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Retrieving Risk Neutral Moments And Expected Quadratic Variation From Option Prices
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Book Synopsis Retrieving Risk Neutral Moments and Expected Quadratic Variation from Option Prices by : Leonidas Rompolis
Download or read book Retrieving Risk Neutral Moments and Expected Quadratic Variation from Option Prices written by Leonidas Rompolis and published by . This book was released on 2017 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives exact formulas for retrieving risk neutral moments of future payoffs of any order from generic European-style option prices. It also provides an exact formula for retrieving the expected quadratic variation of the stock market implied by European option prices, which nowadays is used as an estimate of the implied volatility, and a formula approximating the jump component of this measure of variation. To implement the above formulas to discrete sets of option prices, the paper suggests a numerical procedure and provides upper bounds of its approximation errors. The performance of this procedure is evaluated through a simulation and an empirical exercise. Both of these exercises clearly indicate that the suggested numerical procedure can provide accurate estimates of the risk neutral moments, over different horizons ahead. These can be in turn employed to obtain accurate estimates of risk neutral densities and calculate option prices, efficiently, in a model-free manner. The paper also shows that, in contrast to the prevailing view, ignoring the jump component of the underlying asset can lead to seriously biased estimates of the new volatility index suggested by the Chicago Board Options Exchange (CBOE).
Book Synopsis Extracting Risk-Neutral Density and Its Moments from American Option Prices by : Yisong S. Tian
Download or read book Extracting Risk-Neutral Density and Its Moments from American Option Prices written by Yisong S. Tian and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: There has been a surge in the use of option-implied moments (e.g., volatility, skewness and kurtosis) in various empirical applications such as volatility forecasting, variance risk premium, empirical asset pricing, and portfolio selection. One potential obstacle in such applications is the requirement of European option prices in the estimation of these moments. In this paper, we develop a simple, accurate method for extracting risk-neutral density and its moments from American option prices. A key advantage of our approach is that a single implied binomial tree is constructed to fit all American option prices, utilizing the full information set in the entire options market. Since American options are more commonly traded than European options, our methodology expands the scope of research on option-implied density and moments to a much wider class of underlying assets (e.g., equity and futures options).
Book Synopsis Option-Implied Risk-Neutral Distributions and Risk Aversion by : Jens Carsten Jackwerth
Download or read book Option-Implied Risk-Neutral Distributions and Risk Aversion written by Jens Carsten Jackwerth and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Option Pricing and Higher Order Moments of the Risk-neutral Probability Density Function by : Lawrence Edward Kochard
Download or read book Option Pricing and Higher Order Moments of the Risk-neutral Probability Density Function written by Lawrence Edward Kochard and published by . This book was released on 1999 with total page 364 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Closed-Form Approach to Valuing Risk-Neutral Moments from Option Prices by : Aristogenis Lazos
Download or read book A Closed-Form Approach to Valuing Risk-Neutral Moments from Option Prices written by Aristogenis Lazos and published by . This book was released on 2018 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops closed-form solutions for the finite integrals in the volatility, cubic and quartic contracts in Bakshi, Kapadia and Madan (2003) which avoid discretization errors and do not involve interpolation and extrapolation. It compares the accuracy of the closed-form approach with the popular interpolation-extrapolation approach in the literature. Our results show that the closed-form approach provides more accurate estimates for skewness. This holds across different option pricing models and parameterization which have been shown to be favourable for the interpolation-extrapolation approach. Finally, our results show that the closed-form approach always extracts expectations consistent with the term structure of the volatility smirk whereas the interpolation-extrapolation approach fails several times.
Book Synopsis Extracting Risk-neutral Probability Distributions from Option Prices Using Trading Volume as a Filter by : Dominique Y. Dupont
Download or read book Extracting Risk-neutral Probability Distributions from Option Prices Using Trading Volume as a Filter written by Dominique Y. Dupont and published by . This book was released on 2001 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Are We Extracting the True Risk Neutral Density from Option Prices? A Question with No Easy Answer by : James Huang
Download or read book Are We Extracting the True Risk Neutral Density from Option Prices? A Question with No Easy Answer written by James Huang and published by . This book was released on 2009 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we raise a question on the theoretical foundation of option implied risk neutral density. We prove that given any number of options, there exist numerous risk neutral densities which are piecewise constant, have only two values, either an lower bound or an upper bound on the true risk neutral density, and price all these options correctly. We also prove that given any number of options, there exist numerous risk neutral densities consistent with the prices of all these options whose first derivatives are piecewise constant and have only two values, either an lower bound or an upper bound on the true risk neutral density's first derivative. Similar results are proved with respect to the true risk neutral density's higher order derivatives. These results show how large errors we can make when extracting RNDs from option prices.
