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A Nonparametric Approach to Pricing and Hedging Derivative Securities via Learning Networks

Hutchinson, James M.; Lo, Andrew; Poggio, Tomaso
Fonte: MIT - Massachusetts Institute of Technology Publicador: MIT - Massachusetts Institute of Technology
Formato: 397765 bytes; 1887637 bytes; application/octet-stream; application/pdf
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We propose a nonparametric method for estimating derivative financial asset pricing formulae using learning networks. To demonstrate feasibility, we first simulate Black-Scholes option prices and show that learning networks can recover the Black-Scholes formula from a two-year training set of daily options prices, and that the resulting network formula can be used successfully to both price and delta-hedge options out-of-sample. For comparison, we estimate models using four popular methods: ordinary least squares, radial basis functions, multilayer perceptrons, and projection pursuit. To illustrate practical relevance, we also apply our approach to S&P 500 futures options data from 1987 to 1991.

Tests of Conditional Asset Pricing Models in the Brazilian Stock Market

BONOMO, Marco; GARCIA, René
Fonte: Université de Montréal Publicador: Université de Montréal
Tipo: Artigo de Revista Científica Formato: 430395 bytes; application/pdf
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In this paper, we test a version of the conditional CAPM with respect to a local market portfolio, proxied by the Brazilian stock index during the 1976-1992 period. We also test a conditional APT model by using the difference between the 30-day rate (Cdb) and the overnight rate as a second factor in addition to the market portfolio in order to capture the large inflation risk present during this period. The conditional CAPM and APT models are estimated by the Generalized Method of Moments (GMM) and tested on a set of size portfolios created from a total of 25 securities exchanged on the Brazilian markets. The inclusion of this second factor proves to be crucial for the appropriate pricing of the portfolios.; Dans cet article, nous testons une version du CAPM conditionnel par rapport au portefeuille de marché local, approximé par un indice boursier brésilien, au cours de la période 1976-1992. Nous tenons également un modèle APT conditionnel en utilisant la différence entre les taux d’intérêt sur les dépôts de 30 jours (Cdb) et le taux au jour le jour comme deuxième facteur en plus du portefeuille de marché pour capter l’important risque inflationniste présent durant cette période. Les modèles conditionnels CAPM et APT sont estimés par la méthode généralisée des moments (GMM) et testés sur un ensemble de portefeuilles construits selon la taille à partir d’un total de 25 titres échangés sur les marchés boursiers brésiliens. L’incorporation de ce deuxième facteur se révèle cruciale pour une juste valorisation des portefeuilles.

Tests of Conditional Asset Pricing Models in the Brazilian Stock Market

BONOMO, Marco; GARCIA, René
Fonte: Université de Montréal Publicador: Université de Montréal
Tipo: Artigo de Revista Científica Formato: 149496 bytes; application/pdf
Português
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In this paper, we test a version of the conditional CAPM with respect to a local market portfolio, proxied by the Brazilian stock index during the 1976-1992 period. We also test a conditional APT model by using the difference between the 30-day rate (Cdb) and the overnight rate as a second factor in addition to the market portfolio in order to capture the large inflation risk present during this period. the conditional CAPM and APT models are estimated by the Generalized Method of Moments (GMM) and tested on a set of size portfolios created from a total of 25 securities exchanged on the Brazilian markets. the inclusion of this second factor proves to be crucial for the appropriate pricing of the portfolios.

Pricing assets with higher moments: Evidence from the Australian and US stock markets

Doan, P.; Lin, C.T.; Zurbrugg, R.Y.
Fonte: Elsevier BV, North-Holland Publicador: Elsevier BV, North-Holland
Tipo: Artigo de Revista Científica
Publicado em //2010 Português
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Phuong Doan, Chien-Ting Lin, Ralf Zurbruegg

