Showing 1 - 10 of 108
When the pricing kernel is U-shaped, then expected returns of claims with payout on the upside are negative for strikes beyond a threshold, determined by the slope of the U-shaped kernel in its increasing region, and have negative partial derivative with respect to strike in the increasing...
Persistent link: https://www.econbiz.de/10012940716
This paper studies the structure of stock market crashes, rallies, their jump arrival rates, and extremes. Large market moves are characterized in a pure-jump modeling framework. Based on both raw and devolatized returns, it is shown empirically that crashes are more severe in intensity than...
Persistent link: https://www.econbiz.de/10012712509
Exponentials of squared returns in Gaussian densities, with their consequently thin tails, are replaced by the absolute return to form Laplacian and exponentially tilted Laplacian densities at unit time. Scaling provides densities at other maturities. Stochastic processes with these marginals...
Persistent link: https://www.econbiz.de/10012988873
Options paying the product of put and/or call option payouts at different strikes on two underlying assets are observed to synthesize joint densities and replicate differentiable functions of two underlying asset prices. The pricing of such options is undertaken from three perspectives. The...
Persistent link: https://www.econbiz.de/10013201039
It is argued that the growth in the breadth of option strikes traded after the financial crisis of 2008 poses difficulties for the use of Fourier inversion methodologies in volatility surface calibration. Continuous time Markov chain approximations are proposed as an alternative. They are shown...
Persistent link: https://www.econbiz.de/10012611129
The Sato process model for option prices is expanded to accomodate credit considerations by incorporating a single jump to default occuring at an independent random time with a Weibull distribution. Explicit formulas for bid and ask prices are derived. Liquidity considerations are captured by...
Persistent link: https://www.econbiz.de/10013131024
Distortions introduced by limited liability towards higher volatility and kurtosis, increased liability skewness, reduced asset skewness and an incentive to decorrelate assets from liabilities are demonstrated in the context of a stylized model. The concept of acceptable risks operationalized by...
Persistent link: https://www.econbiz.de/10013133968
Single period risks acceptable to the market at zero cost are modeled by a convex set of random variables leading to bid and ask prices that are trade size dependent. The theory of nonlinear expectations is employed to construct dynamically consistent sequences of bid and ask unit size prices...
Persistent link: https://www.econbiz.de/10013138036
Observing first that the daily option surface may be summarized by the level of the spot price and the four parameters of the Sato process based on the variance gamma process, a time series is constructed for this five dimensional set of factors driving the surface of S&P 500 index option...
Persistent link: https://www.econbiz.de/10013138037
An argument for adjusting Black Scholes implied call deltas downwards for a gamma exposure in a left skewed market is presented. It is shown that when the objective for the hedge is the conservation of capital ignoring the gamma for the delat position is expensive. The gamma adjustment factor in...
Persistent link: https://www.econbiz.de/10013138038