Book Synopsis Dynamic Hedging by : Nassim Nicholas Taleb
Download or read book Dynamic Hedging written by Nassim Nicholas Taleb and published by John Wiley & Sons. This book was released on 1997-01-14 with total page 536 pages. Available in PDF, EPUB and Kindle. Book excerpt: Destined to become a market classic, Dynamic Hedging is the only practical reference in exotic options hedgingand arbitrage for professional traders and money managers Watch the professionals. From central banks to brokerages to multinationals, institutional investors are flocking to a new generation of exotic and complex options contracts and derivatives. But the promise of ever larger profits also creates the potential for catastrophic trading losses. Now more than ever, the key to trading derivatives lies in implementing preventive risk management techniques that plan for and avoid these appalling downturns. Unlike other books that offer risk management for corporate treasurers, Dynamic Hedging targets the real-world needs of professional traders and money managers. Written by a leading options trader and derivatives risk advisor to global banks and exchanges, this book provides a practical, real-world methodology for monitoring and managing all the risks associated with portfolio management. Nassim Nicholas Taleb is the founder of Empirica Capital LLC, a hedge fund operator, and a fellow at the Courant Institute of Mathematical Sciences of New York University. He has held a variety of senior derivative trading positions in New York and London and worked as an independent floor trader in Chicago. Dr. Taleb was inducted in February 2001 in the Derivatives Strategy Hall of Fame. He received an MBA from the Wharton School and a Ph.D. from University Paris-Dauphine.
Book Synopsis Risk Neutral Distributions Implied in Option Prices and Their Relevance for Monetary Policy by : Luca Cazzulani
Download or read book Risk Neutral Distributions Implied in Option Prices and Their Relevance for Monetary Policy written by Luca Cazzulani and published by . This book was released on 2001 with total page 153 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Implied Risk-neutral Probability Functions from Option Prices by : Bhupinder Bahra
Download or read book Implied Risk-neutral Probability Functions from Option Prices written by Bhupinder Bahra and published by . This book was released on 1997 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Complex Systems in Finance and Econometrics by : Robert A. Meyers
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.
Book Synopsis Stochastic Calculus for Finance I by : Steven Shreve
Download or read book Stochastic Calculus for Finance I written by Steven Shreve and published by Springer Science & Business Media. This book was released on 2005-06-28 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt: Developed for the professional Master's program in Computational Finance at Carnegie Mellon, the leading financial engineering program in the U.S. Has been tested in the classroom and revised over a period of several years Exercises conclude every chapter; some of these extend the theory while others are drawn from practical problems in quantitative finance
Book Synopsis Option Pricing Models and Volatility Using Excel-VBA by : Fabrice D. Rouah
Download or read book Option Pricing Models and Volatility Using Excel-VBA written by Fabrice D. Rouah and published by John Wiley & Sons. This book was released on 2012-06-15 with total page 456 pages. Available in PDF, EPUB and Kindle. Book excerpt: This comprehensive guide offers traders, quants, and students the tools and techniques for using advanced models for pricing options. The accompanying website includes data files, such as options prices, stock prices, or index prices, as well as all of the codes needed to use the option and volatility models described in the book. Praise for Option Pricing Models & Volatility Using Excel-VBA "Excel is already a great pedagogical tool for teaching option valuation and risk management. But the VBA routines in this book elevate Excel to an industrial-strength financial engineering toolbox. I have no doubt that it will become hugely successful as a reference for option traders and risk managers." —Peter Christoffersen, Associate Professor of Finance, Desautels Faculty of Management, McGill University "This book is filled with methodology and techniques on how to implement option pricing and volatility models in VBA. The book takes an in-depth look into how to implement the Heston and Heston and Nandi models and includes an entire chapter on parameter estimation, but this is just the tip of the iceberg. Everyone interested in derivatives should have this book in their personal library." —Espen Gaarder Haug, option trader, philosopher, and author of Derivatives Models on Models "I am impressed. This is an important book because it is the first book to cover the modern generation of option models, including stochastic volatility and GARCH." —Steven L. Heston, Assistant Professor of Finance, R.H. Smith School of Business, University of Maryland
Book Synopsis Multidimensional Integral Transformations by :
Download or read book Multidimensional Integral Transformations written by and published by CRC Press. This book was released on 1992 with total page 404 pages. Available in PDF, EPUB and Kindle. Book excerpt: A cross between a textbook and a monograph, this extensive introduction discusses all of the most important transformations, compiling information otherwise scattered throughout the literature. Attention is concentrated on the operational calculus of the major integral transformations and some of its applications, with an investigation of transforms in spaces of functions and of distributions. Annotation copyrighted by Book News, Inc., Portland, OR
