This paper discusses the pitfalls in the pricing of barrier options a pproximations of the underlying continuous processes via discrete lattice models. These problems are studied first in a Black-Scholes model. Improvements result from a trinomial model and a further modified model where price...

In this paper we analyze in what way the demand generated by dynamic hedging strategies affects the equilibrium prices of the underlying asset. We derive an explicit expression for the transformation of market volatility under the impact of hedging. It turns out that market volatility increases...

In this survey we discuss models with level-dependent and stochastic volatility from the viewpoint of erivative asset analysis. Both classes of models are generalisations of the classical Black-Scholes model; they have been developed in an effort to build models that are flexible enough to cope...

This paper describes a method for solving a class of forward-looking Markov-switching Rational Expectations models under noisy measurement, by specifying the unobservable expectations component as a general-measurable function of the observable states of the system, to be determined optimally...

We study a model of local evolution. Players are located on a network and play games agains their neighbors. Players are characterized by three properties: (1) The stage game strategies they use agains their neighbors. (2) The repeated game strategy that determines the former. (3) A learning...

This paper applies the idea of evolution to a spatial model. We assume that prisoners' dilemmas or coordination games are played repeatedly within neighborhoods where players do not optimize but instead copy successful strategies. Discriminatory behavior of players is introduced representing...

The finding of clustered volatility and ARCH effects is ubiquitous in financial data. This paper presents a possible explanation of this phenomenon within a multi-agent framework of speculative activity. In the model, both chartist and fundamentalist strategies are considered with agents...

The benefit from using second-order approximations tostochastic dynamic rational expec- tations models is explained. By example of the neoclassical growth model, this note as- sesses the accuracy of the obtained approximation. The implications for optimal policy are discussed.

This paper reports statistical analyses performed on simulated data from a stochastic multi-agent model of speculative behaviour in a financial market. The price dynamics resulting from this artificial market process exhibits the same type of scaling laws as do empirical data from stock markets...

Tuning one's shower in some hotels may turn into a challenging coordination game with imperfect information. The temperature sensitivity increases with the number of agents, making the problem possibly unlearnable. Because there is in practice a finite number of possible tap positions, identical...