-
Martingale defects in the volatility surface and bubble conditions in the underlying Rev. Deriv. Res. (IF 0.786) Pub Date : 2024-01-19 Philip Stahl, Jérôme Blauth
-
Pricing levered warrants under the CEV diffusion model Rev. Deriv. Res. (IF 0.786) Pub Date : 2024-01-11
Abstract Much of the work on the valuation of levered (and unlevered) warrants assumes that the volatility of the underlying state variable is constant. This paper extends the literature on warrant pricing to a more general assumption for the state variable process, the so-called constant elasticity of variance (CEV) process. The CEV model is well-known for its ability to capture some empirical observations
-
Pricing fixed income derivatives under a three-factor CIR model with unspanned stochastic volatility Rev. Deriv. Res. (IF 0.786) Pub Date : 2024-01-10 Yuecai Han, Fengtong Zhang
Most empirical studies show that three factors are sufficient to explain all the relevant uncertainties inherent in option prices. In this paper, we consider a three-factor CIR model exhibiting unspanned stochastic volatility (USV), which means that it is impossible to fully hedge volatility risk with portfolios of bonds or swaps. The incompleteness of bond markets is necessary for the existence of
-
Volatility-dependent probability weighting and the dynamics of the pricing kernel puzzle Rev. Deriv. Res. (IF 0.786) Pub Date : 2023-11-29 Maik Dierkes, Jan Krupski, Sebastian Schroen, Philipp Sibbertsen
-
Pricing swaptions and zero-coupon futures options under the discrete-time arbitrage-free Nelson–Siegel model Rev. Deriv. Res. (IF 0.786) Pub Date : 2023-10-04 Frédéric Godin, Ramin Eghbalzadeh, Patrice Gaillardetz
The paper outlines pricing procedures for several interest rate derivatives under the discrete-time arbitrage-free Nelson–Siegel (DTAFNS) model of Eghbalzadeh et al. (The discrete-time arbitrage-free Nelson–Siegel model: a closed-form solution and applications to mixed funds representation, 2022). Derivatives considered include swaptions, zero-coupon futures, and options on such futures. Formulas for
-
Implied volatility surfaces: a comprehensive analysis using half a billion option prices Rev. Deriv. Res. (IF 0.786) Pub Date : 2023-09-30 Maxim Ulrich, Lukas Zimmer, Constantin Merbecks
-
Hedging cryptocurrency options Rev. Deriv. Res. (IF 0.786) Pub Date : 2023-02-10 Jovanka Lili Matic, Natalie Packham, Wolfgang Karl Härdle
-
Continuity correction: on the pricing of discrete double barrier options Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-11-24 Sheng-Feng Luo, Hsin-Chieh Wong
This article deals with the pricing of double-barrier options monitored discretely. A continuity correction method is established to provide an analytical approximation for the price of such discrete options under the Black–Scholes model. We achieve this by applying the smooth-fit principle simultaneously to the two flat boundaries (barriers) associated. The resulting correction form still involves
-
Pricing vulnerable basket spread options with liquidity risk Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-10-17 Ziming Dong, Dan Tang, Xingchun Wang
-
Interest rate swaps: a comparison of compounded daily versus discrete reference rates Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-09-26 Robert Jarrow, Siguang Li
This paper studies the hedging effectiveness of interest rate swaps using different reference rates for eliminating interest rate risk from floating rate loans. Two reference rates are studied. The first rate’s maturity, \(\Delta\), matches the payment interval of floating rate loans. The second has an incompatible maturity \(\Delta /N\). The prime examples are LIBOR and SOFR, respectively. We show
-
Asymptotic extrapolation of model-free implied variance: exploring structural underestimation in the VIX Index Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-09-18 Philip Stahl
-
Arbitrage-free smile construction on FX option markets using Garman-Kohlhagen deltas and implied volatilities Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-09-18 Matthias Muck
-
CMS spread options in quadratic Gaussian model Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-09-10 Parviz Rakhmonov, Firuz Rakhmonov
-
Bakshi, Kapadia, and Madan (2003) risk-neutral moment estimators: A Gram–Charlier density approach Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-06-21 Pakorn Aschakulporn, Jin E. Zhang
