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Robust pricing and hedging via neural SDEs [article]

Patryk Gierjatowicz and Marc Sabate-Vidales and David Šiška and Lukasz Szpruch and Žan Žurič
2020 arXiv   pre-print
Thus the model can be used to simulate market scenarios needed for assessing risk profiles and hedging strategies. We develop and analyse novel algorithms needed for efficient use of neural SDEs.  ...  We validate our approach with numerical experiments using both local and stochastic volatility models.  ...  ACKNOWLEDGEMENTS This work was supported by the Alan Turing Institute under EPSRC grant no. EP/N510129/1. We thank Antoine Jacquier (Imperial) for fruitful discussions on the topic of the paper.  ... 
arXiv:2007.04154v1 fatcat:fsfqwpn34jf4lfidhxk6aqfxbe

Estimating option-implied distributions in illiquid markets and implementing the Ross recovery theorem

Emlyn Flint, Eben Maré
2018 South African Actuarial Journal  
The issue of calibration with sparse and noisy data is considered at length and a simple but robust fitting algorithm is proposed.  ...  Although the extraction of a forward-looking risk-neutral distribution is well-established in the literature, the issue of estimating distributions in an illiquid market is not.  ...  We are also grateful to the SAAJ editorial team for their help during the submission process.  ... 
doi:10.4314/saaj.v17i1.1 fatcat:szwcw7ahcbhlfgfrirni2gymni

Pricing Options in an Extended Black Scholes Economy with Illiquidity: Theory and Empirical Evidence

U. Çetin, R. Jarrow, P. Protter, M. Warachka
2006 The Review of financial studies  
Consistent with the market microstructure literature, the supply curve is upward sloping with purchases executed at higher prices and sales at lower prices.  ...  Empirical evidence reveals a significant liquidity cost intrinsic to every option.  ...  Specifically, we study the pricing and hedging of a European call option on a stock in an extended Black Scholes economy with illiquidity.  ... 
doi:10.1093/rfs/hhj014 fatcat:ebxtjmdhgrgdfehefhyl7v3me4

Page 3516 of Mathematical Reviews Vol. , Issue 2001E [page]

2001 Mathematical Reviews  
A min-max algorithm is used to solve the problem and illustrate the robust character of min- max with return and risk scenarios.  ...  The pricing, hedging, and replication of options in the context of illiquid markets is discussed and a nonlinear partial differential equation for an option replication strategy is derived.  ... 

Time-Varying Crash Risk: The Role of Stock Market Liquidity

Peter Christoffersen, Bruno Feunou, Yoontae Jeon, Chayawat Ornthanalai
2017 Social Science Research Network  
We conclude that our main results are robust to different definitions of market illiquidity.  ...  We use the fast Fourier transform (FFT) method first developed by Carr and Madan (1999) to numerically evaluate option prices.  ...  To construct higher risk-neutral moments, we focus on the payoff function G with power contracts.  ... 
doi:10.2139/ssrn.2797308 fatcat:tgdq5acebnasjebmc65z5bojn4

Liquidity effect in OTC options markets: Premium or discount?

Prachi Deuskar, Anurag Gupta, Marti G. Subrahmanyam
2011 Journal of financial markets  
markets, we find that more illiquid interest rate options in the OTC markets trade at higher prices relative to the more liquid options, controlling for other effects.  ...  Are illiquid options always priced lower than liquid options, similar to the liquidity effect consistently observed in the underlying asset markets, or does this depend on the institutional structure of  ...  Consequently, the market maker with a net short position may raise the price of illiquid options. 5 Hence, illiquidity in this case has a positive relationship with the price, rather than the 4 In recent  ... 
doi:10.1016/j.finmar.2010.08.003 fatcat:w6a7liwxlfcyhdydo27z2atimy

On Nonlinear Models of Markets with Finite Liquidity: Some Cautionary Notes

Kristoffer J. Glover, Peter W. Duck, David P. Newton
2010 SIAM Journal on Applied Mathematics  
The first may be attributed to the infinite second derivative associated with standard option payoff conditions, for which it is necessary to admit solutions with discontinuous first derivatives; perhaps  ...  Numerical results, and more particularly an asymptotic approach close to option expiry, reveal subtle differences from the Black-Scholes-Merton model.  ...  Analysis close to expiry: European options. Consider the behavior of the option value close to expiry.  ... 
doi:10.1137/080736119 fatcat:fhqjipj6knbd5crd4cmbxwe7ty

Is stock liquidity transferred and upgraded in acquisitions? Evidence from liquidity synergies in US freeze-outs

