Download or read book Out of Sample Performance of Jump Diffusion Models for Equity Indices written by Roman Frey and published by . This book was released on 2015 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: Out-of-sample performance of continuous time models for equity returns is crucial in practical applications such as computing risk measures like value at risk, determine optimal portfolios or pricing derivatives. For all these applications investors need to model the return distribution of an underlying at some point in time in the future given current information. In this paper we analyze the out-of-sample performance of exponentially affine and non-affine continuous time stochastic volatility models with jumps in returns and volatility. Our analysis evaluates the density forecasts implied by the models. In a first step, we find in general that the good in-sample fits reported in the related literature do not carry over to the out-of-sample performance. In particular the left tail of the distribution poses a considerable challenge to the proposed models. In a second step, we analyze the models by using a rolling window approach. We find that using estimation periods that include high market stress events improve forecasting power considerably. In a third step, we apply parameters estimated on the sub period including the financial crisis (period with highest market stress) to all other forecasting sub periods. This approach further increases overall forecasting power and results in an outperformance of affine compared to non-affine models and an outperformance of jump models.

Download or read book Essays on Jump Diffusion Models in Asset Pricing and on the Prediction of Aggregate Stock Returns written by Roman Frey and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Diese Dissertation besteht aus drei individuellen Aufsätzen, die jeweils eine in sich geschlossene Forschungsarbeit darstellt. Im ersten Aufsatz, "Out-of-Sample Performance of Jump-Diffusion Models for Equity Indices: What the Financial Crisis was Good For", analysieren wir die out-of-sample Performance von zeitstetigen affinen und nicht affinen stochastischen Volatilitätsmodellen. Die out-of-sample Modellperformance ist eine Kennzahl mit zentraler Bedeutung für Investoren. Sie spielt unter anderem im Risikomanagement, der Asset Allocation wie auch in der Bewertung von derivativen Instrumenten, eine entscheidende Rolle. In dieser empirischen Studie, die auf täglichen Renditen des Aktienindex S&P 500 basiert, testen wir insgesamt 24 verschiedene Modellspezifikationen. Unser Testansatz evaluiert die durch die Modelle vorhergesagten Verteilungsdichten. Der entscheidende Vorteil dieser Methodik liegt darin, dass wir jeweils die gesamte modellinduzierte Dichte berücksichtigen. Unsere empirischen Resultate zeigen, dass sich die, in der Literatur häufig diskutierte, gute in-sample Modellperformance in out-of-sample Anwendungen generell nicht bestätigen lässt. Mittels eines rollierenden Zeitfensters beobachten wir, dass Modellparameter, die während einer genügend volatilen Marktphase geschätzt wurden, deutlich bessere out-of-sample Resultate liefern. Vielversprechend ist demzufolge die out-of-sample Performance, wenn die Modellparameter auf der sich kürzlich abgespielten Finanzkrise geschätzt und zur Vorhersage von Verteilungsdichten verwendet werden. Generell beobachten wir, dass zum einen affine Modelle bessere Resultate erreichen als nicht affine. Zum anderen deuten unsere Ergebnisse darauf hin, dass Modelle mit Sprüngen in den Renditen sowie Varianzen besser performen als pure Diffusionsmodelle. Der zweite Aufsatz mit dem Titel "Pricing CO2 Futures Options - Empirical In- and Out-of-Sample Performance Analysis" analys.

Download or read book Empirical Analysis of Affine vs Non Affine Variance Specifications in Jump Diffusion Models for Equity Indices written by Katja Ignatieva and published by . This book was released on 2015 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: How to model the variance process driving stock returns is a major research questions in finance. The specification of a variance model has implications for, e.g., risk management decisions, portfolio allocation or derivative pricing. This paper analyzes several crucial questions for setting up a variance model. (i) Are jumps an important model ingredient even when using a non-affine specification? (ii) How do affine specifications perform when compared to non-affine models. (iii) How should non-linearities be modeled? We find that, first, jump models clearly outperform pure stochastic volatility models. Second, non-affine specifications outperform affine models, even after including jumps. And finally, we find that the polynomial specification of the drift term, that has also been used in short rate models, is the best non-affine model under consideration.

Download or read book Computational Finance 1999 written by Yaser S. Abu-Mostafa and published by MIT Press. This book was released on 2000 with total page 744 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book covers the techniques of data mining, knowledge discovery, genetic algorithms, neural networks, bootstrapping, machine learning, and Monte Carlo simulation. Computational finance, an exciting new cross-disciplinary research area, draws extensively on the tools and techniques of computer science, statistics, information systems, and financial economics. This book covers the techniques of data mining, knowledge discovery, genetic algorithms, neural networks, bootstrapping, machine learning, and Monte Carlo simulation. These methods are applied to a wide range of problems in finance, including risk management, asset allocation, style analysis, dynamic trading and hedging, forecasting, and option pricing. The book is based on the sixth annual international conference Computational Finance 1999, held at New York University's Stern School of Business.