On the Measurement of financial market integration

Balbás, Alejandro
Fonte: Real Academia de Ciencias Exactas, Físicas y Naturales Publicador: Real Academia de Ciencias Exactas, Físicas y Naturales
Tipo: Artigo de Revista Científica Formato: application/pdf
Publicado em //1998 Português
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The paper presents sorne vector optimization problems to measure arbitrage and integration of financial markets. This new approach may be applied under static or dynamic asset pricing assumptions and leads to both, numerical and stochastic integration measures. Thus, the paper provides a new methodology in a very general setting, allowing many instruments in each market to test optimal arbitrage portfolios depending on the state of nature and the date. Markets with frictions are also analyzed, and sorne empirical results are presented.; El artículo aplica la optimización vectorial para introducir nuevos procedimientos que miden el nivel de arbitraje e integración de mercados financieros. Las técnicas son aplicables tanto bajo supuestos estáticos, como bajo supuestos dinámicos de valoración de activos. Por consiguiente el nivel de generalidad es alto, y se proporcionan instrumentos que permiten determinar estrategias de arbitraje óptimas de carácter dinámico y estocástico. Finalmente, también se analizan los mercados con fricciones y se presentan los resultados de algunas contrastaciones empíricas.

The Liquidity Premium in Equity Pricing under a Continuous Auction System

Rubio, Gonzalo; Tapia, Mikel
Fonte: Taylor & Francis Publicador: Taylor & Francis
Tipo: Artigo de Revista Científica Formato: application/pdf
Publicado em /03/1998 Português
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The paper shows that the cost of illiquidity is not (positively) priced over all months in the Spanish continuous auction system, where liquidity is provideh in the absence of market makers. Two distinct approaches are employed. Both the two-step traditional cross-sectional method and the pooled cross-section time series analysis tend to indicate that the liquidity premium is negative during months other than January. Morever, the liquidity premium in January is positive (although not significant) and at the 10% level it seems to be significantly higher than the liquidity premium over the rest of the year. Therefore, given the previous results for the US market, we conclude that, independently of the market trading mechanism with the exception of NASDAQ, the behaviour of the relationship between the bid-ask spread and stock returns is rather similar.

Essays on Bond Yields

Murik, Vijay
Fonte: Universidade Nacional da Austrália Publicador: Universidade Nacional da Austrália
Tipo: Thesis (PhD); Doctor of Philosophy (PhD)
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This doctoral dissertation comprises three essays which study the determinants of bond yields. The dissertation is organised around the idea that bond yields can be partitioned into a risky component which prices for the risk of illiquidity and default; and a risk-free component which prices for investors' time preferences, and expected monetary policy movements. The first essay considers the liquidity and credit premia in supranational, semi-government and agency bond yields; term premia in sovereign bond yields and their relation to the economy constitute the focus of the second essay; and the third essay is devoted to an inquiry into the nature of expectations of future monetary policy movements in bond yields. In each case, it is found that valuable information can indeed be extracted from the market pricing implied by bond yields.; Principal Supervisor: Professor Tom Smith t.smith@business.uq.edu.au; Yes

Valoración del costo de los recursos propios de las empresas. caso particular: empresas de servicios a la persona en Francia

Acuña Rodriguez, Amelia Maria
Fonte: Facultad de administración Publicador: Facultad de administración
Tipo: info:eu-repo/semantics/bachelorThesis; info:eu-repo/semantics/acceptedVersion Formato: application/pdf
Publicado em 10/07/2014 Português
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El WACC o Coste Medio Ponderado de Capital es la tasa a la que se deben descontar los flujos para evaluar un proyecto o empresa. Para calcular esta tasa es necesario determinar el costo de la deuda y el costo de los recursos propios de la compañía; el costo de la deuda es la tasa actual del mercado que la empresa está pagando por su deuda, sin embargo el costo de los recursos propios podría ser difícil y más complejo de estimar ya que no existe un costo explícito. En este trabajo se presenta un panorama de las teorías propuestas a lo largo de la historia para calcular el costo de los recursos propios. Como caso particular, se estimará el costo de los recursos propios sin apalancamiento financiero de seis empresas francesas que no cotizan en bolsa y pertenecientes al sector de Servicios a la Persona (SAP). Para lograr lo anterior, se utilizará el Proceso de Análisis Jerárquico (AHP) y el Modelo de Valoración del Precio de los Activos Financieros (CAPM) con base en lo presentado por Martha Pachón (2013) en “Modelo alternativo para calcular el costo de los recursos propios”.; The Weighted Average Cost of Capital (WACC) is the rate at which flows should be discounted to evaluate a project or company. To calculate this rate...

