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Transaction Costs And Stochastic Dominance Efficiency In The Index Futures Options Market
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Book Synopsis Transaction Costs and Stochastic Dominance Efficiency in the Index Futures Options Market by : Michal Czerwonko
Download or read book Transaction Costs and Stochastic Dominance Efficiency in the Index Futures Options Market written by Michal Czerwonko and published by . This book was released on 2006 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the stochastic dominance efficiency in the presence of transaction costs for Samp;P 500 index futures call and put options by estimating bounds on reservation write and reservation purchase prices and then verifying whether the observed option prices satisfy them. The bounds are estimated from data on past realizations of the underlying asset and under various data-based assumptions about the investor-assumed distribution of that asset. The bounds are then compared to observed market prices and several violations are identified under all distributional assumptions, although these violations are relatively few under forward-looking distributions. The paper then derives trading strategies that exploit these violations and increase expected utility for any risk averse investor. It develops a metric that evaluates the increase in expected utility for any given investor within a certain utility class and links it with the traditional second degree stochastic dominance criterion. Last, it demonstrates by out-of-sample tests with realized underlying asset prices that these strategies to exploit the mispricing of index futures options do indeed improve risk-adjusted returns for risk averse investors.
Book Synopsis The Stochastic Dominance Valuation of Options Under Transaction Costs by : Michal Czerwonko
Download or read book The Stochastic Dominance Valuation of Options Under Transaction Costs written by Michal Czerwonko and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the first essay American call and put options on the S & P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (CP, 2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid prices do, while evidence of underpriced calls and puts over this period is scant. In out-of-sample tests, the inclusion of short positions in such overpriced calls, puts, and, particularly, straddles in the market portfolio is shown to increase the expected utility of any risk averse investor and also increase the Sharpe ratio, net of transaction costs and bid-ask spreads. The results are strongly supportive of mispricing and also strongly supportive of the CP bounds as screening mechanisms for mispriced options. The second essay introduces a result for call lower bound more powerful that the one applied in the first part of this thesis. The Proposition 5 call lower bound in Constantinides and Perrakis (2002) is shown to have a non-trivial limit as the time interval tends to zero. This establishes the bound as the first call lower bound known in the literature on derivative pricing in the presence of transaction costs with a non-trivial limit. The bound is shown to be tight even for a low number of time subdivisions. Novel numerical methods to derive recursive expectations under a Markovian but non-identically distributed stochastic process are presented. The third essay relaxes an assumption in the first part of this thesis on the optimal trading policy in the presence of transaction costs. We derive the boundaries of the region of no transaction when the risky asset follows a mixed jump-diffusion instead of a simple diffusion process. These boundaries are shown to differ from their diffusion counterparts in relation to the jump intensity for lognormally distributed jump size. A general numerical approach is presented for iid risky asset returns in discrete time. An error in an earlier published work on the region of no transaction for discretized diffusions is demonstrated and corrected results are presented. Comparative results with a recent study on the same topic are presented and it is shown that the numerical algorithm has equally attractive approximation properties to the unknown continuous time limit.
Book Synopsis Stochastic Dominance Option Pricing by : Stylianos Perrakis
Download or read book Stochastic Dominance Option Pricing written by Stylianos Perrakis and published by Palgrave Macmillan. This book was released on 2019-05-16 with total page 277 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book illustrates the application of the economic concept of stochastic dominance to option markets and presents an alternative option pricing paradigm to the prevailing no arbitrage simultaneous equilibrium in the frictionless underlying and option markets. This new methodology was developed primarily by the author, working independently or jointly with other co-authors, over the course of more than thirty years. Among others, it yields the fundamental Black-Scholes-Merton option value when markets are complete, presents a new approach to the pricing of rare event risk, and uncovers option mispricing that leads to tradeable strategies in the presence of transaction costs. In the latter case it shows how a utility-maximizing investor trading in the market and a riskless bond, subject to proportional transaction costs, can increase his/her expected utility by overlaying a zero-net-cost portfolio of options bought at their ask price and written at their bid price, irrespective of the specific form of the utility function. The book contains a unified presentation of these methods and results, making it a highly readable supplement for educators and sophisticated professionals working in the popular field of option pricing. It also features a foreword by George Constantinides, the Leo Melamed Professor of Finance at the Booth School of Business, University of Chicago, USA, who was a co-author in several parts of the book.
Book Synopsis Stochastic Dominance Bounds on Option Prices in the Presence of Transaction Costs by : Michal Czerwonko
Download or read book Stochastic Dominance Bounds on Option Prices in the Presence of Transaction Costs written by Michal Czerwonko and published by . This book was released on 2002 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Are options on index futures profitable for risk averse investors? : Empirical evidence by : George M. Constantinides
Download or read book Are options on index futures profitable for risk averse investors? : Empirical evidence written by George M. Constantinides and published by . This book was released on 2010 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: American options on the S & P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out of sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk averse investor holding the market and cash, net of transaction costs and bid ask spreads. The results are economically significant and robust.