-
A multidimensional Hilbert transform approach for barrier option pricing and survival probability calculation Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-04-02 Jie Chen, Liaoyuan Fan, Lingfei Li, Gongqiu Zhang
-
Oil futures volatility smiles in 2020: Why the bachelier smile is flatter Rev. Deriv. Res. (IF 0.786) Pub Date : 2022-02-15 Roza Galeeva, Ehud Ronn
In this paper, we consider the response of the oil-futures option market to the onset of severe conditions in the aftermath of Feb. 15, 2020. Motivated in part by the decline of the WTI futures contract into negative territory on April 20, 2020, for the derivative market on oil futures we consider an analytical contrast between the traditional Black model and its long-ago predecessor, the Bachelier
-
The impact of non-cash collateralization on the over-the-counter derivatives markets Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-11-17 Kazuhiro Takino
In this study, we propose a microeconomics model to verify effects of the non-cash collateralization on the liquidity of the over-the-counter (OTC) derivatives markets accepting both cash and non-cash assets. Liquidity is measured as an equilibrium volume of the derivatives contract. The equilibrium volume is obtained by solving the utility maximization problem of a risk-averse collateral payer who
-
Deep calibration of financial models: turning theory into practice Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-08-17 Patrick Büchel, Michael Kratochwil, Maximilian Nagl, Daniel Rösch
The calibration of financial models is laborious, time-consuming and expensive, and needs to be performed frequently by financial institutions. Recently, the application of artificial neural networks (ANNs) for model calibration has gained interest. This paper provides the first comprehensive empirical study on the application of ANNs for calibration based on observed market data. We benchmark the
-
Pricing commodity-linked bonds with stochastic convenience yield, interest rate and counterparty credit risk: application of Mellin transform methods Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-07-17 Zonggang Ma, Chaoqun Ma, Zhijian Wu
This paper investigates the effects of the spot underlying commodity price, stochastic convenience yield, interest rate and counterparty credit risk on the pricing of the commodity-linked bonds. The stochastic factors or state variables in the model are the spot price of the underlying commodity follows geometrical Brownian motion process with a stochastic drift, the net convenience yield and the short-term
-
Optimal exercise of American put options near maturity: A new economic perspective Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-06-28 Anna Battauz, Marzia De Donno, Janusz Gajda, Alessandro Sbuelz
The critical price \(S^{*}\left( t\right) \) of an American put option is the underlying stock price level that triggers its immediate optimal exercise. We provide a new perspective on the determination of the critical price near the option maturity T when the jump-adjusted dividend yield of the underlying stock is either greater than or weakly smaller than the riskfree rate. Firstly, we prove that
-
Valuing fade-in options with default risk in Heston–Nandi GARCH models Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-06-11 Xingchun Wang
In this paper, we present a pricing model to value fade-in options with default risk, where the underlying asset price is driven by the Heston–Nandi GARCH process and is correlated with the intensity process. The explicit pricing formulae are obtained, which contain pricing formulae of vanilla European options with/without default risk as special cases. Finally, a comparative analysis of the impacts
-
Does model complexity improve pricing accuracy? The case of CoCos Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-05-12 Christian Koziol, Sebastian Weitz
In this study, we analyze whether model complexity improves accuracy of CoCo pricing models. We compare the out-of-sample pricing ability of four models using a broad dataset that contains all CoCos which were issued between January 1, 2013 and May 31, 2016 in euros. The regarded models include the standard model from De Spiegeleer and Schoutens (J Deriv 20:27–36, 2012), a modified version enriched
-
Pricing vulnerable options with jump risk and liquidity risk Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-03-17 Xingchun Wang
