We propose a new semi-parametric model for the implied volatility surface, which incorporates machine learning algorithms. Given a starting model, a tree-boosting algorithm sequentially minimizes the residuals of observed and estimated implied volatility. To overcome the poor predicting power of...

We propose constructing a set of trading strategies using predicted option returns for a relatively small forecasting period of ten trading days to form profitable hold-to-expiration, equally weighted, zero-cost portfolios based on 1-month at-the-money call and put options. We use a statistical...

Stock picking is the field of financial analysis that is of particular interest for many professional investors and researchers. In this study stock picking is implemented via binary classification trees. Optimal tree size is believed to be the crucial factor in forecasting performance of the...

This paper develops methods for relating the prices of discrete- and continuous-time versions of path-dependent options sensitive to extremal values of the underlying asset, including lookback, barrier, and hindsight options. The relationships take the form of correction terms that can be...

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...

This book offers an introduction to wavelet theory and provides the essence of wavelet analysis ¡ª including Fourier analysis and spectral analysis; the maximum overlap discrete wavelet transform; wavelet variance, covariance, and correlation ¡ª in a unified and friendly manner. It aims to...

The credit valuation adjustment (CVA) of OTC derivatives is an important part of the Basel III credit risk capital requirements and current accounting rules. Its calculation is not an easy task - not only it is necessary to model the future value of the derivative, but also the probability of...

This paper considers the realistic modelling of derivative contracts on exchange rates. We propose a stochastic volatility model that recovers not only the typically observed implied volatility smiles and skews for short dated vanilla foreign exchange options but allows one also to price payoffs...

We derive a closed-form expression for the bilateral credit valuation adjustment of a credit default swap in presence of simultaneous defaults. We develop our analysis under a default intensity model specified by a class of three-dimensional subordinators, allowing for default dependence through...