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Journal articles on the topic 'Real options (Finance) Stochastic processes'

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Published: 4 June 2021

Last updated: 16 February 2022

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1

HEATH, DAVID, and ECKHARD PLATEN. "CURRENCY DERIVATIVES UNDER A MINIMAL MARKET MODEL WITH RANDOM SCALING." International Journal of Theoretical and Applied Finance 08, no. 08 (2005): 1157–77. http://dx.doi.org/10.1142/s0219024905003360.

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This paper uses an alternative, parsimonious stochastic volatility model to describe the dynamics of a currency market for the pricing and hedging of derivatives. Time transformed squared Bessel processes are the basic driving factors of the minimal market model. The time transformation is characterized by a random scaling, which provides for realistic exchange rate dynamics. The pricing of standard European options is studied. In particular, it is shown that the model produces implied volatility surfaces that are typically observed in real markets.

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2

Amédée-Manesme, Charles-Olivier, Michel Baroni, Fabrice Barthélémy, and Mahdi Mokrane. "The impact of lease structures on the optimal holding period for a commercial real estate portfolio." Journal of Property Investment & Finance 33, no. 2 (2015): 121–39. http://dx.doi.org/10.1108/jpif-02-2014-0010.

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Purpose – The purpose of this paper is to demonstrate the impact of lease duration and lease break options on the optimal holding period for a real estate asset or portfolio. Design/methodology/approach – The authors use a Monte Carlo simulation framework to simulate a real estate asset’s cash flows in which lease structures (rent, indexation pattern, overall lease duration and break options) are explicitly taken into account. The authors assume that a tenant exercises his/her option to break a lease if the rent paid is higher than the market rental value (MRV) of similar properties. The autho

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3

Jaeger, Peter. "Modelling Real World Using Stochastic Processes and Filtration." Formalized Mathematics 24, no. 1 (2016): 1–16. http://dx.doi.org/10.1515/forma-2016-0001.

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Summary First we give an implementation in Mizar [2] basic important definitions of stochastic finance, i.e. filtration ([9], pp. 183 and 185), adapted stochastic process ([9], p. 185) and predictable stochastic process ([6], p. 224). Second we give some concrete formalization and verification to real world examples. In article [8] we started to define random variables for a similar presentation to the book [6]. Here we continue this study. Next we define the stochastic process. For further definitions based on stochastic process we implement the definition of filtration. To get a better under

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4

AHLIP, REHEZ. "FOREIGN EXCHANGE OPTIONS UNDER STOCHASTIC VOLATILITY AND STOCHASTIC INTEREST RATES." International Journal of Theoretical and Applied Finance 11, no. 03 (2008): 277–94. http://dx.doi.org/10.1142/s0219024908004804.

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In this paper, we present a stochastic volatility model with stochastic interest rates in a Foreign Exchange (FX) setting. The instantaneous volatility follows a mean-reverting Ornstein–Uhlenbeck process and is correlated with the exchange rate. The domestic and foreign interest rates are modeled by mean-reverting Ornstein–Uhlenbeck processes. The main result is an analytic formula for the price of a European call on the exchange rate. It is derived using martingale methods in arbitrage pricing of contingent claims and Fourier inversion techniques.

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Li, Chenxu. "BESSEL PROCESSES, STOCHASTIC VOLATILITY, AND TIMER OPTIONS." Mathematical Finance 26, no. 1 (2013): 122–48. http://dx.doi.org/10.1111/mafi.12041.

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6

Ritchken, Peter, and Rob Trevor. "Pricing Options under Generalized GARCH and Stochastic Volatility Processes." Journal of Finance 54, no. 1 (1999): 377–402. http://dx.doi.org/10.1111/0022-1082.00109.

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7

Shastri, Kuldeep, and Kulpatra Wethyavivorn. "PRICING OF FOREIGN CURRENCY OPTIONS FOR ARBITRARY STOCHASTIC PROCESSES." Journal of Business Finance & Accounting 17, no. 2 (1990): 324–34. http://dx.doi.org/10.1111/j.1468-5957.1990.tb00563.x.

