Related papers: Option Pricing with State-dependent Pricing Kernel

Numerous kinds of uncertainties may affect an economy, e.g. economic, political, and environmental ones. We model the aggregate impact by the uncertainties on an economy and its associated financial market by randomised mixtures of L\'evy…

In this paper we formulate a regression problem to predict realized volatility by using option price data and enhance VIX-styled volatility indices' predictability and liquidity. We test algorithms including regularized regression and…

In this paper new analytical and numerical approaches to valuating path-dependent options of European type have been developed. The model of stochastic volatility as a basic model has been chosen. For European options we could improve the…

We test various volatility models using the Bitcoin spot price series. Our models include HIST, EMA ARCH, GARCH, and EGARCH, models. Both of our in-sample-fit and out-of-sample-forecast results suggest that GARCH and EGARCH models perform…

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…

HYGARCH model is basically used to model long-range dependence in volatility. We propose Markov switch smooth-transition HYGARCH model, where the volatility in each state is a time-dependent convex combination of GARCH and FIGARCH. This…

In this paper analytic formulas for electricity derivatives are calculated. To this end, we assume that electricity spot prices follow a 3-regime Markov regime-switching model with independent spikes and drops and periodic transition…

Models for financial risk often assume that underlying asset returns are stationary. However, there is strong evidence that multivariate financial time series entail changes not only in their within-series dependence structure, but also in…

This paper explores Artificial Neural Network (ANN) as a model-free solution for a calibration algorithm of option pricing models. We construct ANNs to calibrate parameters for two well-known GARCH-type option pricing models: Duan's GARCH…

We propose a method to construct a proposal density for the Metropolis-Hastings algorithm in Markov Chain Monte Carlo (MCMC) simulations of the GARCH model. The proposal density is constructed adaptively by using the data sampled by the…

In this study, we examine the fluctuation in the value of the Great Britain Pound (GBP). We focus particularly on its relationship with the United States Dollar (USD) and the Euro (EUR) currency pairs. Utilizing data from June 15, 2018, to…

In this paper we consider the pricing of variable annuities (VAs) with guaranteed minimum withdrawal benefits. We consider two pricing approaches, the classical risk-neutral approach and the benchmark approach, and we examine the associated…

In this paper we study recent developments in the approximation of the spread option pricing. As the Kirk\'s Approximation is extremely flawed in the cases when the correlation is very high, we explore a recent development that allows…

Time-series calibrations often suggest that the GARCH diffusion model could also be a suitable candidate for option (risk-neutral) calibration. But unlike the popular Heston model, it lacks a fast, semi-analytic solution for the pricing of…

This paper presents a multinomial method for option pricing when the underlying asset follows an exponential Variance Gamma process. The continuous time Variance Gamma process is approximated by a discrete time Markov chain with the same…

We construct liquidity-adjusted return and volatility using purposely designed liquidity metrics (liquidity jump and liquidity diffusion) that incorporate additional liquidity information. Based on these measures, we introduce a…

For a given time horizon DT, this article explores the relationship between the realized volatility (the volatility that will occur between t and t+DT), the implied volatility (corresponding to at-the-money option with expiry at t+DT), and…

In this paper we present an algorithm for pricing barrier options in one-dimensional Markov models. The approach rests on the construction of an approximating continuous-time Markov chain that closely follows the dynamics of the given…

Risk aversion is a key element of utility maximizing hedge strategies; however, it has typically been assigned an arbitrary value in the literature. This paper instead applies a GARCH-in-Mean (GARCH-M) model to estimate a time-varying…

When trading American and Asian options in the FX derivatives market, banks must calculate prices using a complex mathematical model. It is often observed that different models produce varying prices for the same exotic option, which…