Dynamic Conic Finance: Pricing and Hedging in Market Models with Transaction Costs via Dynamic Coherent Acceptability Indices

Bielecki, Tomasz R.; Cialenco, Igor; Iyigunler, Ismail; Rodriguez, Rodrigo
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
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In this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of Asset Pricing using the dynamic coherent risk measures. We introduce the dynamic ask and bid prices of a derivative contract in markets with transaction costs. Based on these results, we derive a representation theorem for the dynamic bid and ask prices in terms of dynamically consistent sequence of sets of probability measures and risk-neutral measures. To illustrate our results, we compute the ask and bid prices of some path-dependent options using the dynamic Gain-Loss Ratio.; Comment: extended-preprint version of the published paper

$L^2$-approximating pricing under restricted information

Mania, M.; Tevzadze, R.; Toronjadze, T.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 30/08/2007 Português
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We consider the mean-variance hedging problem under partial information in the case where the flow of observable events does not contain the full information on the underlying asset price process. We introduce a martingale equation of a new type and characterize the optimal strategy in terms of the solution of this equation. We give relations between this equation and backward stochastic differential equations for the value process of the problem.

Option Pricing Model Based on a Markov-modulated Diffusion with Jumps

Ratanov, Nikita
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 03/12/2008 Português
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The paper proposes a class of financial market models which are based on inhomogeneous telegraph processes and jump diffusions with alternating volatilities. It is assumed that the jumps occur when the tendencies and volatilities are switching. We argue that such a model captures well the stock price dynamics under periodic financial cycles. The distribution of this process is described in detail. For this model we obtain the structure of the set of martingale measures. This incomplete model can be completed by adding another asset based on the same sources of randomness. Explicit closed-form formulae for prices of the standard European options are obtained for the completed market model.

Coherent CVA and FVA with Liability Side Pricing of Derivatives

Lou, Wujiang
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 24/10/2015 Português
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This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged, resembles in economics an issued variable funding note, and should be priced at the market rate of the issuer's debt. For the purpose of determining the fair value, the party on the liability side is economically neutral to make a deposit to the other party, which earns his current debt rate and effectively provides funding and hedging for the party holding the derivative asset. The newly derived partial differential equation for an option discounts the derivative's receivable part with counterparty's curve and payable part with own financing curve. The price difference from the counterparty risk free price, or total counterparty risk adjustment, is precisely defined by discounting the product of the risk free price and the credit spread at the local liability curve. Subsequently the adjustment can be broken into a default risk component -- CVA and a funding component -- FVA, consistent with a simple note's fair value treatment and in accordance with the usual understanding of a bond's credit spread consisting of a CDS spread and a basis. As for FVA...

American Options Pricing under Stochastic Volatility: Approximation of the Early Exercise Surface and Monte Carlo Simulations

Kuperin, Yu. A.; Poloskov, P. A.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 28/09/2010 Português
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The aim of this study was to develop methods for evaluating the American-style option prices when the volatility of the underlying asset is described by a stochastic process. As part of this problem were developed techniques for modeling the early exercise surface of the American option. These methods of present work are compared to the complexity of modeling and computation speed. The paper presents the semi-analytic expression for the price of American options with stochastic volatility. The results of numerical computations and their calibration are also presented. The obtained results were compared with results excluding the effect of volatility smile.; Comment: 10 pages

Pricing and Hedging in Affine Models with Possibility of Default

Cheridito, Patrick; Wugalter, Alexander
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
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We propose a general framework for the simultaneous modeling of equity, government bonds, corporate bonds and derivatives. Uncertainty is generated by a general affine Markov process. The setting allows for stochastic volatility, jumps, the possibility of default and correlation between different assets. We show how to calculate discounted complex moments by solving a coupled system of generalized Riccati equations. This yields an efficient method to compute prices of power payoffs. European calls and puts as well as binaries and asset-or-nothing options can be priced with the fast Fourier transform methods of Carr and Madan (1999) and Lee (2005). Other European payoffs can be approximated with a linear combination of government bonds, power payoffs and vanilla options. We show the results to be superior to using only government bonds and power payoffs or government bonds and vanilla options. We also give conditions for European continent claims in our framework to be replicable if enough financial instruments are liquidly tradable and study dynamic hedging strategies. As an example we discuss a Heston-type stochastic volatility model with possibility of default and stochastic interest rates.; Comment: 25 pages, 3 figures