Download or read book Mathematical Finance with Applications written by Wing-Keung Wong and published by MDPI. This book was released on 2020-12-07 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt: Mathematical finance plays a vital role in many fields within finance and provides the theories and tools that have been widely used in all areas of finance. Knowledge of mathematics, probability, and statistics is essential to develop finance theories and test their validity through the analysis of empirical, real-world data. For example, mathematics, probability, and statistics could help to develop pricing models for financial assets such as equities, bonds, currencies, and derivative securities.

Download or read book Evolutionary Computation in Economics and Finance written by Shu-Heng Chen and published by Physica. This book was released on 2013-11-11 with total page 459 pages. Available in PDF, EPUB and Kindle. Book excerpt: After a decade's development, evolutionary computation (EC) proves to be a powerful tool kit for economic analysis. While the demand for this equipment is increasing, there is no volume exclusively written for economists. This volume for the first time helps economists to get a quick grasp on how EC may support their research. A comprehensive coverage of the subject is given, that includes the following three areas: game theory, agent-based economic modelling and financial engineering. Twenty leading scholars from each of these areas contribute a chapter to the volume. The reader will find himself treading the path of the history of this research area, from the fledgling stage to the burgeoning era. The results on games, labour markets, pollution control, institution and productivity, financial markets, trading systems design and derivative pricing, are new and interesting for different target groups. The book also includes informations on web sites, conferences, and computer software.

Download or read book Financial Modelling with Jump Processes written by Peter Tankov and published by CRC Press. This book was released on 2003-12-30 with total page 552 pages. Available in PDF, EPUB and Kindle. Book excerpt: WINNER of a Riskbook.com Best of 2004 Book Award! During the last decade, financial models based on jump processes have acquired increasing popularity in risk management and option pricing. Much has been published on the subject, but the technical nature of most papers makes them difficult for nonspecialists to understand, and the mathematic

Download or read book An Examination on the Roles of Diffusions and Stochastic Volatility in the Exponential Levy Jumps Models written by Elton Daal and published by . This book was released on 2006 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent studies have shown that stochastic volatility in a continuous-time framework provides an excellent fit for financial asset returns when combined with finite-activity Merton's type compound Poisson Jump-diffusion models. However, we demonstrate that stochastic volatility does not play a central role when incorporated with infinite-activity Leacute;vy type pure jump models such as variance-gamma and normal inverse Gaussian processes to model high and low frequency historical time-series SP500 index returns. In addition, whether sources of stochastic volatility are diffusions or jumps are not relevant to improve the overall empirical fits of returns. Nevertheless, stochastic diffusion volatility with infinite-activity Levy jumps processes considerably reduces SP500 index call option in-sample and out-of-sample pricing errors of long-term ATM and OTM options, which contributed to a substantial improvement of pricing performances of SVJ and EVGSV models, compared to constant volatility Levy-type pure jumps models and/or stochastic volatility model without jumps. Interestingly, unlike asset returns, whether pure Levy jumps specifications are finite or infinite activity is not an important factor to enhance option pricing model performances once stochastic volatility is incorporated. Option prices are computed via improved Fast Fourier Transform algorithm using characteristic functions to match arbitrary log-strike grids with equal intervals with each moneyness and maturity of actual market option prices considered in this paper.

Download or read book General Equilibrium Option Pricing Method Theoretical and Empirical Study written by Jian Chen and published by Springer. This book was released on 2018-04-10 with total page 163 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book mainly addresses the general equilibrium asset pricing method in two aspects: option pricing and variance risk premium. First, volatility smile and smirk is the famous puzzle in option pricing. Different from no arbitrage method, this book applies the general equilibrium approach in explaining the puzzle. In the presence of jump, investors impose more weights on the jump risk than the volatility risk, and as a result, investors require more jump risk premium which generates a pronounced volatility smirk. Second, based on the general equilibrium framework, this book proposes variance risk premium and empirically tests its predictive power for international stock market returns.

