently traded single stock options, and their calibration is computationally challenging since no closed-form expression is available. Due to the higher flexibility in comparison to European…
Characterization of the American put option price is still an open issue. From the beginning of the nineties there exists a non-closed formula for this price but nontrivial numerical computations are required to solve it. Strong efforts…
In this paper we examine the problem of valuing an exotic derivative known as the American passport option where the underlying is driven by a L\'evy process. The passport option is a call option on a trading account. We derive the pricing…
Technical trading rules and linear regressive models are often used by practitioners to find trends in financial data. However, these models are unsuited to find non-linearly separable patterns. We propose a decision tree forecasting model…
This paper examines the valuation of American capped call options with two-level caps. The structure of the immediate exercise region is significantly more complex than in the classical case with constant cap. When the cap grows over time,…
Options have provided a field of much study because of the complexity involved in pricing them. The Black-Scholes equations were developed to price options but they are only valid for European styled options. There is added complexity when…
We present a new approximation scheme for the price and exercise policy of American options. The scheme is based on Hermite polynomial expansions of the transition density of the underlying asset dynamics and the early exercise premium…