In this paper, we consider vulnerable options with jump risk and liquidity risk. In the proposed framework, we allow discontinuous changes in the information processes and the liquidity discount factors as well, and default risk is taken into consideration. Specially, we investigate the effect of jumps in the liquidity discount factors and find that the effects of jumps in the liquidity discount factors
-
Mean-variance hedging in the presence of estimation risk Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-02-11 Wan-Yi Chiu
The mean-variance hedging (MVH) with a significant risk-aversion coefficient is approximately equal to the minimum-variance (MV) hedge. However, how large the risk-aversion coefficient should be in practice? We determine the boundaries of risk-aversion coefficients that significantly distinguish the MV hedge and the MVH based on the different magnitudes of statistical errors in the presence of estimation
-
Idiosyncratic volatility, option-based measures of informed trading, and investor attention Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-01-28 Hannes Mohrschladt, Judith C. Schneider
We establish a direct link between sophisticated investors in the option market, private stock market investors, and the idiosyncratic volatility (IVol) puzzle. To do so, we employ three option-based volatility spreads and attention data from Google Trends. In line with the IVol puzzle, the volatility spreads indicate that sophisticated investors indeed consider high-IVol stocks as being overvalued
-
The value of power-related options under spectrally negative Lévy processes Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-01-15 Jean-Philippe Aguilar
We provide analytical tools for pricing power options with exotic features (capped or log payoffs, gap options etc.) in the framework of exponential Lévy models driven by one-sided stable or tempered stable processes. Pricing formulas take the form of fast converging series of powers of the log-forward moneyness and of the time-to-maturity; these series are obtained via a factorized integral representation
-
Bayesian estimation of the stochastic volatility model with double exponential jumps Rev. Deriv. Res. (IF 0.786) Pub Date : 2021-01-01 Jinzhi Li
This paper generalizes the stochastic volatility model to allow for the double exponential jumps. To derive the jumps and time-varying volatility in returns, we implement an efficient Markov chain Monte Carlo approach based on the band and sparse matrix algorithms used in Chan and Hsiao (SSRN Electron J., 2013, https://doi.org/10.2139/ssrn.2359838) to estimate this model. We illustrate the the methodology
-
A model-free approach to multivariate option pricing Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-10-27 Carole Bernard, Oleg Bondarenko, Steven Vanduffel
We propose a novel model-free approach to extract a joint multivariate distribution, which is consistent with options written on individual stocks as well as on various available indices. To do so, we first use the market prices of traded options to infer the risk-neutral marginal distributions for the stocks and the linear combinations given by the indices and then apply a new combinatorial algorithm
-
The impact of the leverage effect on the implied volatility smile: evidence for the German option market Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-09-15 A. W. Rathgeber, J. Stadler, S. Stöckl
It is a widely known theoretical derivation, that the firm’s leverage is negatively related to volatility of stock returns, although the empirical evidence is still outstanding. To empirically evaluate the leverage we first complement previous simulation studies by deriving theoretical predictions of leverage changes on the volatility smile. Even more important, we empirically test these predictions
-
Uncertain strike lookback options pricing with floating interest rate Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-08-13 Lidong Zhang, Yanmei Sun, Ziping Du, Xiangbo Meng
Considering the floating interest rate and the uncertainty of the strike price, we derive the pricing formulas of lookback options including lookback call option and lookback put option. Furthermore, we give the numerical algorithms to illustrate our results and analyze the relationships between the price of lookback options and all the parameters.
