Related papers: Change of Measure in Midcurve Pricing
A multi-dimensional extension of the structural default model with firms' values driven by diffusion processes with Marshall-Olkin-inspired correlation structure is presented. Semi-analytical methods for solving the forward calibration…
We consider a method of lines (MOL) approach to determine prices of European and American exchange options when underlying asset prices are modelled with stochastic volatility and jump-diffusion dynamics. As the MOL, as with any other…
In this paper, a multivariate constrained robust M-regression (MCRM) method is developed to estimate shaping coefficients for electricity forward prices. An important benefit of the new method is that model arbitrage can be ruled out at an…
This paper provides intuition on the relationship of accrual and mark-to-market valuation for cash and forward interest rate trades. Discounted cashflow valuation is compared to spread-based valuation for forward trades, which explains the…
We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX…
We develop theoretical and numerical tools for the quantification of entanglement in systems with continuous degrees of freedom. Continuous variable entanglement swapping is introduced and based on this idea we develop methods of…
In this paper, we are presenting a method for estimation of market parameters modeled by jump diffusion process. The method proposed is based on Gibbs sampler, while the market parameters are the drift, the volatility, the jump intensity…
This paper studies pricing derivatives in an age-dependent semi-Markov modulated market. We consider a financial market where the asset price dynamics follow a regime switching geometric Brownian motion model in which the coefficients…
Successful forecasting models strike a balance between parsimony and flexibility. This is often achieved by employing suitable shrinkage priors that penalize model complexity but also reward model fit. In this note, we modify the stochastic…
Stock price change in financial market occurs through transactions in analogy with diffusion in stochastic physical systems. The analysis of price changes in real markets shows that long-range correlations of price fluctuations largely…
In this article, we consider a Markov-modulated model with jumps for short rate dynamics. We obtain closed formulas for the term structure and forward rates using the properties of the jump-telegraph process and the expectation hypothesis.…
We discuss a weighted estimation of correlation and covariance matrices from historical financial data. To this end, we introduce a weighting scheme that accounts for similarity of previous market conditions to the present one. The…
We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state…
In economic studies and popular media, interest rates are routinely cited as a major factor behind commodity price fluctuations. At the same time, the transmission channels are far from transparent, leading to long-running debates on the…
In this paper we give complete results on the presence of Shift, Slope and Curvature for a correlation model of interest rates, by improving and extending the content of a previous paper on the subject. We get our goal essentially…
Pricing composite and quanto contracts requires a joint model of both the underlying asset and the exchange rate. In this contribution, we explore the potential of local-correlation models to address the challenges of calibrating synthetic…
The duality principle in option pricing aims at simplifying valuation problems that depend on several variables by associating them to the corresponding dual option pricing problem. Here, we analyze the duality principle for options that…
We derive a forward partial integro-differential equation for prices of call options in a model where the dynamics of the underlying asset under the pricing measure is described by a -possibly discontinuous- semimartingale. A uniqueness…
The objective of the paper is to price weather contracts using temperature as the underlying process when the later follows a mean-reverting dynamics driven by a time-changed Brownian motion coupled to a Gamma Levy subordinator and…
We present a general framework for a comparative theory of variability measures, with a particular focus on the recently introduced one-parameter families of inter-Expected Shortfall differences and inter-expectile differences, that are…