Related papers: Change of Measure in Midcurve Pricing
In order to overcome the drawbacks of assuming deterministic volatility coefficients in the standard LIBOR market models to capture volatility smiles and skews in real markets, several extensions of LIBOR models to incorporate stochastic…
This paper proposes swaps on two important new measures of generalized variance, namely the maximum eigenvalue and trace of the covariance matrix of the assets involved. We price these generalized variance swaps for Barndorff-Nielsen and…
Most models for barrier pricing are designed to let a market maker tune the model-implied covariance between moves in the asset spot price and moves in the implied volatility skew. This is often implemented with a local…
We use a continuous version of the standard deviation premium principle for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a…
In this paper we consider the pricing of options on interest rates such as caplets and swaptions in the L\'evy Libor model developed by Eberlein and \"Ozkan (2005). This model is an extension to L\'evy driving processes of the classical…
The purpose of these notes is to provide a systematic quantitative framework - in what is intended to be a "pedagogical" fashion - for discussing mean-reversion and optimization. We start with pair trading and add complexity by following…
In this paper we study recent developments in the approximation of the spread option pricing. As the Kirk\'s Approximation is extremely flawed in the cases when the correlation is very high, we explore a recent development that allows…
In the context of multi-curve modeling we consider a two-curve setup, with one curve for discounting (OIS swap curve) and one for generating future cash flows (LIBOR for a give tenor). Within this context we present an approach for the…
We consider a stochastic volatility model with jumps where the underlying asset price is driven by the process sum of a 2-dimensional Brownian motion and a 2-dimensional compensated Poisson process. The market is incomplete, resulting in…
We propose a non-parametric extension with leverage functions to the Andersen commodity curve model. We calibrate this model to market data for WTI and NG including option skew at the standard maturities. While the model can be calibrated…
The main result of this paper that a martingale evolution can be chosen for Libor such that all the Libor interest rates have a common market measure; the drift is fixed such that each Libor has the martingale property. Libor is described…
This project attempts to address the problem of asset pricing in a financial market, where the interest rates and volatilities exhibit regime switching. This is an extension of the Black-Scholes model. Studies of Markov-modulated regime…
Realization of uncertainty of prices is captured by volatility, that is the tendency of prices to vary along a period of time. This is generally measured as standard deviation of daily returns. In this paper we propose and investigate the…
We develop a multi-curve term structure setup in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to LIBOR swaptions data and show that a rational two-factor lognormal multi-curve model…
We study the fair strike of a discrete variance swap for a general time-homogeneous stochastic volatility model. In the special cases of Heston, Hull-White and Schobel-Zhu stochastic volatility models we give simple explicit expressions…
In this paper, we propose an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income streams. In an incomplete market, there exist two traded risky assets (e.g. stock/commodity and weather derivative)…
The use of non-translation invariant risk measures within the equal risk pricing (ERP) methodology for the valuation of financial derivatives is investigated. The ability to move beyond the class of convex risk measures considered in…
The aim of this work is to provide fast and accurate approximation schemes for the Monte Carlo pricing of derivatives in LIBOR market models. Standard methods can be applied to solve the stochastic differential equations of the successive…
Recent studies have identified long-range dependence as a key feature in the dynamics of both mortality and interest rates. Building on this insight, we develop a novel bi-variate stochastic framework based on mixed fractional Brownian…
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.…