-
Diversification with options and structured products Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-07-23 Shuonan Yuan, Marc Oliver Rieger
Different from diversification of stocks, there are two strategies to diversify portfolios consisting of options: one is to combine options on single underlying stocks, and the other one is to buy an option based on the index of these stocks. In this paper we analyse which diversification strategy is optimal for classical rational investors with constant relative risk aversion. We employ the Black–Scholes
-
Bermudan option in Singapore Savings Bonds Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-07-19 Kian Guan Lim
The Singapore Savings Bonds (SSB) is a unique investment program offered by the Singapore government whereby retail investors can earn risk-free tax-free step-up interest closely matched to Treasury bond rates for up to 10 years and can redeem on any business day prior to maturity without any early redemption penalty. This study analyses the unique design of the SSB and provides a valuation of the
-
Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-06-10 Gechun Liang, Xingchun Wang
This paper proposes a hybrid credit risk model, in closed form, to price vulnerable options with stochastic volatility. The distinctive features of the model are threefold. First, both the underlying and the option issuer’s assets follow the Heston–Nandi GARCH model with their conditional variance being readily estimated and implemented solely on the basis of the observable prices in the market. Second
-
Option-implied information: What’s the vol surface got to do with it? Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-05-07 Maxim Ulrich, Simon Walther
We find that option-implied information such as forward-looking variance, skewness and the variance risk premium are sensitive to the way the volatility surface is constructed. For some state-of-the-art volatility surfaces, the differences are economically surprisingly large and lead to systematic biases, especially for out-of-the-money put options. Estimates for risk-neutral variance differ across
-
Computing valuation adjustments for counterparty credit risk using a modified supervisory approach Rev. Deriv. Res. (IF 0.786) Pub Date : 2020-01-14 Patrick Büchel, Michael Kratochwil, Daniel Rösch
Considering counterparty credit risk (CCR) for derivatives using valuation adjustments (CVA) is a fundamental and challenging task for entities involved in derivative trading activities. Particularly calculating the expected exposure is time consuming and complex. This paper suggests a fast and simple semi-analytical approach for exposure calculation, which is a modified version of the new regulatory
-
A note on options and bubbles under the CEV model: implications for pricing and hedging Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-09-24 José Carlos Dias, João Pedro Vidal Nunes, Aricson Cruz
The discounted price process under the constant elasticity of variance (CEV) model is not a martingale (wrt the risk-neutral measure) for options markets with upward sloping implied volatility smiles. The loss of the martingale property implies the existence of (at least) two option prices for the call option: the price for which the put-call parity holds and the (risk-neutral) price representing the
-
Portfolio construction using bootstrapping neural networks: evidence from global stock market Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-07-25 Hsiao-Fen Hsiao, Jiang-Chuan Huang, Zheng-Wei Lin
The study investigates the investment value of global stock markets by a portfolio construction method combined with bootstrapping neural network architecture. A residual sample will be generated from bootstrapping sample procedure and then incorporated into the estimation of the expected returns and the covariant matrix. The outputs are further processed by the traditional Markowitz optimization procedure
-
Approaching rainfall-based weather derivatives pricing and operational challenges Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-07-08 Andrea Martínez Salgueiro, Maria-Antonia Tarrazon-Rodon
This article approaches some of the current rainfall derivatives pricing and operational challenges through an empirical application to Comunidad Valenciana, Spain. Regarding the former, two different issues are addressed. First, we examine the rightness of suggesting the Gamma distribution to price rainfall contracts, which is the alternative chosen by previous authors applying the Index Value Simulation
-
Yield curves from different bond data sets Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-07-05 Antonio Díaz, Francisco Jareño, Eliseo Navarro
It is well known that zero coupon rates are not observable variables. Their estimation process may be cumbersome and time consuming. We explore the extent to which the set of security prices used in the yield curve construction of three popular interest rate datasets (from the Federal Reserve Board, the US Department of the Treasury, and Bloomberg) may determine the results of different analyses. Using
-
A generalization of option pricing to price-limit markets Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-07-03 Jia-Hau Guo, Lung-Fu Chang
This paper proposes an analytic solution for pricing options in markets with daily price limits. The Black–Scholes model is a nested case in which the daily price limit approaches infinity. Compared to the Black–Scholes model, our solution may solve the mispricing problem and could yield consistent results with existing numerical methods. Practitioners trading options in price-limit markets may resort
