Related papers: Rational Finance Approach to Behavioral Option Pri…
Black-Scholes (BS) is the standard mathematical model for option pricing in financial markets. Option prices are calculated using an analytical formula whose main inputs are strike (at which price to exercise) and volatility. The BS…
In lending, where prices are specific to both customers and products, having a well-functioning personalized pricing policy in place is essential to effective business making. Typically, such a policy must be derived from observational…
Contextual pricing strategies are prevalent in online retailing, where the seller adjusts prices based on products' attributes and buyers' characteristics. Although such strategies can enhance seller's profits, they raise concerns about…
In economics literature, it is accepted that all people are rational and they try to maximize their utilities as possible as they can. In addition, economic theories are formed with the assumptions not suitable to real life. For instance,…
We study an American option pricing problem with liquidity risks and transaction fees. As endogenous transaction costs, liquidity risks of the underlying asset are modeled by a mean-reverting process. Transaction fees are exogenous…
In this paper, we describe a general method for constructing the posterior distribution of an option price. Our framework takes as inputs the prior distributions of the parameters of the stochastic process followed by the underlying, as…
Present bias, the tendency to overvalue immediate rewards while undervaluing future ones, is a well-known barrier to achieving long-term goals. As artificial intelligence and behavioral economics increasingly focus on this phenomenon, the…
This article considers the pricing and hedging of a call option when liquidity matters, that is, either for a large nominal or for an illiquid underlying asset. In practice, as opposed to the classical assumptions of a price-taking agent in…
In finance, sequential decision problems are often faced, for which reinforcement learning (RL) emerges as a promising tool for optimisation without the need of analytical tractability. However, the objective of classical RL is the expected…
We consider a financial market model which consists of a financial asset and a large number of interacting agents classified into many types. Different types of agents are heterogeneous in their price expectations. Each agent can change its…
We derive a recursive formula for arithmetic Asian option prices with finite observation times in semimartingale models. The method is based on the relationship between the risk-neutral expectation of the quadratic variation of the return…
Following the foundational work of the Black--Scholes model, extensive research has been developed to price the option by addressing its underlying assumptions and associated pricing biases. This study introduces a novel framework for…
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…
We compare static arbitrage price bounds on basket calls, i.e. bounds that only involve buy-and-hold trading strategies, with the price range obtained within a multi-variate generalization of the Black-Scholes model. While there is no gap…
We will compare three types of prices, namely, rational (hedging) prices, geometric (growth rate) prices, and martingale (measure) prices. We will show that rational prices in the complete market theory are sometimes contrary to common…
We construct a statistical indicator for the detection of short-term asset price bubbles based on the information content of bid and ask market quotes for plain vanilla put and call options. Our construction makes use of the martingale…
This paper considers the pricing of long-term options on assets such as housing, where either government intervention or the economic nature of the asset is assumed to limit large falls in prices. The observed asset price is modelled by a…
Positive feedback trading, which buys when prices rise and sells when prices fall, has long been criticized for being destabilizing as it moves prices away from the fundamentals. Motivated by the relationship between positive feedback…
We survey some new progress on the pricing models driven by fractional Brownian motion \cb{or} mixed fractional Brownian motion. In particular, we give results on arbitrage opportunities, hedging, and option pricing in these models. We…
The purpose of this paper is to analyze the problem of option pricing when the short rate follows subdiffusive fractional Merton model. We incorporate the stochastic nature of the short rate in our option valuation model and derive explicit…