Related papers: An Empirical Implementation of the Shadow Riskless…
We consider the pricing problem related to payoffs that can have discontinuities of polynomial growth. The asset price dynamic is modeled within the Black and Scholes framework characterized by a stochastic volatility term driven by a…
In the classical model of stock prices which is assumed to be Geometric Brownian motion, the drift and the volatility of the prices are held constant. However, in reality, the volatility does vary. In quantitative finance, the Heston model…
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 study the effect of investor inertia on stock price fluctuations with a market microstructure model comprising many small investors who are inactive most of the time. It turns out that semi-Markov processes are tailor made for modelling…
We use a continuous version of the standard deviation premium principle for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a…
This paper aims at designing the different important components of a semi-closed simulated stock market (pricing mechanism, stock allocation and news generation). The purpose is to understand the interactions of the different aspects within…
We present two models for incorporating the total effect of market microstructure noise into dynamic pricing of assets and European options. The first model is developed under a Black-Scholes-Merton, continuous-time framework. The second…
We develop inference under model uncertainty due to weak, noisy, multiple candidate restrictions and theories, and nuisance control covariates. A unified framework is given with degrees of misspecification and corresponding shadow prices,…
In this paper, we showed that the no-arbitrage condition holds if the market follows the mixture of the geometric Brownian motion (GBM). The mixture of GBM can incorporate heavy-tail behavior of the market. It automatically leads us to…
In this paper we study the valuation problem of an insurance company by maximizing the expected discounted future dividend payments in a model with partial information that allows for a changing economic environment. The surplus process is…
We use deep neural networks to estimate an asset pricing model for individual stock returns that takes advantage of the vast amount of conditioning information, while keeping a fully flexible form and accounting for time-variation. The key…
We introduce a discrete binary tree for pricing contingent claims with the underlying security prices exhibiting history dependence characteristic of that induced by market microstructure phenomena. Example dependencies considered include…
We consider the problem of estimating the roughness of the volatility process in a stochastic volatility model that arises as a nonlinear function of fractional Brownian motion with drift. To this end, we introduce a new estimator that…
The comparative statics of the optimal portfolios across individuals is carried out for a continuous-time complete market model, where the risky assets price process follows a joint geometric Brownian motion with time-dependent and…
In this paper, we study the pricing of contracts in fixed income markets under volatility uncertainty in the sense of Knightian uncertainty or model uncertainty. The starting point is an arbitrage-free bond market under volatility…
We present a unified, market-complete model that integrates both the Bachelier and Black-Scholes-Merton frameworks for asset pricing. The model allows for the study, within a unified framework, of asset pricing in a natural world that…
We give a complete solution to the problem of minimizing the expected liquidity costs in presence of a general drift when the underlying market impact model has linear transient price impact with exponential resilience. It turns out that…
A system manager dynamically controls a diffusion process Z that lives in a finite interval [0,b]. Control takes the form of a negative drift rate \theta that is chosen from a fixed set A of available values. The controlled process evolves…
In this paper an arbitrage strategy is constructed for the modified Black-Scholes model driven by fractional Brownian motion or by a time changed fractional Brownian motion, when the volatility is stochastic. This latter property allows the…
We develop two alternate approaches to arbitrage-free, market-complete, option pricing. The first approach requires no riskless asset. We develop the general framework for this approach and illustrate it with two specific examples. The…