Download or read book Essays on the Specification Testing for Dynamic Asset Pricing Models written by Jaeho Yun and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on the subjects of specification testing on dynamic asset pricing models. In the first essay (with Yongmiao Hong), "A Simulation Test for Continuous-Time Models," we propose a simulation method to implement Hong and Li's (2005) transition density-based test for continuous-time models. The idea is to simulate a sequence of dynamic probability integral transforms, which is the key ingredient of Hong and Li's (2005) test. The proposed procedure is generally applicable whether or not the transition density of a continuous-time model has a closed form and is simple and computationally inexpensive. A Monte Carlo study shows that the proposed simulation test has very similar sizes and powers to the original Hong and Li's (2005) test. Furthermore, the performance of the simulation test is robust to the choice of the number of simulation iterations and the number of discretization steps between adjacent observations. In the second essay (with Yongmiao Hong), "A Specification Test for Stock Return Models," we propose a simulation-based specification testing method applicable to stochastic volatility models, based on Hong and Li (2005) and Johannes et al. (2008). We approximate a dynamic probability integral transform in Hong and Li' s (2005) density forecasting test, via the particle filters proposed by Johannes et al. (2008). With the proposed testing method, we conduct a comprehensive empirical study on some popular stock return models, such as the GARCH and stochastic volatility models, using the S&P 500 index returns. Our empirical analysis shows that all models are misspecified in terms of density forecast. Among models considered, however, the stochastic volatility models perform relatively well in both in- and out-of-sample. We also find that modeling the leverage effect provides a substantial improvement in the log stochastic volatility models. Our value-at-risk performance analysis results also support stochastic volatility models rather than GARCH models. In the third essay (with Yongmiao Hong), "Option Pricing and Density Forecast Performances of the Affine Jump Diffusion Models: the Role of Time-Varying Jump Risk Premia," we investigate out-of-sample option pricing and density forecast performances for the affine jump diffusion (AJD) models, using the S&P 500 stock index and the associated option contracts. In particular, we examine the role of time-varying jump risk premia in the AJD specifications. For comparison purposes, nonlinear asymmetric GARCH models are also considered. To evaluate density forecasting performances, we extend Hong and Li's (2005) specification testing method to be applicable to the famous AJD class of models, whether or not model-implied spot volatilities are available. For either case, we develop (i) the Fourier inversion of the closed-form conditional characteristic function and (ii) the Monte Carlo integration based on the particle filters proposed by Johannes et al. (2008). Our empirical analysis shows strong evidence in favor of time-varying jump risk premia in pricing cross-sectional options over time. However, for density forecasting performances, we could not find an AJD specification that successfully reconcile the dynamics implied by both time-series and options data.

Download or read book Jump Activity Analysis for Affine Jump Diffusion Models written by José Da Fonseca and published by . This book was released on 2016 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: The objective of this paper is to perform a joint analysis of jump activity for commodities and their respective volatility indices. Exploiting the property that for affine jump-diffusion models a volatility index, which is quoted on the market, is an affine function of the instantaneous volatility state variable (thus turning this quantity observable), we perform a test of common jumps for multidimensional processes to assess whether an asset and its volatility jump together. Applying this test to the crude oil pair USO/OVX and the gold pair GLD/GVZ we find strong evidence that for these two markets the asset and its volatility have disjoint jumps. This result contrasts with existing results for the equity market and underpins a very specific nature of the commodity market. The results are further confirmed by analysing jump size distributions using a copula methodology.

Download or read book Emerging Markets written by Greg N. Gregoriou and published by CRC Press. This book was released on 2009-06-26 with total page 870 pages. Available in PDF, EPUB and Kindle. Book excerpt: Although emerging market economies consist of 50% of the global population, they are relatively unknown. Filling this knowledge gap, Emerging Markets: Performance, Analysis and Innovation compiles the latest research by noteworthy academics and money managers from around the world. With a focus on both traditional emerging markets and new areas, su

Download or read book Complex Systems in Finance and Econometrics written by Robert A. Meyers and published by Springer Science & Business Media. This book was released on 2010-11-03 with total page 919 pages. Available in PDF, EPUB and Kindle. Book excerpt: Finance, Econometrics and System Dynamics presents an overview of the concepts and tools for analyzing complex systems in a wide range of fields. The text integrates complexity with deterministic equations and concepts from real world examples, and appeals to a broad audience.

Download or read book Performance of Affine Jump Diffusion Models During The Financial Crisis written by and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Genetic Programming written by John R. Koza and published by Morgan Kaufmann Publishers. This book was released on 1998 with total page 924 pages. Available in PDF, EPUB and Kindle. Book excerpt: Proceedings of the Annual Conferences on Genetic Programming. These proceedings present the most recent research in the field of genetic programming as well as recent research results in the fields of genetic algorithms, artificial life and evolution strategies, DNA computing, evolvable hardware, and genetic learning classifier systems.

Download or read book Calculation of Volatility in a Jump Diffusion Model written by Javier F. Navas and published by . This book was released on 2007 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: A common way to incorporate discontinuities in asset returns is to add a Poisson process to a Brownian motion. The jump-diffusion process provides probability distributions that typically fit market data better than those of the simple diffusion process. To compare the performance of these models in option pricing, the total volatility of the jump-diffusion process must be used in the Black-Scholes formula. A number of authors, including Merton (1976a amp; b), Ball and Torous (1985), Jorion (1988), and Amin (1993), miscalculate this volatility because they do not include the effect of uncertainty over the jump size. We calculate the volatility correctly and show how this affects option prices.

Download or read book The Journal of Derivatives written by and published by . This book was released on 2002 with total page 292 pages. Available in PDF, EPUB and Kindle. Book excerpt: