Related papers: Robust Replication of Volatility and Hybrid Deriva…
We study the problem of optimal pricing and hedging of a European option written on an illiquid asset $Z$ using a set of proxies: a liquid asset $S$, and $N$ liquid European options $P_i$, each written on a liquid asset $Y_i, i=1,N$. We…
In informationally efficient financial markets, option prices and this implied volatility should immediately be adjusted to new information that arrives along with a jump in underlying's return, whereas gradual changes in implied volatility…
The problem of European-style option pricing in time-changed L\'{e}vy models in the presence of compound Poisson jumps is considered. These jumps relate to sudden large drops in stock prices induced by political or economical hits. As the…
We investigate whether it is possible to formulate option pricing and hedging models without using probability. We present a model that is consistent with two notions of volatility: a historical volatility consistent with statistical…
Dynamic hedging of an European option under a general local volatility model with small linear transaction costs is studied. A continuous control version of Leland's strategy that asymptotically replicates the payoff is constructed. An…
We consider insurance derivatives depending on an external physical risk process, for example a temperature in a low dimensional climate model. We assume that this process is correlated with a tradable financial asset. We derive optimal…
We discuss the pricing and hedging of volatility options in some rough volatility models. First, we develop efficient Monte Carlo methods and asymptotic approximations for computing option prices and hedge ratios in models where…
The aim of this work is to introduce a new stochastic volatility model for equity derivatives. To overcome some of the well-known problems of the Heston model, and more generally of the affine models, we define a new specification for the…
We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of…
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…
This work examines a stochastic volatility model with double-exponential jumps in the context of option pricing. The model has been considered in previous research articles, but no thorough analysis has been conducted to study its quality…
Single index financial market models cannot account for the empirically observed complex interactions between shares in a market. We describe a multi-share financial market model and compare characteristics of the volatility, that is the…
This study presents contemporaneous modeling of asset return and price range within the framework of stochastic volatility with leverage. A new representation of the probability density function for the price range is provided, and its…
This article develops a model that takes into account skewness risk in risk parity portfolios. In this framework, asset returns are viewed as stochastic processes with jumps or random variables generated by a Gaussian mixture distribution.…
We present a new volatility model, simple to implement, that includes a leverage effect whose return-volatility correlation function fits to empirical observations. This model is able to capture both the "retarded effect" induced by the…
Paper is based on "The cost of illiquidity and its effects on hedging", L. C. G. Rogers and Surbjeet Singh, 2010. We generalize its thesis to constant elasticity model, which own previously used Black-Schoels model as a special case. The…
In this article, we combine replication pricing with expectation pricing for derivative trades that are partially collateralized by cash. The derivatives are replicated by underlying assets and cash, using repurchasing agreement (repo) and…
We consider the pricing of derivatives written on accumulated marks, such as weather derivatives or aggregate loss claims, using a self-exciting marked point process. The jump intensity mean-reverts between events and increases at jump…
Explicit robust hedging strategies for convex or concave payoffs under a continuous semimartingale model with uncertainty and small transaction costs are constructed. In an asymptotic sense, the upper and lower bounds of the cumulative…
We study the Heston model for pricing European options on stocks with stochastic volatility. This is a Black\--Scholes\--type equation whose spatial domain for the logarithmic stock price $x\in \RR$ and the variance $v\in (0,\infty)$ is the…