Description:
by Marc E. Levitt The purpose of this paper is to demonstrate that by changing the underlying data used in technical analysis and technical trading systems the performance of these techniques can be greatly improved. We present two techniques Discuss this paper
Description:
thesis by ANTONIO HERRERO GARCIA Abstract In this project we propose the use of some widespread prediction techniques in the last few years for modeling derivatives. In order to do that, we have reviewed the state-of-the-art of the prediction models dealing with stochastic processes. In the oil futures sector, Schwartz suggested a model in which the oil futures price was split in two factors: the long-term equilibrium price and the short-term variations. As a result, we propose a Hull-White discrete-time two-factor interest rate model, whose factors are the short and the long term.
Description:
by Sarves Verma, Gunhan Mehmet Ertosun, Wei Wang, Benjamin Ambruster, Kay Giesecke
Abstract In this work, we extend the idea of [9] and classify options both on the basis of moneyness and maturity i.e. we form maturity & moneyness buckets and study the impact of different PCA factors on implied volatility. We believe that this will give a clear idea to a trader; which factor to look for when hedging an option of a specific moneyness and a specific maturity. In this context, we also come across a novel way of looking at gamma and vega (greeks) using principal components. Further, we also develop a comprehensive model to incorporate the effect of maturity on implied volatility. Section II describes the methodology while Section III deals with our results & interpretation of those results. Finally we conclude with Section IV. Discuss this paper
This paper models the impact of statistical arbitrageurs on stock prices and trading volume when the drift of the dividend process is unknown to the hedge fund. The learning process of statistical arbitrageurs leads to an optimal trading strategy that can be upwardsloping in prices. The presence of privatly informed investors makes the equilibrium price dependent the history of trading volume and prices, and the optimal trading strategy of statistical arbitrageurs can be a positive feedback strategy for certain parameters and histories.
Description:
article by Alexander Levin Intensive developments in interest rate modeling have delivered a bold but confusing model selection choice to financial engineers, risk managers, and investment analysts. Do these modeling issues sound familiar?
Description:
by Robert Jarrow, Haitao Li, and Feng Zhao Using more than two years of daily interest rate cap price data, this paper provides a systematic documentation of a volatility smile in cap prices. We find that Black (1976) implied volatilities exhibit an asymmetric smile (sometimes called a sneer) with a stronger skew for in-the-money caps than out-of-the-money caps. The volatility smile is time varying and is more pronounced after September 11, 2001. We also study the ability of generalized LIBOR market models to capture this smile. We show that the best performing model has constant elasticity of variance combined with uncorrelated stochastic volatility or upward jumps. However, this model still has a bias for short- and medium-term caps. In addition, it appears that large negative jumps are needed after September 11, 2001. We conclude that the existing class of LIBOR market models can not fully capture the volatility smile
Description:
by Raphael Yan In this study, the implementation of the BGM model is investigated. Theoretical background and numerical techniques are presented. Derivatives on Libor are priced in this model, and numerical results are compared to existing literature
Description:
by George Chalamandaris The purpose of this paper is to develop certain relatively recent mathematical discoveries known generally as stochastic calculus, or more specifically as It Discuss this paper
This paper surveys the main concepts and techniques of recent developments in the modeling of the term structure of interest rates that are used in the risk management and valuation of interest-rate-dependent cash flows. These developments extend the concepts of immunization and matching to a stochastic interest rate environment. Such cash flows include the cash flows on assets such as bonds and mortgage-backed securities as well as those for annuity products, life insurance products with interest-rate-sensitive withdrawals, accrued liabilities for definedbenefit pension funds, and property and casualty liability cash flows
Summary: Volatility has a key role to play in the determination of risk and in the valuation of options and other derivative securities. The widespread Black-Scholes model for asset prices assumes constant volatility. The purpose of this document is to introduce implied, local and stochastic volatility, to review evidence of non-constant volatility, and to consider the implications for option pricing of alternative random or stochastic volatility models. We focus on continuous time diffusion models for the volatility, but we also briefly discuss certain classes of discrete time models, such as ARV or ARCH. Discuss this paper
Vasicek interest model is one of the mostly used in modern finance. It constitutes a basis for derivative pricing theory and finds a sound application in practice. Nevertheless there is a still undeveloped estimation techniques and discussion is going on. In this paper we provided a comparative analysis of the mostly used Euler approximation technique and continuous record based exact ML estimators. We proved asymptotical properties of exact ML estimator and performed a Monte Carlo simulation to investigate convergence peculiarities.