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8

SANDMANN, KLAUS, and MANUEL WITTKE. "IT'S YOUR CHOICE: A UNIFIED APPROACH TO CHOOSER OPTIONS." International Journal of Theoretical and Applied Finance 13, no. 01 (2010): 139–61. http://dx.doi.org/10.1142/s0219024910005711.

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We propose a unified framework for the pricing and hedging of chooser options on lognormal assets. This includes e.g. exchange or inflation rates under stochastic interest rates or equities under stochastic interest rates and dividend yields. This extends and includes chooser options under deterministic interest rates by a multidimensional model of an international economy with correlated stochastic processes. In this framework we derive closed form solutions of the arbitrage price for different specifications of chooser options. Also different hedge strategies are derived and their properties

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PAGLIARANI, STEFANO, and ANDREA PASCUCCI. "LOCAL STOCHASTIC VOLATILITY WITH JUMPS: ANALYTICAL APPROXIMATIONS." International Journal of Theoretical and Applied Finance 16, no. 08 (2013): 1350050. http://dx.doi.org/10.1142/s0219024913500507.

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We present new approximation formulas for local stochastic volatility models, possibly including Lévy jumps. Our main result is an expansion of the characteristic function, which is worked out in the Fourier space. Combined with standard Fourier methods, our result provides efficient and accurate formulas for the prices and the Greeks of plain vanilla options. We finally provide numerical results to illustrate the accuracy with real market data.

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10

Derman, Emanuel, and Iraj Kani. "Stochastic Implied Trees: Arbitrage Pricing with Stochastic Term and Strike Structure of Volatility." International Journal of Theoretical and Applied Finance 01, no. 01 (1998): 61–110. http://dx.doi.org/10.1142/s0219024998000059.

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In this paper we present an arbitrage pricing framework for valuing and hedging contingent equity index claims in the presence of a stochastic term and strike structure of volatility. Our approach to stochastic volatility is similar to the Heath-Jarrow-Morton (HJM) approach to stochastic interest rates. Starting from an initial set of index options prices and their associated local volatility surface, we show how to construct a family of continuous time stochastic processes which define the arbitrage-free evolution of this local volatility surface through time. The no-arbitrage conditions are

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11

Lee, Kuo-Jung, David S. Shyu, and Miao-Ling Dai. "The Valuation of Information Technology Investments by Real Options Analysis." Review of Pacific Basin Financial Markets and Policies 12, no. 04 (2009): 611–28. http://dx.doi.org/10.1142/s0219091509001770.

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This study establishes a dynamic model under real options analysis to analyze the optimal timing decision of information technology (IT) investments when the output price for firms is stochastic and benefits of IT investments are arisen from the increasing output price, increasing sale, and cost savings. We derive the closed form expression of the timing of IT investments and furthermore prove that IT investments rise at an increasing rate in economic booms and fall in economic busts. This study finds that increasing (decreasing) price volatility will delay (advance) the timing of IT investmen

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12

Dong, Zhi, and Tien Foo Sing. "Developers’ heterogeneity and real estate development timing options." Journal of Property Investment & Finance 35, no. 5 (2017): 472–88. http://dx.doi.org/10.1108/jpif-07-2016-0058.

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Purpose The purpose of this paper is to examine developers’ optimal development timing when developers are heterogeneous and have different marginal costs in a real estate development market. Design/methodology/approach This study uses a multiple-player game theoretic real option model and provides tractable results of asymmetric development strategies from a two-stochastic-variable model. Anecdotal evidence and market observations are presented. Findings Stronger developers (with low marginal costs) exercise real estate development options earlier than weaker developers (with high marginal co

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13

JIANG, GEORGE J. "STOCHASTIC VOLATILITY AND JUMP-DIFFUSION — IMPLICATIONS ON OPTION PRICING." International Journal of Theoretical and Applied Finance 02, no. 04 (1999): 409–40. http://dx.doi.org/10.1142/s0219024999000212.

