Related papers: Rational Finance Approach to Behavioral Option Pri…
Behavioral finance has become an increasingly important subfield of finance. However the main parts of behavioral finance, prospect theory included, understand financial markets through individual investment behavior. Behavioral finance…
We develop two alternate approaches to arbitrage-free, market-complete, option pricing. The first approach requires no riskless asset. We develop the general framework for this approach and illustrate it with two specific examples. The…
We apply methods of quantum mechanics for mathematical modeling of price dynamics at the financial market. We propose to describe behavioral financial factors (e.g., expectations of traders) by using the pilot wave (Bohmian) model of…
We study a generic model for self-referential behaviour in financial markets, where agents attempt to use some (possibly fictitious) causal correlations between a certain quantitative information and the price itself. This correlation is…
Real life hedging in the Black-Scholes model must be imperfect and if the stock's drift is higher than the risk free rate, leads to a profit on average. Hence the option price is examined as a fair game agreement between the parties, based…
This work suggests modifications to a previously introduced class of heterogeneous agent models that allow for the inclusion of different types of agent motivations and behaviours in a unified way. The agents operate within a highly…
American options in a multi-asset market model with proportional transaction costs are studied in the case when the holder of an option is able to exercise it gradually at a so-called mixed (randomised) stopping time. The introduction of…
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…
We present an adaptive approach for valuing the European call option on assets with stochastic volatility. The essential feature of the method is a reduction of uncertainty in latent volatility due to a Bayesian learning procedure. Starting…
We consider the pricing problem related to payoffs that can have discontinuities of polynomial growth. The asset price dynamic is modeled within the Black and Scholes framework characterized by a stochastic volatility term driven by a…
Pricing financial or real options with arbitrary payoffs in regime-switching models is an important problem in finance. Mathematically, it is to solve, under certain standard assumptions, a general form of optimal stopping problems in…
Recent work has considered theoretical models for the behavior of agents with specific behavioral biases: rather than making decisions that optimize a given payoff function, the agent behaves inefficiently because its decisions suffer from…
The main aim of this work is to incorporate selected findings from behavioural finance into a Heterogeneous Agent Model using the Brock and Hommes (1998) framework. Behavioural patterns are injected into an asset pricing framework through…
We reconsider the problem of option pricing using historical probability distributions. We first discuss how the risk-minimisation scheme proposed recently is an adequate starting point under the realistic assumption that price increments…
Many biological, psychological and economic experiments have been designed where an organism or individual must choose between two options that have the same expected reward but differ in the variance of reward received. In this way,…
We suggest an intermediate currency approach that allows us to price options on all FX markets simultaneously under the same risk-neutral measure which ensures consistency of FX option prices across all markets. In particular, it is…
American options are studied in a general discrete market in the presence of proportional transaction costs, modelled as bid-ask spreads. Pricing algorithms and constructions of hedging strategies, stopping times and martingale…
Standard economic theory assumes that agents in markets behave rationally. However, the observation of extremely large fluctuations in the price of financial assets that are not correlated to changes in their fundamental value, as well as…
We introduce a stochastic heterogeneous interacting-agent model for the short-time non-equilibrium evolution of excess demand and price in a stylized asset market. We consider a combination of social interaction within peer groups and…
This paper studies arbitrage pricing theory in financial markets with implicit transaction costs. We extend the existing theory to include the more realistic possibility that the price at which the investors trade is dependent on the traded…