Book Synopsis Handbook of Volatility Models and Their Applications by : Luc Bauwens
Download or read book Handbook of Volatility Models and Their Applications written by Luc Bauwens and published by John Wiley & Sons. This book was released on 2012-03-22 with total page 566 pages. Available in PDF, EPUB and Kindle. Book excerpt: A complete guide to the theory and practice of volatility models in financial engineering Volatility has become a hot topic in this era of instant communications, spawning a great deal of research in empirical finance and time series econometrics. Providing an overview of the most recent advances, Handbook of Volatility Models and Their Applications explores key concepts and topics essential for modeling the volatility of financial time series, both univariate and multivariate, parametric and non-parametric, high-frequency and low-frequency. Featuring contributions from international experts in the field, the book features numerous examples and applications from real-world projects and cutting-edge research, showing step by step how to use various methods accurately and efficiently when assessing volatility rates. Following a comprehensive introduction to the topic, readers are provided with three distinct sections that unify the statistical and practical aspects of volatility: Autoregressive Conditional Heteroskedasticity and Stochastic Volatility presents ARCH and stochastic volatility models, with a focus on recent research topics including mean, volatility, and skewness spillovers in equity markets Other Models and Methods presents alternative approaches, such as multiplicative error models, nonparametric and semi-parametric models, and copula-based models of (co)volatilities Realized Volatility explores issues of the measurement of volatility by realized variances and covariances, guiding readers on how to successfully model and forecast these measures Handbook of Volatility Models and Their Applications is an essential reference for academics and practitioners in finance, business, and econometrics who work with volatility models in their everyday work. The book also serves as a supplement for courses on risk management and volatility at the upper-undergraduate and graduate levels.
Book Synopsis Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives by : Jean-Pierre Fouque
Download or read book Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives written by Jean-Pierre Fouque and published by Cambridge University Press. This book was released on 2011-09-29 with total page 456 pages. Available in PDF, EPUB and Kindle. Book excerpt: Building upon the ideas introduced in their previous book, Derivatives in Financial Markets with Stochastic Volatility, the authors study the pricing and hedging of financial derivatives under stochastic volatility in equity, interest-rate, and credit markets. They present and analyze multiscale stochastic volatility models and asymptotic approximations. These can be used in equity markets, for instance, to link the prices of path-dependent exotic instruments to market implied volatilities. The methods are also used for interest rate and credit derivatives. Other applications considered include variance-reduction techniques, portfolio optimization, forward-looking estimation of CAPM 'beta', and the Heston model and generalizations of it. 'Off-the-shelf' formulas and calibration tools are provided to ease the transition for practitioners who adopt this new method. The attention to detail and explicit presentation make this also an excellent text for a graduate course in financial and applied mathematics.
Book Synopsis Introduction to the Economics and Mathematics of Financial Markets by : Jaksa Cvitanic
Download or read book Introduction to the Economics and Mathematics of Financial Markets written by Jaksa Cvitanic and published by MIT Press. This book was released on 2004-02-27 with total page 528 pages. Available in PDF, EPUB and Kindle. Book excerpt: An innovative textbook for use in advanced undergraduate and graduate courses; accessible to students in financial mathematics, financial engineering and economics. Introduction to the Economics and Mathematics of Financial Markets fills the longstanding need for an accessible yet serious textbook treatment of financial economics. The book provides a rigorous overview of the subject, while its flexible presentation makes it suitable for use with different levels of undergraduate and graduate students. Each chapter presents mathematical models of financial problems at three different degrees of sophistication: single-period, multi-period, and continuous-time. The single-period and multi-period models require only basic calculus and an introductory probability/statistics course, while an advanced undergraduate course in probability is helpful in understanding the continuous-time models. In this way, the material is given complete coverage at different levels; the less advanced student can stop before the more sophisticated mathematics and still be able to grasp the general principles of financial economics. The book is divided into three parts. The first part provides an introduction to basic securities and financial market organization, the concept of interest rates, the main mathematical models, and quantitative ways to measure risks and rewards. The second part treats option pricing and hedging; here and throughout the book, the authors emphasize the Martingale or probabilistic approach. Finally, the third part examines equilibrium models—a subject often neglected by other texts in financial mathematics, but included here because of the qualitative insight it offers into the behavior of market participants and pricing.