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This paper conducts a thorough and detailed investigation on the implications of stochastic volatility and random jump on option prices. Both stochastic volatility and jump-diffusion processes admit asymmetric and fat-tailed distribution of asset returns and thus have similar impact on option prices compared to the Black–Scholes model. While the dynamic properties of stochastic volatility model are shown to have more impact on long-term options, the random jump is shown to have relatively larger impact on short-term near-the-money options. The misspecification risk of stochastic volatility as

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14

WILLEMS, SANDER. "LINEAR STOCHASTIC DIVIDEND MODEL." International Journal of Theoretical and Applied Finance 23, no. 07 (2020): 2050044. http://dx.doi.org/10.1142/s0219024920500442.

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In this paper, we propose a new model for pricing stock and dividend derivatives. We jointly specify dynamics for the stock price and the dividend rate such that the stock price is positive and the dividend rate nonnegative. In its simplest form, the model features a dividend rate that is mean-reverting around a constant fraction of the stock price. The advantage of directly specifying dynamics for the dividend rate, as opposed to the more common approach of modeling the dividend yield, is that it is easier to keep the distribution of cumulative dividends tractable. The model is nonaffine but

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15

MERINO, RAÚL, JAN POSPÍŠIL, TOMÁŠ SOBOTKA, TOMMI SOTTINEN, and JOSEP VIVES. "DECOMPOSITION FORMULA FOR ROUGH VOLTERRA STOCHASTIC VOLATILITY MODELS." International Journal of Theoretical and Applied Finance 24, no. 02 (2021): 2150008. http://dx.doi.org/10.1142/s0219024921500084.

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The research presented in this paper provides an alternative option pricing approach for a class of rough fractional stochastic volatility models. These models are increasingly popular between academics and practitioners due to their surprising consistency with financial markets. However, they bring several challenges alongside. Most noticeably, even simple nonlinear financial derivatives as vanilla European options are typically priced by means of Monte–Carlo (MC) simulations which are more computationally demanding than similar MC schemes for standard stochastic volatility models. In this pa

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16

SCHOUTENS, WIM, and STIJN SYMENS. "THE PRICING OF EXOTIC OPTIONS BY MONTE–CARLO SIMULATIONS IN A LÉVY MARKET WITH STOCHASTIC VOLATILITY." International Journal of Theoretical and Applied Finance 06, no. 08 (2003): 839–64. http://dx.doi.org/10.1142/s0219024903002249.

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Recently, stock price models based on Lévy processes with stochastic volatility were introduced. The resulting vanilla option prices can be calibrated almost perfectly to empirical prices. Under this model, we will price exotic options, like barrier, lookback and cliquet options, by Monte–Carlo simulation. The sampling of paths is based on a compound Poisson approximation of the Lévy process involved. The precise choice of the terms in the approximation is crucial and investigated in detail. In order to reduce the standard error of the Monte–Carlo simulation, we make use of the technique of co

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17

Edwards, Craig. "Integrating delta: An intuitive single-integral approach to pricing European options on diverse stochastic processes." Economics Letters 92, no. 1 (2006): 20–25. http://dx.doi.org/10.1016/j.econlet.2006.01.010.

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18

FUNAHASHI, HIDEHARU. "REPLICATION SCHEME FOR THE PRICING OF EUROPEAN OPTIONS." International Journal of Theoretical and Applied Finance 24, no. 03 (2021): 2150014. http://dx.doi.org/10.1142/s021902492150014x.

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This paper proposes an efficient method for calculating European option prices under local, stochastic, and fractional volatility models. Instead of directly calculating the density function of a target underlying asset, we replicate it from a simpler diffusion process with a known analytical solution for the European option. For this purpose, we derive six functions that characterize the density function of a diffusion process, for both the original and simpler processes and match these functions so that the latter mimics the former. Using the analytical formula, we then approximate the optio

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19

VAN DER STOEP, ANTHONIE W., LECH A. GRZELAK, and CORNELIS W. OOSTERLEE. "COLLOCATING VOLATILITY: A COMPETITIVE ALTERNATIVE TO STOCHASTIC LOCAL VOLATILITY MODELS." International Journal of Theoretical and Applied Finance 23, no. 06 (2020): 2050038. http://dx.doi.org/10.1142/s0219024920500387.

