International Journal of Theoretical and Applied Finance

We develop a new approach for pricing both continuous-time and discrete-time American options which is based on the fact that any American option is equivalent to a European one with a consumption process involved. This approach admits the construction of an upper bound (a lower bound) on the true price using some lower bound (an upper bound) by Monte Carlo simulation. A number of effective estimators of upper and lower bounds with the reduced variance are proposed. The method is supported by numerical experiments which look promising.

In this paper cointegrating relations between six East and Southeast Asian markets relative to a base cluster of three global markets are investigated in the framework of zero-non-zero (ZNZ) patterned vector error-correction modelling (VECM). The analysis focuses upon market relations both before and after the Asian currency crisis. The strength of integration between markets is also evaluated by extending Geweke's measurement approach within this framework. The results show that, since the crisis, estimated integration strengths have become more powerful between the Asian and global markets, with the US market leading both the Asian markets and the markets of Japan and the UK.

We study a novel issue in the real-options-based technology innovation literature by means of double barrier contingent claims analysis. We show how much a firm with the monopoly over a project is willing to spend in investment technology innovation that softens the irreversible cost of accessing the project before its irreversible demise. The answer depends on the project's characteristics and on the effectiveness demanded from technology innovation.

We construct the contingent claims models that price participating policies with rate guarantees and default risk. These policies are characterized by the sharing of profits from an investment portfolio between the insurer and the policyholders. A certain reserve distribution mechanism is employed to credit interest at or above certain specified guaranteed rate periodically to the policyholders. Besides the reversionary reserve distribution, terminal bonus is also paid to the policyholders if the terminal surplus is positive. However, the insurer may default at maturity and the policyholders can only receive the residual assets. By neglecting market frictions, mortality risk and surrender option, and under certain assumptions on the interest rate crediting mechanism, we are able to find analytic approximation solution to the pricing model using perturbation techniques. We also develop effective finite difference algorithms for the numerical solution of the contingent claims models. Pricing behaviors of these participating policies with respect to various parameters in the pricing models are examined.

The aim of this work is to present a modification of the standard binomial method which allows to price American barrier options improving the efficiency of the trinomial methods. Our approach is based on a suitable interpolation of binomial values and allows to price and hedge such options also in the critical case of near barriers. All the different types of single barrier options are considered, in the case of knock-in barriers a new implementation of the binomial method is provided.

A general model for intraday stock price movements is studied. The asset price dynamics is described by a marked point process Y, whose local characteristics (in particular the jump-intensity) depend on some unobservable hidden state variable X. The dynamics of Y and X may be strongly dependent. In particular the two processes may have common jump times, which means that the actual trading activity may affect the law of X and could be also related to the possibility of catastrophic events. The agents, in this model, are restricted to observing past asset prices. This leads to a filtering problem with marked point process observations. The conditional law of X given the past asset prices (the filter) is characterized as the unique weak solution of the Kushner–Stratonovich equation. An explicit representation of the filter is obtained by the Feyman–Kac formula using a linearization method. This representation allows us to provide a recursive algorithm for the filter computation.

We describe the Bond Market Model, a multi-factor interest rate term structure model, where it is possible to price with Black-like formulas the three classes of over-the-counter plain vanilla options. We derive the prices of caps/floors, bond options and swaptions. A comparison with Libor Market Model and Swap Market Model is discussed in detail, underlining advantages and limits of the different approaches.

Crash hedging strategies are derived as solutions of non-linear differential equations which itself are consequences of an equilibrium strategy which make the investor indifferent to uncertain (down) jumps. This is done in the situation where the investor has a logarithmic utility and where the market coefficients after a possible crash may change. It is scrutinized when and in which sense the crash hedging strategy is optimal. The situation of an investor with incomplete information is considered as well. Finally, introducing the crash horizon, an implied volatility is derived.

We consider an investor who has available a bank account (risk free asset) and a stock (risky asset). It is assumed that the interest rate for the risk free asset is zero and the stock price is modeled by a diffusion process. The wealth can be transferred between the two assets under a proportional transaction cost. Investor is allowed to obtain loans from the bank and also to short-sell the risky asset when necessary. The optimization problem addressed here is to maximize the probability of reaching a financial goal a before bankruptcy and to obtain an optimal portfolio selection policy. Our optimal policy is a combination of local-time processes and jumps. In the interesting case, it is determined by a non-linear switching curve on the state space. This work is a generalization of Weerasinghe [20], where this switching boundary is a vertical line segment.