Download or read book The Shape and Term Structure of the Index Option Smirk written by Peter Christoffersen and published by . This book was released on 2009 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: State-of-the-art stochastic volatility models generate a quot;volatility smirkquot; that explains why out-of-the-money index puts have high prices relative to the Black-Scholes benchmark. These models also adequately explain how the volatility smirk moves up and down in response to changes in risk. However, the data indicate that the slope and the level of the smirk fluctuate largely independently. While single-factor stochastic volatility models can capture the slope of the smile, they cannot explain such largely independent fluctuations in its level and slope over time. We propose to model these movements using a two-factor stochastic volatility model. Because the factors have distinct correlations with market returns, and because the weights of the factors vary over time, the model generates stochastic correlation between volatility and stock returns. Besides providing more flexible modeling of the time variation in the smirk, the model also provides more flexible modeling of the volatility term structure. Our empirical results indicate that the model improves on the benchmark Heston model by 24% in-sample and 23% out-of-sample. The better fit results from improvements in the modeling of the term structure dimension as well as the moneyness dimension.

Download or read book Volatility Surface and Term Structure written by Kin Keung Lai and published by Routledge. This book was released on 2013-09-11 with total page 113 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.

Download or read book The Implied Volatility Term Structure of Stock Index Options written by Scott Mixon and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper tests the expectations hypothesis of the term structure of implied volatility for several national stock market indices (Samp;P 500, FTSE 100, DAX, CAC, and Nikkei 225). The tests indicate that the slope of at-the-money implied volatility over different maturities has predictive ability for future short dated implied volatility, although not to the extent predicted by the expectations hypothesis. Equivalently, the forward implied volatility is a biased forecast of future implied volatility. The low forecast power may be due to a failure to control for a risk premium in the prices of options. Evidence is presented that a time varying risk premium that increases in volatility is consistent with the results. Including a volatility risk proxy in the specification improves the forecasting ability beyond that embedded in the implied volatility term structure.

Download or read book Rethinking Valuation and Pricing Models written by Carsten Wehn and published by Academic Press. This book was released on 2012-11-08 with total page 658 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is widely acknowledged that many financial modelling techniques failed during the financial crisis, and in our post-crisis environment many techniques are being reconsidered. This single volume provides a guide to lessons learned for practitioners and a reference for academics. Including reviews of traditional approaches, real examples, and case studies, contributors consider portfolio theory; methods for valuing equities and equity derivatives, interest rate derivatives, and hybrid products; and techniques for calculating risks and implementing investment strategies. Describing new approaches without losing sight of their classical antecedents, this collection of original articles presents a timely perspective on our post-crisis paradigm. Highlights pre-crisis best classical practices, identifies post-crisis key issues, and examines emerging approaches to solving those issues Singles out key factors one must consider when valuing or calculating risks in the post-crisis environment Presents material in a homogenous, practical, clear, and not overly technical manner

Download or read book The Greeks and Hedging Explained written by Peter Leoni and published by Springer. This book was released on 2014-05-29 with total page 145 pages. Available in PDF, EPUB and Kindle. Book excerpt: A practical guide to basic and intermediate hedging techniques for traders, structerers and risk management quants. This book fills a gap for a technical but not impenetrable guide to hedging options, and the 'Greek' (Theta, Vega, Rho and Lambda) -parameters that represent the sensitivity of derivatives prices.

Download or read book Handbook Of Financial Econometrics Mathematics Statistics And Machine Learning In 4 Volumes written by Cheng Few Lee and published by World Scientific. This book was released on 2020-07-30 with total page 5053 pages. Available in PDF, EPUB and Kindle. Book excerpt: This four-volume handbook covers important concepts and tools used in the fields of financial econometrics, mathematics, statistics, and machine learning. Econometric methods have been applied in asset pricing, corporate finance, international finance, options and futures, risk management, and in stress testing for financial institutions. This handbook discusses a variety of econometric methods, including single equation multiple regression, simultaneous equation regression, and panel data analysis, among others. It also covers statistical distributions, such as the binomial and log normal distributions, in light of their applications to portfolio theory and asset management in addition to their use in research regarding options and futures contracts.In both theory and methodology, we need to rely upon mathematics, which includes linear algebra, geometry, differential equations, Stochastic differential equation (Ito calculus), optimization, constrained optimization, and others. These forms of mathematics have been used to derive capital market line, security market line (capital asset pricing model), option pricing model, portfolio analysis, and others.In recent times, an increased importance has been given to computer technology in financial research. Different computer languages and programming techniques are important tools for empirical research in finance. Hence, simulation, machine learning, big data, and financial payments are explored in this handbook.Led by Distinguished Professor Cheng Few Lee from Rutgers University, this multi-volume work integrates theoretical, methodological, and practical issues based on his years of academic and industry experience.

