Related papers: Model Risk in Real Option Valuation
"What are the origins of risks?" and "How material are they?" -- these are the two most fundamental questions of any risk analysis. Quantitative Structuring -- a technology for building financial products -- provides economically meaningful…
Value-at-risk (VaR) has been playing the role of a standard risk measure since its introduction. In practice, the delta-normal approach is usually adopted to approximate the VaR of portfolios with option positions. Its effectiveness,…
Models to price long term loans in the securities lending business are developed. These longer horizon deals can be viewed as contracts with optionality embedded in them. This insight leads to the usage of established methods from…
The discrepancy between realized volatility and the market's view of volatility has been known to predict individual equity options at the monthly horizon. It is not clear how this predictability depends on a forecast's ability to predict…
Changes in input distribution can induce shifts in the average predictions of machine learning models. Such prediction shifts may impact downstream business outcomes (e.g. a bank's loan approval rate), so understanding their causes can be…
This paper presents a convenient framework for modeling default process and pricing derivative securities involving credit risk. The framework provides an integrated view of credit valuation adjustment by linking distance-to-default,…
We investigate the relation between the fair price for European-style vanilla options and the distribution of short-term returns on the underlying asset ignoring transaction and other costs. We compute the risk-neutral probability density…
The paper considers an investment timing problem appearing in real options theory. Present values from an investment project are modeled by general diffusion process. We prove necessary and sufficient conditions under which an optimal…
Risk management is very important for individual investors or companies. There are many ways to measure the risk of investment. Prices of risky assets vary rapidly and randomly due to the complexity of finance market. Random interval is a…
In this paper a real option approach for the valuation of real assets is presented. Two continuous time models used for valuation are described: geometric Brownian motion model and interest rate model. The valuation for electricity spread…
We apply a utility-based method to obtain the value of a finite-time investment opportunity when the underlying real asset is not perfectly correlated to a traded financial asset. Using a discrete-time algorithm to calculate the…
This study delves into the intricate realm of risk evaluation within the domain of specific financial derivatives, notably options. Unlike other financial instruments, like bonds, options are susceptible to broader risks. A distinctive…
In this paper new analytical and numerical approaches to valuating path-dependent options of European type have been developed. The model of stochastic volatility as a basic model has been chosen. For European options we could improve the…
According to the volatility feedback effect, an unexpected increase in squared volatility leads to an immediate decline in the price-dividend ratio. In this paper, we consider the properties of stock price dynamics and option valuations…
In the information-based approach to asset pricing the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market…
The introduction of transaction costs into the theory of option pricing could lead not only to the change of return for options, but also to the change of the volatility. On the base of assumption of the portfolio analysis, a new equation…
The so-called risk diversification principle is analyzed, showing that its convenience depends on individual characteristics of the risks involved and the dependence relationship among them. ----- Se analiza el principio de…
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 introduce an ensemble learning method for dynamic portfolio valuation and risk management building on regression trees. We learn the dynamic value process of a derivative portfolio from a finite sample of its cumulative cash flow. The…
Selecting language models in business contexts requires a careful analysis of the final financial benefits of the investment. However, the emphasis of academia and industry analysis of LLM is solely on performance. This work introduces a…