We present a new approach to the pricing of catastrophe event derivatives that does not assume a fully diversifiable event risk. Instead, we assume that the event occurrence and intensity affect the return of the market portfolio of an agent that trades in the event derivatives. Based on this...

We present a new approach to the pricing of catastrophe event derivatives that does not assume a fully diversifiable event risk. Instead, we assume that the event occurrence and intensity affect the return of the market portfolio of an agent that trades in the event derivatives. Based on this...

In this paper we formulate the Risk Management Control problem in the interest rate area as a constrained stochastic portfolio optimization problem. The utility that we use can be any continuous function and based on the viscosity theory, the unique solution of the problem is guaranteed. The...

The problem of optimal portfolio choice is solved, in closed form, for an ambiguity averse investor who has access to stock and derivatives markets. The investor can have different levels of uncertainty about models for stock return and its stochastic volatility. Although both types of ambiguity...

In 1985 Leland suggested an approach to price contingent claims under proportional transaction costs. Its main idea is to use the classical Black–Scholes formula with a suitably enlarged volatility for a periodically revised portfolio whose terminal value approximates the pay-off of the call...

The objective of the paper is to extend the results in Fournié, Lasry, Lions, Lebuchoux, and Touzi (1999), Cass and Fritz (2007) for continuous processes to jump processes based on the Bismut–Elworthy–Li (BEL) formula in Elworthy and Li (1994). We construct a jump process using a...

Robert C. Merton is the School of Management Distinguished Professor of Finance at Massachusetts Institute of Technology, and the John and Natty McArthur University Professor Emeritus at Harvard University. Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new...

This paper studies the optimal investment problem with random endowment in an inventory-based price impact model with competitive market makers. Our goal is to analyze how price impact affects optimal policies, as well as both pricing rules and demand schedules for contingent claims. For...

We investigate the effect of including variance derivatives as calibration and hedging instruments for pricing and hedging exotic structures. This is studied empirically using market data for SPX and VIX derivatives applied in a stochastic volatility jump diffusion model