Table of Contents List of tables Discuss this paper
Description:
by WONG HO KA After Roger mentioned the optimized outcome by Response Surface Methodology in pairs trading, one may wonder if the same works given he/she has a favorite pair, but also limited money. Especially, can we apply the same model in Hong Kong market. In this study, as an application of Roger Discuss this paper
Description:
Quoted : " Andrew CAIRNS tel: (+44) 131 451 3245 fax: (+44) 131 451 3249 e-mail: A. Cairns@ma.hw.ac.uk Solutions to selected problems in my book can be found by looking at the following files. The tutorials (from my MSc lecture course) contain various problems which appear in the book, so users will need to match tutorial problems up with those in the book. Andrew Cairns "
Abstract Despite its success, the Black-Scholes formula has become increasingly unreliable over time in the very markets where one would expect it to be most accurate. In addition, attempts by financial economists to extract probabilistic information from option prices have been puny in comparison to what is clearly possible. This paper develops a new method for inferring risk-neutral probabilities (or state-contingent prices) from the simultaneously observed prices of European options. These probabilities are then used to infer a unique fully specified recombining binomial tree that is consistent with these probabilities (and hence consistent with all the observed option prices). If specified exogenously, the model can also accommodate local interest rates and underlying asset payout rates that are general functions of the concurrent underlying asset price and time. One byproduct is a map of the local and risk-neutral global volatility structure of the underlying asset return over future dates and states. In a 200 step lattice, for example, there are a total of 60,301 unknowns: 40,200 potentially different move sizes, 20,100 potentially different move probabilities, and 1 interest rate to be determined from 60,301 independent equations, many of which are non-linear in the unknowns. Despite this, a 3-step backwards recursive solution procedure exists which is only slightly more time-consuming than for a standard binomial tree with given constant move sizes and move probabilities. Moreover, closed-form expressions exist for the values and hedging parameters of European options maturing with or before the end of tree. The tree can also be used to value and hedge American and several types of exotic options. From the standpoint of the standard binomial option pricing model which implies a limiting risk-neutral lognormal distribution for the underlying asset, the approach here provides the natural (and probably the simplest) way to generalize to arbitrary ending risk-neutral probability distributions. Interpreted in terms of continuous-time diffusion processes, the model here assumes that the drift and local volatility are at most functions of the underlying asset price and time. But instead of beginning with a parameterization of these functions (as in previous research), the model derives these functions endogenously to fit current option prices. As a result, it can be thought of as an attempt to exhaust the potential for single state-variable path-independent diffusion processes to rectify problems with the Black- Scholes formula that arise in practice.
Description:
Roger W. Lee Abstract Given the price of a call or put option, the Black-Scholes implied volatility is the unique volatility parameter for which the Bulack-Scholes formula recovers the option price. This article surveys research activity relating to three theoretical questions: First, does implied volatility admit a probabilistic interpretation? Second, how does implied volatility behave as a function of strike and expiry? Here one seeks to characterize the shapes of the implied volatility skew (or smile) and term structure, which together constitute what can be termed the statics of the implied volatility surface. Third, how does implied volatility evolve as time rolls forward? Here one seeks to characterize the dynamics of implied volatility.
Description:
Emanuel Derman Iraj Kani Neil Chriss SUMMARY In options markets where there is a significant or persistent volatility smile, implied tree models can ensure the consistency of exotic options prices with the market prices of liquid standard options. Implied trees can be constructed in a variety of ways. Implied binomial trees are minimal: they have just enough parameters Discuss this paper
Description:
Antonietta Mira INDEX (Literature) Monte Carlo Markov chains Markov chain Monte Carlo Metropolis algorithm (1953) Hastings algorithm (1970) Gibbs Sampler (Geman & Geman, 1984) \heat bath" physics 1979, 1976 Green algorithm (1995) Examples Discuss this paper
Description:
ABSCHLUSSARBEIT Abstract Dynamic Semiparametric Factor Model (DSFM) is a convenient tool for analysis of implied volatility surfice (IVS). It offers dimension reduction of the IVS and can be therefore applied in hedging, prediction or risk mangement. However the estimation of the DSFM parameters is a complex procedure since it requires huge number of observation. Therefore the efficient implementation is a key issue for application possibilites of this model. In this master thesis we discuss implementation issues of DSFM. We describe key features of the model and present its implementation in statistical computing enviroment XploRe. Keywords: Dynamic Semiparametric Factor Model, Implied Volatility, Option Pricing Discuss this paper
Description:
Christoph Klose Li Chang Yuan Contents of this paper Contents...................................................................................................................... 2 1. Introduction to Term Structure Models..................................................................... 3 2. Term Structure Equation for Continuous Time........................................................... 4 3. Overview - Basic Processes of One-Factor Models ................................................... 6 4. The Black Derman and Toy Model (BDT) .................................................................. 7 4.1. Characteristics ................................................................................................. 7 4.2. Modeling of an Discuss this paper
Description:
lecture Notes by Peter Carr Bloomberg LP and Courant Institute, NYU Based on Notes by Robert Kohn, Courant Institute, NYU Discuss this paper
Description:
Abstract: In this paper, we introduce a suitable extension of the Black-Litterman Bayesian approach to portfolio construction that allows for the incorporation of active views about hedge fund strategy performance in the presence of nontrivial preferences about higher moments of hedge fund return distributions. We also present a numerical application illustrating how investors can use a multifactor approach to generate such active views and dynamically adjust their allocation to various hedge fund strategies while staying coherent with a longterm strategic allocation benchmark. Overall the results in this paper strongly suggest that significant value can be added in a hedge fund portfolio through the systematic implementation of active style allocation decisions, both at the strategic and tactical levels.
Description:
Wolfram Boenkost Wolfgang M. Schmidt Abstract When pricing the convexity effect in irregular interest rate derivatives such as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile, which is quite pronounced in the interest rate options market. This note solves the problem of convexity by replicating the irregular interest flow or option with liquidly traded options with different strikes thereby taking into account the volatility smile. This idea is known among practitioners for pricing CMS caps. We approach the problem on a more general scale and apply the result to various examples Discuss this paper
Visit Link 
(0 Votes) 
(3 Votes) 
(1 Vote) 
(1 Vote) 
(1 Vote) 