Download or read book The Heston Model and Its Extensions in VBA written by Fabrice D. Rouah and published by John Wiley & Sons. This book was released on 2015-04-27 with total page 359 pages. Available in PDF, EPUB and Kindle. Book excerpt: Practical options pricing for better-informed investment decisions. The Heston Model and Its Extensions in VBA is the definitive guide to options pricing using two of the derivatives industry's most powerful modeling tools—the Heston model, and VBA. Light on theory, this extremely useful reference focuses on implementation, and can help investors more efficiently—and accurately—exploit market information to better inform investment decisions. Coverage includes a description of the Heston model, with specific emphasis on equity options pricing and variance modeling, The book focuses not only on the original Heston model, but also on the many enhancements and refinements that have been applied to the model, including methods that use the Fourier transform, numerical integration schemes, simulation, methods for pricing American options, and much more. The companion website offers pricing code in VBA that resides in an extensive set of Excel spreadsheets. The Heston model is the derivatives industry's most popular stochastic volatility model for pricing equity derivatives. This book provides complete guidance toward the successful implementation of this valuable model using the industry's ubiquitous financial modeling software, giving users the understanding—and VBA code—they need to produce option prices that are more accurate, and volatility surfaces that more closely reflect market conditions. Derivatives pricing is often the hinge on which profit is made or lost in financial institutions, making accuracy of utmost importance. This book will help risk managers, traders, portfolio managers, quants, academics and other professionals better understand the Heston model and its extensions, in a writing style that is clear, concise, transparent and easy to understand. For better pricing accuracy, The Heston Model and Its Extensions in VBA is a crucial resource for producing more accurate model outputs such as prices, hedge ratios, volatilities, and graphs.

Download or read book The Volatility Smile written by Emanuel Derman and published by John Wiley & Sons. This book was released on 2016-09-06 with total page 528 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models The first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.

Download or read book Functionals of Multidimensional Diffusions with Applications to Finance written by Jan Baldeaux and published by Springer Science & Business Media. This book was released on 2013-08-13 with total page 432 pages. Available in PDF, EPUB and Kindle. Book excerpt: This research monograph provides an introduction to tractable multidimensional diffusion models, where transition densities, Laplace transforms, Fourier transforms, fundamental solutions or functionals can be obtained in explicit form. The book also provides an introduction to the use of Lie symmetry group methods for diffusions, which allows to compute a wide range of functionals. Besides the well-known methodology on affine diffusions it presents a novel approach to affine processes with applications in finance. Numerical methods, including Monte Carlo and quadrature methods, are discussed together with supporting material on stochastic processes. Applications in finance, for instance, on credit risk and credit valuation adjustment are included in the book. The functionals of multidimensional diffusions analyzed in this book are significant for many areas of application beyond finance. The book is aimed at a wide readership, and develops an intuitive and rigorous understanding of the mathematics underlying the derivation of explicit formulas for functionals of multidimensional diffusions.​

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 The Financial Crisis and the Behavior of S P 500 Index Option Prices written by Mo Chaudhury and published by . This book was released on 2015 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Stronger volatility skew and smile effects accompanied by a risk-neutral distribution that is closer to the Normal seem unconventional at first thought. But that is what we find during the financial crisis, with the unconventionally high risk-neutral volatility level playing a major role. Additionally, the term structure of implied volatility became inverted (negatively sloped) during the crisis, driven by the inversion of the term structure of risk-neutral volatility and by the rise in the shorter term unconditional volatility. The term structures of risk-neutral skewness and kurtosis appear relatively flat with only negligible change during the crisis. The scale and its term structure rather than the shape factors of the unconditional risk neutral distribution to maturity thus appear more important for the structure of crisis time option prices.

Download or read book Data Analysis and Related Applications 4 written by Yiannis Dimotikalis and published by John Wiley & Sons. This book was released on 2024-10-08 with total page 420 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Emerging Financial Derivatives written by Jerome Yen and published by Routledge. This book was released on 2014-11-27 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: Exotic options and structured products are two of the most popular financial products over the past ten years and will soon become very important to the emerging markets, especially China. This book first discusses the products' recent development in the world and provides comprehensive overview of the major products. The book also discusses the risks of issuing and buying such products as well as the techniques to price them and to assess the risks. Volatility is the most important factor in determining the return and risk. Therefore, significant part of the book's content discusses how we can measure the volatility by using local and stochastic volatility models — Heston Model and Dupire Model, the volatility surface, the term structure of volatility, variance swaps, and breakeven volatility. The book introduces a set of dimensions which can be used to describe structured products to help readers to classify them. It also describes the more commonly traded exotic options with details. The book discusses key features of each exotic option which can be used to develop structured products and covers their pricing models and when to issue such products that contain such exotic options. This book contains several case studies about how to use the models or techniques to price and hedge risks. These case analyses are illuminating.

