Related papers: Incorporating Views on Market Dynamics in Options …
We introduce a class of randomly time-changed fast mean-reverting stochastic volatility models and, using spectral theory and singular perturbation techniques, we derive an approximation for the prices of European options in this setting.…
We model investor heterogeneity using different required returns on an investment and evaluate the impact on the valuation of an investment. By assuming no disagreement on the cash flows, we emphasize how risk preferences in particular, but…
Differential equations can be used to construct predictive models of a diverse set of real-world phenomena like heat transfer, predator-prey interactions, and missile tracking. In our work, we explore one particular application of…
We present a simulation-and-regression method for solving dynamic portfolio allocation problems in the presence of general transaction costs, liquidity costs and market impacts. This method extends the classical least squares Monte Carlo…
Assuming that price of the underlying stock is moving in range bound, the Black-Scholes formula for options pricing supports a separation of variables. The resulting time-independent equation is solved employing different behavior of the…
This paper investigates the hedging effectiveness of a dynamic moving window OLS hedging model, formed using wavelet decomposed time-series. The wavelet transform is applied to calculate the appropriate dynamic minimum-variance hedge ratio…
We introduce the Historical and Dynamic Volatility Ratios (HVR/DVR) and show that equity and index volatilities are cointegrated at intraday and daily horizons. This allows us to construct a VECM to forecast portfolio volatility by…
It is shown that delta hedging provides the optimal trading strategy in terms of minimal required initial capital to replicate a given terminal payoff in a continuous-time Markovian context. This holds true in market models where no…
In practice daily volatility of portfolio returns is transformed to longer holding periods by multiplying by the square-root of time which assumes that returns are not serially correlated. Under this assumption this procedure of scaling can…
The Hawkes model is suitable for describing self and mutually exciting random events. In addition, the exponential decay in the Hawkes process allows us to calculate the moment properties in the model. However, due to the complexity of the…
The classical discrete time model of proportional transaction costs relies on the assumption that a feasible portfolio process has solvent increments at each step. We extend this setting in two directions, allowing for convex transaction…
Active portfolio management tries to incorporate any source of meaningful information into the asset selection process. In this contribution we consider qualitative views specified as total orders of the expected asset returns and discuss…
In volatile financial markets, balancing risk and return remains a significant challenge. Traditional approaches often focus solely on equity allocation, overlooking the strategic advantages of options trading for dynamic risk hedging. This…
In the over-the-counter market in derivatives, we sometimes see large numbers of traders taking the same position and risk. When there is this kind of concentration in the market, the position impacts the pricings of all other derivatives…
The objective of this paper is to introduce the theory of option pricing for markets with informed traders within the framework of dynamic asset pricing theory. We introduce new models for option pricing for informed traders in complete…
For a long investment time horizon, it is preferable to rebalance the portfolio weights at intermediate times. This necessitates a multi-period market model in which portfolio optimization is usually done through dynamic programming.…
In financial markets, accurately measuring the risk of future fluctuations in asset prices is of paramount importance. Studies such as Carr and Madan have shown that the expected value of the quadratic variation of log prices can be…
The problem of stock hedging is reconsidered in this paper, where a put option is chosen from a set of available put options to hedge the market risk of a stock. A formula is proposed to determine the probability that the potential loss…
Measuring beliefs about natural disasters is challenging. Deep out-of-the-money options allow investors to hedge at a range of strikes and time horizons, thus the 3-dimensional surface of firm-level option prices provides information on (i)…
The Black-Litterman model is a framework for incorporating forward-looking expert views in a portfolio optimization problem. Existing work focuses almost exclusively on single-period problems with the forecast horizon matching that of the…