-
Time consistent pricing of options with embedded decisions Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-05-04 G. Dorfleitner, J. Gerer
Many financial contracts are equipped with exercise rights or other features enabling the parties to actively shape the contract’s payoff. These decisions pose a great challenge for the pricing and hedging of such contracts. The existing literature deals with these decisions by providing methods for specific contracts that are not easily transferable to other models. In this paper we present a framework
-
The global minimum variance hedge Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-04-30 Wan-Yi Chiu
We explore futures hedging based on the global minimum variance strategy. As evidenced by using eleven of the world’s major stock market indexes and their corresponding futures contracts, the results show that the global minimum variance hedge may deviate statistically from the Ederington (J Finance 43(1):157–170, 1979) minimum variance hedge. We also present a regression approach to testing the hedge
-
Valuing American-style options under the CEV model: an integral representation based method Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-04-29 Aricson Cruz, José Carlos Dias
This article derives a new integral representation of the early exercise boundary for valuing American-style options under the constant elasticity of variance (CEV) model. An important feature of this novel early exercise boundary characterization is that it does not involve the usual (time) recursive procedure that is commonly employed in the so-called integral representation approach well known in
-
Conditional risk-neutral density from option prices by local polynomial kernel smoothing with no-arbitrage constraints Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-03-20 Ana M. Monteiro, Antonio A. F. Santos
A new approach is considered to estimate risk-neutral densities (RND) within a kernel regression framework, through local cubic polynomial estimation using intraday data. There is a new strategy for the definition of a criterion function used in nonparametric regression that includes calls, puts, and weights in the optimization problem associated with parameters estimation. No-arbitrage constraints
-
Option-implied Value-at-Risk and the cross-section of stock returns Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-03-04 Manuel Ammann, Alexander Feser
Based on a novel rescaled option-implied Value-at-Risk (rVaR) measure, we show that option-implied information is priced differently depending on whether it is based on options with strikes close to the current price of the underlying or far-out-of-the-money options. If the rVaR is estimated from options close-to-the-money, i.e., the 50% rVaR, stocks with high risk outperform stocks with low risk by
-
Towards a $$\Delta $$Δ -Gamma Sato multivariate model Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-02-27 Lynn Boen, Florence Guillaume
The increased trading in multi-name financial products has paved the way for the use of multivariate models that are at once computationally tractable and flexible enough to mimic the stylized facts of asset log-returns and of their dependence structure. In this paper we propose a new multivariate Lévy model, the so-called \(\varDelta \)-Gamma model, where the log-price gains and losses are modeled
-
Empirical performance of reduced-form models for emission permit prices Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-01-11 Steffen Hitzemann, Marliese Uhrig-Homburg
The value of emission permits in environmental markets derives from the particular design features of the underlying cap-and-trade system. In this paper, we evaluate a model framework for the price dynamics of emission permits which accounts for these features in a reduced-form way. Based on permit futures and option data from the European Union Emissions Trading System, the world’s largest environmental
-
Implied risk aversion: an alternative rating system for retail structured products Rev. Deriv. Res. (IF 0.786) Pub Date : 2019-01-04 H. Fink, S. Geissel, J. Sass, F. T. Seifried
This article proposes implied risk aversion as a rating methodology for retail structured products. Implied risk aversion is based on optimal expected utility risk measures as introduced by Geissel et al. (Stat Risk Model 35(1–2):73–87, 2017) and, in contrast to standard V@R-based ratings, takes into account both the upside potential and the downside risks of such products. In addition, implied risk
-
Dissecting the tracking performance of regular and leveraged VIX ETPs Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-11-02 Hongfei Tang, Xiaoqing Eleanor Xu
VIX exchange-traded products (ETPs) provide tracking on the return of a constant-maturity VIX futures index, instead of the uninvestable VIX spot index. In this paper, we develop a comprehensive framework to dissect the tracking performance of regular and leveraged VIX ETPs. In this framework, naïve investors in VIX ETPs expect to achieve the ETP’s leverage ratio multiplied by the VIX return during
-
Pricing cross-currency interest rate swaps under the Levy market model Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-10-16 Ming-Chieh Wang, Li-Jhang Huang
This paper derives a pricing model for interest rate swaps when the underlying markets and settlement currency can be set arbitrarily. Using the risk-neutral valuation method developed by Musiela and Rutkowski (Martingale methods in financing modelling, 2nd edn, Springer, New York, 2005), the authors generate arbitrage-free prices for a Levy market. The Levy processes are attractive because they support
