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Risk Premiums In A Multi Factor Jump Diffusion Model For The Joint Dynamics Of Equity Options And Their Underlying
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Book Synopsis Risk Premiums in a Multi-Factor Jump-Diffusion Model for the Joint Dynamics of Equity Options and Their Underlying by : Robert Huitema
Download or read book Risk Premiums in a Multi-Factor Jump-Diffusion Model for the Joint Dynamics of Equity Options and Their Underlying written by Robert Huitema and published by . This book was released on 2014 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a new approach to measure premiums for volatility and jump risks in option markets. These risks are captured by a multi-factor jump-diffusion model for the joint evolution of the underlying and the implied volatility surface. This market-based approach enables us to carefully test and select the most relevant risk factors in option markets. We extend the approach of Schonbucher (1998) to processes that include jumps and derive a condition that ensures absence of dynamic arbitrage. As this condition is derived under the physical measure, it incorporates a premium for each risk factor in the model. We then interpret the no-arbitrage constraint as a noisy measurement of these risk premiums and other latent variables such as the volatility and jump-intensity of the underlying. This allows us to dynamically calibrate these variables to data from several markets using a Bayesian filtering framework. The results shed new light on how option risk premiums vary over time and across markets. As our approach provides an accurate and arbitrage-free description of option price dynamics it can also be used for risk management of portfolios of options and for testing dynamic option strategies.
Book Synopsis Implied Volatility Risk Premiums by : Bas Peeters
Download or read book Implied Volatility Risk Premiums written by Bas Peeters and published by . This book was released on 2008 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: We incorporate risk premiums for stochastic implied volatility in an arbitrage-free model describing the joint dynamics of options and the security underlying these options. As this model directly describes the implied volatility surface, it also captures dynamics exclusively residing in the option markets. Because an arbitrage-free multi-factor description of this model has yet to be developed, we specify to a stochastic implied volatility model with a single factor determining the dynamics of the implied volatility. Parameters in this model are estimated for several markets, and for the Samp;P 500 the resulting implied volatility risk premium is compared to risk premium estimates from models that describe the instantaneous volatility.
Book Synopsis Jump-diffusion Long-run Risks Models, Variance Risk Premium and Volatility Dynamics by : Jianjian Jin
Download or read book Jump-diffusion Long-run Risks Models, Variance Risk Premium and Volatility Dynamics written by Jianjian Jin and published by . This book was released on 2013 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis American and European Options in Multi-Factor Jump-Diffusion Models, Near Expiry by : Sergei Levendorskii
Download or read book American and European Options in Multi-Factor Jump-Diffusion Models, Near Expiry written by Sergei Levendorskii and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We derive a general formula for the time decay, theta, for out-of-the-money European options on stocks and bonds at expiry, in terms of the density of jumps and payoff. Explicit formulas are derived for the standard put and call options, exchange options in stochastic volatility and local volatility models, and options on bonds in ATSMs. Using these formulas, we show that in the presence of jumps, the limit of the no-exercise region for American options as time to expiry tends to 0 may be larger than in the pure diffusion case. In particular, for many families of non-Gaussian processes used in empirical studies of financial markets, the early exercise boundary for the American put without dividends is separated from the strike price by a non-vanishing margin.
Book Synopsis Financial Modelling with Jump Processes by : Peter Tankov
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
Book Synopsis The Pricing of Jump Propagation by : Du Du
Download or read book The Pricing of Jump Propagation written by Du Du and published by . This book was released on 2017 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the joint time series of the S&P500 index and its options with a two-factor Hawkes jump-diffusion model that captures jump propagation (i.e., the phenomenon in which the strike of one jump substantially raises the probability for more to follow). The propagation effect uncovered from the joint data is severe but short-lived. On average, this component takes up more than two-thirds of the total jump risks. Our jump specification proves crucial not only in reconciling the dynamics implied from the joint data but also in explaining the time series of option-implied volatility skew.