Model-independent Superhedging under Portfolio Constraints

Fahim, Arash; Huang, Yu-Jui
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
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In a discrete-time market, we study model-independent superhedging, while the semi-static superhedging portfolio consists of {\it three} parts: static positions in liquidly traded vanilla calls, static positions in other tradable, yet possibly less liquid, exotic options, and a dynamic trading strategy in risky assets under certain constraints. By considering the limit order book of each tradable exotic option and employing the Monge-Kantorovich theory of optimal transport, we establish a general superhedging duality, which admits a natural connection to convex risk measures. With the aid of this duality, we derive a model-independent version of the fundamental theorem of asset pricing. The notion "finite optimal arbitrage profit", weaker than no-arbitrage, is also introduced. It is worth noting that our method covers a large class of Delta constraints as well as Gamma constraint.; Comment: 29 pages

No-Arbitrage Pricing for Dividend-Paying Securities in Discrete-Time Markets with Transaction Costs

Bielecki, Tomasz R.; Cialenco, Igor; Rodriguez, Rodrigo
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
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We prove a version of First Fundamental Theorem of Asset Pricing under transaction costs for discrete-time markets with dividend-paying securities. Specifically, we show that the no-arbitrage condition under the efficient friction assumption is equivalent to the existence of a risk-neutral measure. We derive dual representations for the superhedging ask and subhedging bid price processes of a derivative contract. Our results are illustrated with a vanilla credit default swap contract.; Comment: Forthcoming in Mathematical Finance

Robust no-free lunch with vanishing risk, a continuum of assets and proportional transaction costs

Bouchard, Bruno; Lepinette, Emmanuel; Taflin, Erik
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 02/02/2013 Português
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We propose a continuous time model for financial markets with proportional transactions costs and a continuum of risky assets. This is motivated by bond markets in which the continuum of assets corresponds to the continuum of possible maturities. Our framework is well adapted to the study of no-arbitrage properties and related hedging problems. In particular, we extend the Fundamental Theorem of Asset Pricing of Guasoni, R\'asonyi and L\'epinette (2012) which concentrates on the one dimensional case. Namely, we prove that the Robust No Free Lunch with Vanishing Risk assumption is equivalent to the existence of a Strictly Consistent Price System. Interestingly, the presence of transaction costs allows a natural definition of trading strategies and avoids all the technical and un-natural restrictions due to stochastic integration that appear in bond models without friction. We restrict to the case where exchange rates are continuous in time and leave the general c\`adl\`ag case for further studies.; Comment: 41 pages

Analytical and Numerical Approaches to Pricing the Path-Dependent Options with Stochastic Volatility

Kuperin, Yu. A.; Poloskov, P. A.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 23/09/2010 Português
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In this paper new analytical and numerical approaches to valuating path-dependent options of European type have been developed. The model of stochastic volatility as a basic model has been chosen. For European options we could improve the path integral method, proposed B. Baaquie, and generalized it to the case of path-dependent options, where the payoff function depends on the history of changes in the underlying asset. The dependence of the implied volatility on the parameters of the stochastic volatility model has been studied. It is shown that with proper choice of model parameters one can accurately reproduce the actual behavior of implied volatility. As a consequence, it can assess more accurately the value of options. It should be noted that the methods developed here allow evaluating options with any payoff function.; Comment: 16 pages, 5 figures

Expected Cash Flow: A Novel Model Of Evaluating Financial Assets

Yandiev, Magomet
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 19/04/2014 Português
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The present paper provides the basis for a novel financial asset pricing model that could avoid the shortcomings of, or even completely replace the traditional DCF model. The model is based on Brownian motion logic and expected future cash flow values. It can be very useful for Islamic Finance.; Comment: 7 pages, 7 equations, 2 figures

Arbitrage in markets with bid-ask spreads

Rola, Przemysław
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 12/07/2014 Português
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In this paper a finite discrete time market with an arbitrary state space and bid-ask spreads is considered. The notion of an equivalent bid-ask martingale measure (EBAMM) is introduced and the fundamental theorem of asset pricing is proved using (EBAMM) as an equivalent condition for no-arbitrage. The Cox-Ross-Rubinstein model with bid-ask spreads is presented as an application of our results.; Comment: 18 pages, 3 figures