State-dependent Jump Risks and American Option Pricing: an Empirical Study of the Gold Futures Market PDF Download

Author: Yu Min Lian
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: Warren Bailey
Publisher:
ISBN:
Category : Gold industry
Languages : en
Pages : 54

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Author: Carl Chiarella
Publisher: World Scientific
ISBN: 9814452637
Category : Business & Economics
Languages : en
Pages : 223

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The early exercise opportunity of an American option makes it challenging to price and an array of approaches have been proposed in the vast literature on this topic. In The Numerical Solution of the American Option Pricing Problem, Carl Chiarella, Boda Kang and Gunter Meyer focus on two numerical approaches that have proved useful for finding all prices, hedge ratios and early exercise boundaries of an American option. One is a finite difference approach which is based on the numerical solution of the partial differential equations with the free boundary problem arising in American option pricing, including the method of lines, the component wise splitting and the finite difference with PSOR. The other approach is the integral transform approach which includes Fourier or Fourier Cosine transforms. Written in a concise and systematic manner, Chiarella, Kang and Meyer explain and demonstrate the advantages and limitations of each of them based on their and their co-workers' experiences with these approaches over the years.

Author: Warren Bernard Bailey
Publisher:
ISBN:
Category : Capital assets pricing model
Languages : en
Pages : 19

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Author: Jeremy Berros
Publisher: LAP Lambert Academic Publishing
ISBN: 9783843356930
Category :
Languages : en
Pages : 60

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Many alternative models have been developed lately to generalize the Black-Scholes option pricing model in order to incorporate more empirical features. Brownian motion and normal distribution have been used in this Black-Scholes option-pricing framework to model the return of assets. However, two main points emerge from empirical investigations: (i) the leptokurtic feature that describes the return distribution of assets as having a higher peak and two asymmetric heavier tails than those of the normal distribution, and (ii) an empirical phenomenon called "volatility smile" in option markets. Among the recent models that addressed the aforementioned issues is that of Kou (2002), which allows the price of the underlying asset to move according to both Brownian increments and double-exponential jumps. The aim of this thesis is to develop an analytic pricing expression for American options in this model that enables us to e±ciently determine both the price and related hedging parameters.

Author: Craig Pirrong
Publisher: Cambridge University Press
ISBN: 1139501976
Category : Business & Economics
Languages : en
Pages : 238

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Commodities have become an important component of many investors' portfolios and the focus of much political controversy over the past decade. This book utilizes structural models to provide a better understanding of how commodities' prices behave and what drives them. It exploits differences across commodities and examines a variety of predictions of the models to identify where they work and where they fail. The findings of the analysis are useful to scholars, traders and policy makers who want to better understand often puzzling - and extreme - movements in the prices of commodities from aluminium to oil to soybeans to zinc.

Author: Scott B. Beyer
Publisher:
ISBN:
Category : Stock options
Languages : en
Pages : 358

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This dissertation uses option prices from near expiration options to extract jump-risk and volatility parameters. To date, the vast majority of empirical option studies have ignored near expiration, or short-dated options. Many of these studies that ignore short-maturity options cite Rubinstein (1985), who excluded all options with less than 21 days until maturity, due to "nonidealalities". It is important to note, however, that overall trading activity in short-dated options (in the final two weeks of trading) is significant, accounting for 30 to 50 percent of total option volume. Specifically, this dissertation focuses on methods to uncover the jump parameters implied by options with a short time to expiration. Intuitively, consider an option that has one day until expiration. Here, diffusion or volatility will have little, if any, impact, upon option prices even with very large volatility. However, jumps allow for large price moves in a short time interval. As a result, the jump premium should represent a larger portion of the value of an option the closer the option is to expiration. Additionally, because volatility does not have much influence on many short-dated option prices, it is plausible that jump and volatility parameters for short-dated options are largely uncorrelated. It is found that DIFF, the price difference between the NSX and SPX index options, is significant for high moneyness options, call options that are in-the-money and put options that are out-of-the-money. Also, the implied volatility is critically different, at near term maturities under the jump-diffusion model versus the Black and Scholes model. That is, it is found that the volatility distributions are significantly different when generated by the aforementioned models. Furthermore, the volatility of volatility is notably different for high moneyness options nearing expiration. These findings may have a profound impact upon the manner in which option trader hedge their near maturity option positions.

Author: Asim Kumar Ghosh
Publisher:
ISBN:
Category : Pricing
Languages : en
Pages : 178

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Category :
Languages : en
Pages :

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In recent years the stock markets have shown tremendous volatility with significant spikes and drops in the stock prices. Within the past decade, there have been numerous jumps in the market; one key example was on September 17, 2001 when the Dow industrial average dropped 684 points following the 9-11 attacks on the United States. These evident jumps in the markets show the inaccuracy of the Black-Scholes model for pricing options. Merton provided the first research to appease this problem in 1976 when he extended the Black-Scholes model to include jumps in the market. In recent years, Kou has shown that the distribution of the jump sizes used in Merton's model does not efficiently model the actual movements of the markets. Consequently, Kou modified Merton's model changing the jump size distribution from a normal distribution to the double exponential distribution. Kou's research utilizes mathematical equations to estimate the value of an American put option where the underlying stocks follow a jump-diffusion process. The research contained within this thesis extends on Kou's research using Monte Carlo simulation (MCS) coupled with least-squares regression to price this type of American option. Utilizing MCS provides a continuous exercise and pricing region which is a distinct difference, and advantage, between MCS and other analytical techniques. The aim of this research is to investigate whether or not MCS is an efficient means to pricing American put options where the underlying stock undergoes a jump-diffusion process. This thesis also extends the simulation to utilize copulas in the pricing of baskets, which contains several of the aforementioned type of American options. The use of copulas creates a joint distribution from two independent distributions and provides an efficient means of modeling multiple options and the correlation between them. The research contained within this thesis shows that MCS provides a means of accurately pricing American put options where the underlying stock follows a jump-diffusion. It also shows that it can be extended to use copulas to price baskets of options with jump-diffusion. Numerical examples are presented for both portions to exemplify the excellent results obtained by using MCS for pricing options in both single dimension problems as well as multidimensional problems.

Author: Samuel Clyde Weaver
Publisher:
ISBN:
Category : Index numbers (Economics)
Languages : en
Pages : 133

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