-
Portfolio benefits of adding corporate credit default swap indices: evidence from North America and Europe Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-09-27 Benjamin Hippert, André Uhde, Sascha Tobias Wengerek
Employing main and sector-specific investment-grade CDS indices from the North American and European CDS market and performing mean-variance out-of-sample analyses for conservative and aggressive investors over the period from 2006 to 2014, this paper analyzes portfolio benefits of adding corporate CDS indices to a traditional financial portfolio consisting of stock and sovereign bond indices. As a
-
Pricing and risk of swing contracts in natural gas markets Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-06-22 Hendrik Kohrs, Hermann Mühlichen, Benjamin R. Auer, Frank Schuhmacher
Motivated by the growing importance of swing contracts in natural gas markets, this article extends the literature on commodity price modelling as well as valuation methods and sensitivity analysis for swing options. While most previous studies focused on simple price models, we face the challenge of deriving option properties under more realistic commodity price dynamics. We begin by formulating a
-
Pricing VIX derivatives with free stochastic volatility model Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-06-16 Wei Lin, Shenghong Li, Shane Chern, Jin E. Zhang
This paper aims to develop a new free stochastic volatility model, joint with jumps. By freeing the power parameter of instantaneous variance, this paper takes Heston model and 3/2 model for special examples, and extends the generalizability. This model is named after free stochastic volatility model, and it owns two distinctive features. First of all, the power parameter is not constrained, so as
-
Is trading in the shortest-term index options profitable? Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-06-13 Ging-Ginq Pan, Yung-Ming Shiu, Tu-Cheng Wu
The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our results generally reveal that the index option returns are significantly negative, we also find that whilst the return rates of monthly-expiring calls are inferior to those of weekly-expiring calls, the return rates of monthly puts tend to be
-
A general closed form option pricing formula Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-05-19 Ciprian Necula, Gabriel Drimus, Walter Farkas
A new method to retrieve the risk-neutral probability measure from observed option prices is developed and a closed form pricing formula for European options is obtained by employing a modified Gram–Charlier series expansion, known as the Gauss–Hermite expansion. This expansion converges for fat-tailed distributions commonly encountered in the study of financial returns. The expansion coefficients
-
An empirical investigation of large trader market manipulation in derivatives markets Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-04-18 Robert Jarrow, Scott Fung, Shih-Chuan Tsai
Using account-level transaction data in options and futures markets, we investigate the existence of market manipulation, which is the ability of large traders to trade strategically, impacting prices and making abnormal profits. First, large trader’s option positions have a quantity impact on the underlying asset’s price. Second, large traders generate significantly positive alphas from trading options
-
Dynamic hedging with futures: a copula-based GARCH model with high-frequency data Rev. Deriv. Res. (IF 0.786) Pub Date : 2018-02-20 Yu-Sheng Lai
Modeling the joint distribution of spot and futures returns is crucial for establishing optimal hedging strategies. This paper proposes a new class of dynamic copula-GARCH models that exploits information from high-frequency data for hedge ratio estimation. The copula theory facilitates constructing a flexible distribution; the inclusion of realized volatility measures constructed from high-frequency
-
GARCH option pricing models with Meixner innovations Rev. Deriv. Res. (IF 0.786) Pub Date : 2017-12-26 Matthias R. Fengler, Alexander Melnikov
The paper presents GARCH option pricing models with Meixner-distributed innovations. The risk-neutral dynamics are derived by means of the conditional Esscher transform. Assessing the option pricing performance both in-sample and out-of-sample, we find that the models compare favorably against the benchmark models. Simulations suggest that the driver of these results is the impact of conditional skewness
-
The pricing kernel puzzle in forward looking data Rev. Deriv. Res. (IF 0.786) Pub Date : 2017-11-08 Horatio Cuesdeanu, Jens Carsten Jackwerth
The pricing kernel puzzle concerns the locally increasing empirical pricing kernel, which is inconsistent with a risk-averse representative investor in a single period, single state variable setting. Some recent papers worry that the puzzle is caused simply by the mismatch of backward looking subjective and forward looking risk-neutral distributions of index returns. By using a novel test and forward
-
Pricing exotic options in a regime switching economy: a Fourier transform method Rev. Deriv. Res. (IF 0.786) Pub Date : 2017-09-25 Peter Hieber
This article considers the valuation of digital, barrier, and lookback options in a Markovian, regime-switching, Black–Scholes model. In Fourier space, integral representations for the option prices are derived via the theory on matrix Wiener–Hopf factorizations. Our main focus is on the 2-state case where the matrix Wiener–Hopf factorization is available analytically. A comparison to several numerical