Book Synopsis The Equity Risk Premium by : Bradford Cornell
Download or read book The Equity Risk Premium written by Bradford Cornell and published by John Wiley & Sons. This book was released on 1999-05-26 with total page 250 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Equity Risk Premium-the difference between the rate of return on common stock and the return on government securities-has been widely recognized as the key to forecasting future returns on the stock market. Though relatively simple in theory, understanding and making practical use of the equity risk premium concept has been dauntingly complex-until now. In The Equity Risk Premium, financial advisor, author, and scholar Bradford Cornell makes accessible for the first time an authoritative explanation of the equity risk premium and how it works in the real world. Step-by-step, his lucid, nontechnical presentation leads the reader to a new and more enlightened basis for making asset allocation choices. Cornell begins his analysis by looking at the equity risk premium in the light of stock market history. He examines the use of historical data in estimating future stock market performance, including the historical relationship between stock returns and risk premium, the impact of survival bias, and the effect of long-horizon stock and bond returns. Using the stock market boom of the 1990s as a case study, Cornell demonstrates what equity risk premium analysis can tell us about whether stock prices are high or low, whether the stock market itself may have changed, and whether indeed a new economic paradigm of higher earnings and dividend growth is now in place. Cornell analyzes forward-looking estimates of the equity risk premium through the lens of various competing approaches and assesses the relative merits of each. Among those scrutinized are the Discounted Cash Flow model, the Kaplan-Rubeck study, the Welch survey, and the Fama-French Aggregate IRR analysis. His insights on risk aversion theory, on the types of risk that have been rewarded over time, and on changing investor demographics all supply the sophisticated investor with important pieces of the risk premium puzzle. In his invaluable summing up of the equity risk premium and the long-run outlook for common stocks, Cornell weighs the evidence and assays the impact of a lower equity risk premium in the future-and its profound implications for investments, corporate decision making, and retirement planning. The product of years of serious analysis and hard-won insights, The Equity Risk Premium is essential reading for institutional investors, money managers, corporate financial officers, and all others who require a higher level of market analysis. "The Equity Risk Premium plays a critical role in legal and regulatory matters related to corporate finance. Along with the cost of debt, it is the most important determinant of a company's cost of capital. As such, it is an integral part of the decision-making process in corporate finance. For instance, whether or not a major acquisition makes sense can depend on the assumed value of the equity risk premium. In addition, the equity risk premium is an issue that regulatory bodies consider when they set fair rates of return for regulated companies. Cornell's book is an important contribution because it includes both an historical analysis of the equity risk premium and provides tools for forecasting reasonable levels of the risk premium in the years ahead."-Theodore N. Miller, Partner, Sidley & Austin. "Estimating how well stocks will do in the future from how well they have done in the past is like driving a car while looking in the rearview mirror. Brad Cornell provides us with an important forward-looking view in this easily understood guide to the equity risk premium and confounds the popular view that stocks will do well in the future because they have done well in the past."-Michael Brennan, Past President of the American Finance Association and Professor of Finance at the University of California at Los Angeles.
Book Synopsis The Joint Dynamics of Equity Market Factors by : Peter Christoffersen
Download or read book The Joint Dynamics of Equity Market Factors written by Peter Christoffersen and published by . This book was released on 2014 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: The four equity market factors from Fama and French (1993) and Carhart (1997) are pervasive in academic empirical asset pricing studies and in applied portfolio allocation. However, the joint distributional dynamics of the factors are rarely studied. For investors basing strategies on the factors or using them to model the returns of a wider set of assets, proper risk management requires knowing the joint factor dynamics which we model. We find striking evidence of asymmetric tail dependence across the factors. While the linear factor correlations are small and even negative, the extreme correlations are large and positive, so that the linear correlations drastically overstate the benefits of diversification across the factors. We model the nonlinear factor dependence and explore its economic importance in a portfolio allocation experiment which shows that significant economic value is earned when acknowledging the nonlinear dependence.
Book Synopsis Risk Analysis and Hedging of Parisian Options Under a Jump-Diffusion Model by : Kyoung-Kuk Kim
Download or read book Risk Analysis and Hedging of Parisian Options Under a Jump-Diffusion Model written by Kyoung-Kuk Kim and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: A Parisian option is a variant of a barrier option such that its payment is activated or deactivated only if the underlying asset remains above or below a barrier over a certain amount of time. We show that its complex payoff feature can cause dynamic hedging to fail. As an alternative, we investigate a quasi-static hedge of Parisian options under a more general jump-diffusion process. Specifically, we propose a strategy of decomposing a Parisian option into the sum of other contingent claims which are statically hedged. Through numerical experiments, we show the effectiveness of the suggested hedging strategy.
Book Synopsis Modeling the Time-Varying Risk Premium Using a Mixed GARCH and Jump Diffusion Model by : Bala Arshanapalli
Download or read book Modeling the Time-Varying Risk Premium Using a Mixed GARCH and Jump Diffusion Model written by Bala Arshanapalli and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we employ a combination of the jump diffusion and GARCH model in the mean equation to test the risk-return relationship in the U.S. stock returns. The results suggest a statistically significant relationship between the risk and the return if the risk measure includes components of smoothly changing variance and jump events. These results are not consistently observed when the traditional GARCH in the mean modeling is used.