Book Synopsis Can the Black-Scholes Model Survive under Transaction Costs? An Affirmative Answer by : Michal Czerwonko
Download or read book Can the Black-Scholes Model Survive under Transaction Costs? An Affirmative Answer written by Michal Czerwonko and published by . This book was released on 2008 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the stochastic dominance bounds for call options in the presence of proportional transaction costs, developed in a discrete time and for a discrete or continuous state model of the returns of the underlying asset by Constantinides and Perrakis (CP, 2002, 2007). We consider a lognormal diffusion model of these returns and we formulate a discrete time trading version that converges to diffusion as the time partition becomes progressively more dense. Given the existence of a partition-independent and tight upper bound already derived in CP (2002), we focus on the lower bound, for which the results of that study were not available in a useful formulation. We then show that the CP lower bound for European call options converges to a non-trivial and tight limit that is a function of the transaction cost parameter. This limit defines a reservation purchase price under realistic trading conditions for the call options. The limit is a Black-Scholes type expression that becomes equal to the exact Black-Scholes value if the transaction cost parameter is set equal to zero, thus providing the only known generalization of the Black-Scholes model that produces useful results under transaction costs. We also develop a novel numerical algorithm that computes the CP lower bound for any discrete time partition and converges to the theoretical continuous time limit in a relatively small number of iterations. Last, we extend the lower bound results to American index options.
Book Synopsis Stochastic Dominance Option Pricing by : Stylianos Perrakis
Download or read book Stochastic Dominance Option Pricing written by Stylianos Perrakis and published by Springer. This book was released on 2019-05-03 with total page 277 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book illustrates the application of the economic concept of stochastic dominance to option markets and presents an alternative option pricing paradigm to the prevailing no arbitrage simultaneous equilibrium in the frictionless underlying and option markets. This new methodology was developed primarily by the author, working independently or jointly with other co-authors, over the course of more than thirty years. Among others, it yields the fundamental Black-Scholes-Merton option value when markets are complete, presents a new approach to the pricing of rare event risk, and uncovers option mispricing that leads to tradeable strategies in the presence of transaction costs. In the latter case it shows how a utility-maximizing investor trading in the market and a riskless bond, subject to proportional transaction costs, can increase his/her expected utility by overlaying a zero-net-cost portfolio of options bought at their ask price and written at their bid price, irrespective of the specific form of the utility function. The book contains a unified presentation of these methods and results, making it a highly readable supplement for educators and sophisticated professionals working in the popular field of option pricing. It also features a foreword by George Constantinides, the Leo Melamed Professor of Finance at the Booth School of Business, University of Chicago, USA, who was a co-author in several parts of the book.
Download or read book Stochastic Dominance written by Haim Levy and published by Springer Science & Business Media. This book was released on 2006-08-25 with total page 439 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is devoted to investment decision-making under uncertainty. The book covers three basic approaches to this process: the stochastic dominance approach; the mean-variance approach; and the non-expected utility approach, focusing on prospect theory and its modified version, cumulative prospect theory. Each approach is discussed and compared. In addition, this volume examines cases in which stochastic dominance rules coincide with the mean-variance rule and considers how contradictions between these two approaches may occur.
Book Synopsis Efficiency and Anomalies in Stock Markets by : Wing-Keung Wong
Download or read book Efficiency and Anomalies in Stock Markets written by Wing-Keung Wong and published by Mdpi AG. This book was released on 2022-02-17 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Efficient Market Hypothesis believes that it is impossible for an investor to outperform the market because all available information is already built into stock prices. However, some anomalies could persist in stock markets while some other anomalies could appear, disappear and re-appear again without any warning. A Special Issue on "Efficiency and Anomalies in Stock Markets" will be devoted to advancements in the theoretical development of market efficiency and anomaly in the Stock Market, as well as applications in Stock Market efficiency and anomalies.