Konstantinos Konstantaras, Vasilios Sogiakas
2018 Annals of Operations Research  
The adjustment of target market prices for the attached option to participate in the bid in a new stochastic volatility framework reveals that the bulk of deal-generated wealth depends on the offered option  ...  Although the market penalizes the mean acquirer with negative abnormal returns, those with higher liquidity differences from their targets are suffering less because of their greater potential of liquidity  ...  The proxies employed conclude with option-based models, including Longstaff and Schwartz (2001) upper bound of the opportunity cost for missing the ability to liquidate stocks in the market for both  ... 
doi:10.1007/s10479-018-2870-7 fatcat:z4q3beurmfg5bel4yuehu5iu7u

State Price Densities Implied from Weather Derivatives

Wolfgang K. HHrdle, Brenda LLpez Cabrera, Huei-Wen Teng
2013 Social Science Research Network  
It is able to compute the SPD of both call and put options simultaneously, and is particularly robust when the market faces the illiquidity issue.  ...  Many approaches have been proposed in the last two decades to calibrate a SPD using nancial options from the bond and equity markets.  ...  Monte Carlo algorithm with Gibbs sampler can be adopted, so that no additional tuning procedures are required for exploring the posterior distribution and 4) it is is robust even if the market faces illiquidity  ... 
doi:10.2139/ssrn.2776593 fatcat:npcihqbtuzhfzj4okyfpt2szwq

Bilateral Netting and Systemic Liquidity Shortages in Banking Networks

Edoardo Gaffeo, Lucio Gobbi, Massimo Molinari
2018 Social Science Research Network  
Second, the balance between the two prongs of the trade-off depends on the metric used by regulators to define financial stability and the topological structure characterizing the interbank market.  ...  First, a state-contingent mandatory policy to bilaterally net mutual interbank exposures comes with a trade-off between the benefits of thwarting the channels of contagion and the harms of a greater concentration  ...  More precisely, while in the Eisenberg-Noe's algorithm the propagation process begins with a loss on the asset side -so that it spreads from a debtor to a creditor bank -in the Lee's algorithm the cascade  ... 
doi:10.2139/ssrn.3132933 fatcat:wahd3ectf5gnhiwsgq2kywjbie

Tracking market and non-traditional sources of risks in procyclical and countercyclical hedge fund strategies under extreme scenarios: a nonlinear VAR approach

François-Éric Racicot, Raymond Théoret
2022 Financial Innovation  
shocks—over the subprime crisis in order to investigate their market timing activities.  ...  Our results suggest that the hedge fund strategies' betas respond more to illiquidity uncertainty than to illiquidity risk during crises.  ...  They embed real options related to growth opportunities that appreciate when market volatility, which is directly related to market illiquidity, increases.  ... 
doi:10.1186/s40854-021-00316-3 pmid:35281426 pmcid:PMC8898602 fatcat:g45n53pv2zddxjvq6cdptg4hsu

Optimum Liquidation Problem Associated with the Poisson Cluster Process [article]

A. Sadoghi, J. Vecer
2015 arXiv   pre-print
In this research, we develop a trading strategy for the discrete-time optimal liquidation problem of large order trading with different market microstructures in an illiquid market.  ...  The numerical results indicate that an optimal trading strategy is dependent on characteristics of the market microstructure.  ...  In our numerical simulation, we compare the performance of our algorithm with regard to various market characteristics and price impact functions.  ... 
arXiv:1507.06514v2 fatcat:rxmr2plllzdudpxbmj2m62g2sy

Sequential calibration of options

Erik Lindström, Jonas Ströjby, Mats Brodén, Magnus Wiktorsson, Jan Holst
2008 Computational Statistics & Data Analysis  
Robust calibration of option valuation models to quoted option prices is non-trivial but crucial for good performance.  ...  All calibration methods are also applied to daily European option data on the S&P 500 index, where the Heston, Bates and NIG-CIR models are considered.  ...  Acknowledgements We would like to thank an anonymous referee and the guest editor for helpful comments and suggestions. Erik  ... 
doi:10.1016/j.csda.2007.08.009 fatcat:wjpppw3w7rbmbe6ujasqa45zdm

Swing Pricing and Fragility in Open-end Mutual Funds

Dunhong Jin, Marcin T. Kacperczyk, Bige Kahraman, Felix Suntheim
2019 Social Science Research Network  
Abstract 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.  ...  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.  ...  Periods with market-wide stress are natural candidates to study the risk of fund runs. In our study, we measure market stress using abnormal values of option-implied volatility index (VIX).  ... 
doi:10.2139/ssrn.3280890 fatcat:sisu4q2xhzcs5ejboqjijsk4bq

Swing Pricing and Fragility in Open-end Mutual Funds

Dunhong Jin, Marcin Kacperczyk, Bige Kahraman, Felix Suntheim
2019 IMF Working Papers  
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.  ...  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.  ...  Periods with market-wide stress are natural candidates to study the risk of fund runs. In our study, we measure market stress using abnormal values of option-implied volatility index (VIX).  ... 
doi:10.5089/9781513518336.001 fatcat:nk3a7lpoyff2vakt4rvq44fz7u
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