Related papers: Valuation of Equity Linked Securities with Guarant…
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.…
In this work, I address the issue of forming riskless hedge in the continuous time option pricing model with stochastic stock volatility. I show that it is essential to verify whether the replicating portfolio is self-financing, in order…
We simulate a reputation system in a market to optimise the balance between market security and market equity. We introduce a method of using a reputation system that will stabilise the distribution of wealth in a market in a fair manner.…
We consider a market consisting of one safe and one risky asset, which offer constant investment opportunities. Taking into account both proportional transaction costs and linear price impact, we derive optimal rebalancing policies for…
This paper investigates how to measure common market risk factors using newly proposed Panel Quantile Regression Model for Returns. By exploring the fact that volatility crosses all quantiles of the return distribution and using penalized…
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with…
Index insurance is often proposed to reduce protection gaps, especially for emerging risks. Unlike traditional insurance, it bases compensation on a measurable index, enabling faster payouts and lower claim management costs. This approach…
This paper studies the equal risk pricing (ERP) framework for the valuation of European financial derivatives. This option pricing approach is consistent with global trading strategies by setting the premium as the value such that the…
This paper deals with a high-order accurate implicit finite-difference approach to the pricing of barrier options. In this way various types of barrier options are priced, including barrier options paying rebates, and options on…
Introduced in the late 90s, the passport option gives its holder the right to trade in a market and receive any positive gain in the resulting traded account at maturity. Pricing the option amounts to solving a stochastic control problem…
In this work, we develop an equilibrium model for price formation of securities in a market composed of two populations of different types: the first one consists of cooperative agents, while the other one consists of non-cooperative…
Classical asset pricing relies on the risk-neutral measure $Q$ for valuation, yet its economic interpretation is typically anchored in a physical measure $P$. This creates an inherent asymmetry: pricing is governed by $Q$, while meaning…
Asset correlations are an intuitive and therefore popular way to incorporate event dependence into event risk, e.g., default risk, modeling. In this paper we study the case of estimation of inter-sector asset correlations by separation of…
Equity basket correlation can be estimated both using the physical measure from stock prices, and also using the risk neutral measure from option prices. The difference between the two estimates motivates a so-called "dispersion strategy''.…
How to price and hedge claims on nontraded assets are becoming increasingly important matters in option pricing theory today. The most common practice to deal with these issues is to use another similar or "closely related" asset or index…
Prize linked savings accounts provide a return in the form of randomly chosen accounts receiving large cash prizes, in lieu of a guaranteed and uniform interest rate. This model became legal for American national banks upon bipartisan…
We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification…
We introduce a general decision tree framework to value an option to invest/divest in a project, focusing on the model risk inherent in the assumptions made by standard real option valuation methods. We examine how real option values depend…
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…
As operators acting on the undetermined final settlement of a derivative security, expectation is linear but price is non-linear. When the market of underlying securities is incomplete, non-linearity emerges from the bid-offer around the…