Download or read book Options Markets written by John C. Cox and published by Prentice Hall. This book was released on 1985 with total page 518 pages. Available in PDF, EPUB and Kindle. Book excerpt: Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
Book Synopsis The Efficient Market Theory and Evidence by : Andrew Ang
Download or read book The Efficient Market Theory and Evidence written by Andrew Ang and published by Now Publishers Inc. This book was released on 2011 with total page 99 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Efficient Market Hypothesis (EMH) asserts that, at all times, the price of a security reflects all available information about its fundamental value. The implication of the EMH for investors is that, to the extent that speculative trading is costly, speculation must be a loser's game. Hence, under the EMH, a passive strategy is bound eventually to beat a strategy that uses active management, where active management is characterized as trading that seeks to exploit mispriced assets relative to a risk-adjusted benchmark. The EMH has been refined over the past several decades to reflect the realism of the marketplace, including costly information, transactions costs, financing, agency costs, and other real-world frictions. The most recent expressions of the EMH thus allow a role for arbitrageurs in the market who may profit from their comparative advantages. These advantages may include specialized knowledge, lower trading costs, low management fees or agency costs, and a financing structure that allows the arbitrageur to undertake trades with long verification periods. The actions of these arbitrageurs cause liquid securities markets to be generally fairly efficient with respect to information, despite some notable anomalies.
Download or read book Money written by John Eatwell and published by W. W. Norton & Company. This book was released on 1989 with total page 364 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume follows the course of the debate from the Bullionist Controversy of the Napoleonic period through the perennial arguments over the gold standard to the dispute between Keynesians, monetarist, and 'new classical macroeconomists, ' tracing the evolution of theory and doctrine over nearly 200 years.
Book Synopsis Stock Index Futures by : Charles M.S. Sutcliffe
Download or read book Stock Index Futures written by Charles M.S. Sutcliffe and published by Routledge. This book was released on 2018-01-18 with total page 534 pages. Available in PDF, EPUB and Kindle. Book excerpt: The global value of trading in index futures is about $20 trillion per year and rising and for many countries the value traded is similar to that traded on their stock markets. This book describes how index futures markets work and clearly summarises the substantial body of international empirical evidence relating to these markets. Using the concepts and tools of finance, the book also provides a comprehensive description of the economic forces that underlie trading in index futures. Stock Index Futures 3/e contains many teaching and learning aids including numerous examples, a glossary, essay questions, comprehensive references, and a detailed subject index. Written primarily for advanced undergraduate and postgraduate students, this text will also be useful to researchers and market participants who want to gain a better understanding of these markets.
Book Synopsis Consistent Testing for Stochastic Dominance by : Yoon-Jae Whang
Download or read book Consistent Testing for Stochastic Dominance written by Yoon-Jae Whang and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Equity Markets and Portfolio Analysis by : R. Stafford Johnson
Download or read book Equity Markets and Portfolio Analysis written by R. Stafford Johnson and published by John Wiley & Sons. This book was released on 2014-06-05 with total page 720 pages. Available in PDF, EPUB and Kindle. Book excerpt: Understand today's investment challenges and the role of the Bloomberg system In recent years, changes have swept through the investment industry like wildfire. Academia has followed along and provided new lenses for viewing this transformation, as well as new strategies for gaining a true understanding and knowledge of investment and financial markets. Now, Equity Markets and Portfolio Analysis has been created to further inform investment professionals and finance students on the basic concepts and strategies of investments, and to provide more detailed discussions on advanced strategies and models. The concepts covered in this book will help readers gain a better understanding of the markets and uses for an increasing number of securities, strategies, and methodologies. Equity Markets and Portfolio Analysis is the only core investment book that covers the functionality of Bloomberg terminals, increasingly critical tools both in the classroom and on the trading floor. As Bloomberg terminals now play a key role in the research, teaching, and managing of student investment funds, understanding the system's information and analytical functions has become more important than ever. In-depth coverage of fundamentals through more detailed concepts for students and professionals who want to better understand the evaluation, selection, and management of securities One-of-a-kind training and instructional course, introduction to Bloomberg investment subjects, and reference for CFA preparation Bloomberg material provided in an appendix accompanying each chapter, a useful option for professors Ideal for finance practitioners, investment bankers, and academics This unique resource will give readers both the foundational knowledge and the analytical tools necessary for investment success, both in the classroom and in the real world.
Book Synopsis The New Palgrave Dictionary of Money and Finance by : John Eatwell
Download or read book The New Palgrave Dictionary of Money and Finance written by John Eatwell and published by Springer. This book was released on 1992-10-14 with total page 869 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first reference work ever to be awarded the Eccles Prize for Excellence in Economic Writing from Columbia Business School. Continuing in the tradition of The New Palgrave , this 3-volume set provides an unparalleled guide to modern money, banking and finance. In over 1,000 substantial essays by leading academic and professional authorities, it provides the most comprehensive analysis available of contemporary theory and the fast-evolving global monetary and financial framework. In its scope and depth of coverage, it is indispensable for the academic and practitioner alike.
Book Synopsis Swing Pricing and Fragility in Open-end Mutual Funds by : Dunhong Jin
Download or read book Swing Pricing and Fragility in Open-end Mutual Funds written by Dunhong Jin and published by International Monetary Fund. This book was released on 2019-11-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
