Related papers: Black to Negative: Embedded optionalities in commo…
A coordinated trading process is proposed as a design for an electricity market with significant uncertainty, perhaps from renewables. In this process, groups of agents propose to the system operator (SO) a contingent buy and sell trade…
The robust option pricing problem is to find upper and lower bounds on fair prices of financial claims using only the most minimal assumptions. It contrasts with the classical, model-based approach and gained prominence in the wake of the…
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…
Motivated by the prevalence of prediction problems in the economy, we study markets in which firms sell models to a consumer to help improve their prediction. Firms decide whether to enter, choose models to train on their data, and set…
The relationship between price volatilty and a market extremum is examined using a fundamental economics model of supply and demand. By examining randomness through a microeconomic setting, we obtain the implications of randomness in the…
We have studied here the self-organising features of the dynamics of a model market, where the agents `trade' for a single commodity with their money. The model market consists of fixed numbers of economic agents, money supply and…
We study the upper and lower bounds for prices of European and American style options with the possibility of an external termination, meaning that the contract may be terminated at some random time. Under the assumption that the underlying…
We investigate qualitative and quantitative behavior of a solution of the mathematical model for pricing American style of perpetual put options. We assume the option price is a solution to the stationary generalized Black-Scholes equation…
Optimal transport has become part of the standard quantitative economics toolbox. It is the framework of choice to describe models of matching with transfers, but beyond that, it allows to: extend quantile regression; identify discrete…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
We study a market model in which the volatility of the stock may jump at a random time from a fixed value to another fixed value. This model was already described in the literature. We present a new approach to the problem, based on partial…
We present a stochastic-local volatility model for derivative contracts on commodity futures able to describe forward-curve and smile dynamics with a fast calibration to liquid market quotes. A parsimonious parametrization is introduced to…
In this paper we develop numerical pricing methodologies for European style Exchange Options written on a pair of correlated assets, in a market with finite liquidity. In contrast to the standard multi-asset Black-Scholes framework, trading…
Volatility clustering, long-range dependence, and non-Gaussian scaling are stylized facts of financial assets dynamics. They are ignored in the Black & Scholes framework, but have a relevant impact on the pricing of options written on…
Experimental results on market behavior establish a lower stability and efficiency of markets for durable re-tradable assets compared to markets for non-durable, or perishable, goods. In this chapter, we revisit this known but…
Construal of observable facts or events, that is, the manner in which we understand reality, is based not only on mathematical formulas of a theory suggested as a reasonable explanation for physical phenomena (like general relativity or…
This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American…
Emphasizing the statistics of jumps crossing the strike and local time, we develop a decomposition of equity option risk premiums. Operationalizing this theoretical treatment, we equip the pricing kernel process with unspanned risks, embed…
Negative probabilities arise primarily in physics, statistical quantum mechanics and quantum computing. Negative probabilities arise as mixing distributions of unobserved latent variables in Bayesian modeling. Our goal is to provide a link…
In this paper, we introduce a model that adds a non-linearity to discounting: the discounting factor may depend on the notional (i.e., discounted values are no longer linear in the notional). In the first part of the paper, we provide a…