Download or read book Data Analysis and Related Applications 3 written by Yiannis Dimotikalis and published by John Wiley & Sons. This book was released on 2024-04-10 with total page 269 pages. Available in PDF, EPUB and Kindle. Book excerpt: The book is a collective work by a number of leading scientists, analysts, engineers, mathematicians and statisticians who have been working at the forefront of data analysis and related applications, arising from data science, operations research, engineering, machine learning or statistics. The chapters of this collaborative work represent a cross-section of current research interests in the above scientific areas. The collected material has been divided into appropriate sections to provide the reader with both theoretical and applied information on data analysis methods, models and techniques, along with appropriate applications. The published data analysis methodology includes the updated state-of-the-art rapidly developed theory and applications of data expansion, both of which go through outstanding changes nowadays. New approaches are expected to deliver and have been developed, including Artificial Intelligence.

Download or read book Large Scale Scientific Computing written by Ivan Lirkov and published by Springer. This book was released on 2012-05-24 with total page 669 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book constitutes the thoroughly refereed post-conference proceedings of the 8th International Conference on Large-Scale Scientific Computations, LSSC 2011, held in Sozopol, Bulgaria, in June 2011. The 74 revised full papers presented together with 3 plenary and invited papers were carefully reviewed and selected from numerous submissions. The papers are organized in topical sections on robust multigrid, multilevel and multiscale, deterministic and stochastic methods for modeling highly heterogeneous media, advanced methods for transport, control and uncertain systems, applications of metaheuristics to large-scale problems, environmental modelling, large scale computing on many-core architectures, multiscale industrial, enviromental and biomedical problems, efficient algorithms of computational geometry, high performance Monte Carlo simulations, voxel based computations and contributed papers.

Download or read book Engineering Mathematics I written by Sergei Silvestrov and published by Springer. This book was released on 2016-11-26 with total page 347 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book highlights the latest advances in engineering mathematics with a main focus on the mathematical models, structures, concepts, problems and computational methods and algorithms most relevant for applications in modern technologies and engineering. In particular, it features mathematical methods and models of applied analysis, probability theory, differential equations, tensor analysis and computational modelling used in applications to important problems concerning electromagnetics, antenna technologies, fluid dynamics, material and continuum physics and financial engineering. The individual chapters cover both theory and applications, and include a wealth of figures, schemes, algorithms, tables and results of data analysis and simulation. Presenting new methods and results, reviews of cutting-edge research, and open problems for future research, they equip readers to develop new mathematical methods and concepts of their own, and to further compare and analyse the methods and results discussed.The book consists of contributed chapters covering research developed as a result of a focused international seminar series on mathematics and applied mathematics and a series of three focused international research workshops on engineering mathematics organised by the Research Environment in Mathematics and Applied Mathematics at Mälardalen University from autumn 2014 to autumn 2015: the International Workshop on Engineering Mathematics for Electromagnetics and Health Technology; the International Workshop on Engineering Mathematics, Algebra, Analysis and Electromagnetics; and the 1st Swedish-Estonian International Workshop on Engineering Mathematics, Algebra, Analysis and Applications.It serves as a source of inspiration for a broad spectrum of researchers and research students in applied mathematics, as well as in the areas of applications of mathematics considered in the book.

Download or read book Handbook of Economic Forecasting written by Graham Elliott and published by Newnes. This book was released on 2013-08-23 with total page 719 pages. Available in PDF, EPUB and Kindle. Book excerpt: The highly prized ability to make financial plans with some certainty about the future comes from the core fields of economics. In recent years the availability of more data, analytical tools of greater precision, and ex post studies of business decisions have increased demand for information about economic forecasting. Volumes 2A and 2B, which follows Nobel laureate Clive Granger's Volume 1 (2006), concentrate on two major subjects. Volume 2A covers innovations in methodologies, specifically macroforecasting and forecasting financial variables. Volume 2B investigates commercial applications, with sections on forecasters' objectives and methodologies. Experts provide surveys of a large range of literature scattered across applied and theoretical statistics journals as well as econometrics and empirical economics journals. The Handbook of Economic Forecasting Volumes 2A and 2B provide a unique compilation of chapters giving a coherent overview of forecasting theory and applications in one place and with up-to-date accounts of all major conceptual issues. - Focuses on innovation in economic forecasting via industry applications - Presents coherent summaries of subjects in economic forecasting that stretch from methodologies to applications - Makes details about economic forecasting accessible to scholars in fields outside economics