Book Synopsis Encyclopedia of Finance by : Cheng-Few Lee
Download or read book Encyclopedia of Finance written by Cheng-Few Lee and published by Springer Science & Business Media. This book was released on 2006-07-27 with total page 861 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a major new reference work covering all aspects of finance. Coverage includes finance (financial management, security analysis, portfolio management, financial markets and instruments, insurance, real estate, options and futures, international finance) and statistical applications in finance (applications in portfolio analysis, option pricing models and financial research). The project is designed to attract both an academic and professional market. It also has an international approach to ensure its maximum appeal. The Editors' wish is that the readers will find the encyclopedia to be an invaluable resource.
Book Synopsis Symmetries in Jump-diffusion Models with Applications in Option Pricing and Credit Risk by : Jiri Kamiel Hoogland
Download or read book Symmetries in Jump-diffusion Models with Applications in Option Pricing and Credit Risk written by Jiri Kamiel Hoogland and published by . This book was released on 2002 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Jump and Volatility Risk and Risk Premia by : Pedro Santa-Clara
Download or read book Jump and Volatility Risk and Risk Premia written by Pedro Santa-Clara and published by . This book was released on 2004 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use a novel pricing model to filter times series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex-ante risk assessed by investors. We find that both components of risk vary substantially over time, are quite persistent, and correlate with each other and with the stock index. Using a simple general equilibrium model with a representative investor, we translate the filtered measures of ex-ante risk into an ex-ante risk premium. We find that the average premium that compensates the investor for the risks implicit in option prices, 10.1 percent, is about twice the premium required to compensate the same investor for the realized volatility, 5.8 percent. Moreover, the ex-ante equity premium that we uncover is highly volatile, with values between 2 and 32 percent. The component of the premium that corresponds to the jump risk varies between 0 and 12 percent.
Book Synopsis Jump Risk, Time-varying Risk Premia, and Technical Trading Profits by : Chenyang Feng
Download or read book Jump Risk, Time-varying Risk Premia, and Technical Trading Profits written by Chenyang Feng and published by . This book was released on 1997 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Option Markets, Return Predictability and Term Structure by : Yanhui Zhao
Download or read book Option Markets, Return Predictability and Term Structure written by Yanhui Zhao and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on eliciting information about underlying assets from the equity options markets, and improving our understanding of the term structure cost of equity. In the first essay, we find that high standard deviations of the volatility premium, of implied volatility innovations, and of the volatility term structure spread in equity options predict low underlying returns. This return predictability is not explained by the levels of these three variables, or by volatility of volatility, other known firm characteristics, or common risk factor models. We find support for interpreting the standard deviations of these option-based measures as forward-looking proxies of heterogeneous beliefs. In the second essay, we find that stocks with high risk-neutral skewness (RNS) exhibit abnormal performance driven by rebounds following poor performance. This behavior connects it to momentum crashes caused by reversal in past losers. In periods of post-recession rebounds and high market volatility when momentum crashes occur, a zero-investment high-low RNS portfolio has significant positive abnormal returns. The momentum anomaly is strongest (weakest) in stocks with the lowest (highest) RNS, consistent with the positive relationship of RNS to momentum crashes. These results hold controlling for trading frictions, other firm characteristics, and risk factors. We generalize our findings to all stocks by constructing an RNS factor-mimicking portfolio SKEW and find that a WML strategy that avoids high SKEW beta stocks has superior performance to the baseline and risk-managed WML strategies. In the third essay, we estimate the cost of equity capital term structure for the insurance industry as a whole, and several insurance sectors such as life/health and property/casualty. We use a vector autoregressive process to jointly model the dynamics of expected cash flows, beta, and the market risk premium. We obtain a closed form solution for the discount rate appropriate for each maturity. Our empirical analysis shows that for the insurance industry, the cost of equity based on our term structure model is on average nearly 299.6 basis points higher compared to the single period CAPM. This means that these insurers might overly invest if they rely on the single period CAPM.
Book Synopsis Measuring Systemic Risk-Adjusted Liquidity (SRL) by : Andreas Jobst
Download or read book Measuring Systemic Risk-Adjusted Liquidity (SRL) written by Andreas Jobst and published by International Monetary Fund. This book was released on 2012-08-01 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.
Book Synopsis Handbook of the Equity Risk Premium by : Rajnish Mehra
Download or read book Handbook of the Equity Risk Premium written by Rajnish Mehra and published by Elsevier Science Limited. This book was released on 2008 with total page 609 pages. Available in PDF, EPUB and Kindle. Book excerpt: Edited by Rajnish Mehra, this volume focuses on the equity risk premium puzzle, a term coined by Mehra and Prescott in 1985 which encompasses a number of empirical regularities in the prices of capital assets that are at odds with the predictions of standard economic theory.