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We discuss a competitive alternative to stochastic local volatility models, namely the Collocating Volatility (CV) framework, introduced in [L. A. Grzelak (2019) The CLV framework — A fresh look at efficient pricing with smile, International Journal of Computer Mathematics 96 (11), 2209–2228]. The CV framework consists of two elements, a “kernel process” that can be efficiently evaluated and a local volatility function. The latter, based on stochastic collocation — e.g. [I. Babuška, F. Nobile & R. Tempone (2007) A stochastic collocation method for elliptic partial differential equations wi

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MADAN, DILIP B., and WIM SCHOUTENS. "TWO PROCESSES FOR TWO PRICES." International Journal of Theoretical and Applied Finance 17, no. 01 (2014): 1450005. http://dx.doi.org/10.1142/s0219024914500058.

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Postulating additivity of bid and ask prices for claims comonotone with a long or short stock position, two pricing processes are identified from data on bid and ask prices for options. It is observed that there are two separate put call parity relations in place, with the ask price for call less bid prices for put delivering an ask price for the forward-stock. Likewise the ask for puts less the bid for calls identifies the bid for the forward-stock. Two processes are introduced to determine bid and ask prices for claims comonotone with a long or short position in the stock. For a claim comono

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21

O'SULLIVAN, CONALL, and STEPHEN O'SULLIVAN. "PRICING EUROPEAN AND AMERICAN OPTIONS IN THE HESTON MODEL WITH ACCELERATED EXPLICIT FINITE DIFFERENCING METHODS." International Journal of Theoretical and Applied Finance 16, no. 03 (2013): 1350015. http://dx.doi.org/10.1142/s0219024913500155.

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We present an acceleration technique, effective for explicit finite difference schemes describing diffusive processes with nearly symmetric operators, called Super-Time-Stepping (STS). The technique is applied to the two-factor problem of option pricing under stochastic volatility. It is shown to significantly reduce the severity of the stability constraint known as the Courant-Friedrichs-Lewy condition whilst retaining the simplicity of the chosen underlying explicit method. For European and American put options under Heston's stochastic volatility model we demonstrate degrees of acceleration

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MERINO, R., J. POSPÍŠIL, T. SOBOTKA, and J. VIVES. "DECOMPOSITION FORMULA FOR JUMP DIFFUSION MODELS." International Journal of Theoretical and Applied Finance 21, no. 08 (2018): 1850052. http://dx.doi.org/10.1142/s0219024918500528.

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In this paper, we derive a generic decomposition of the option pricing formula for models with finite activity jumps in the underlying asset price process (SVJ models). This is an extension of the well-known result by Alòs [(2012) A decomposition formula for option prices in the Heston model and applications to option pricing approximation, Finance and Stochastics 16 (3), 403–422, doi: https://doi.org/10.1007/s00780-012-0177-0 ] for Heston [(1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options, The Review of Financial Studies 6 (2),

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23

ERIKSSON, JONATAN. "MONOTONICITY IN THE VOLATILITY OF SINGLE-BARRIER OPTION PRICES." International Journal of Theoretical and Applied Finance 09, no. 06 (2006): 987–96. http://dx.doi.org/10.1142/s0219024906003822.

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We generalize earlier results on barrier options for puts and calls and log-normal stock processes to general local volatility models and convex contracts. We show that Γ ≥ 0, that Δ has a unique sign and that the option price is increasing with the volatility for convex contracts in the following cases: • If the risk-free rate of return dominates the dividend rate, then it holds for up-and-out options if the contract function is zero at the barrier and for down-and-in options in general. • If the risk-free rate of return is dominated by the dividend rate, then it holds for down-and-out option

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24

Wilson, William, Sumadhur Shakya, and Bruce Dahl. "Valuing new random genetically modified (GM) traits with real options." Agricultural Finance Review 75, no. 2 (2015): 213–29. http://dx.doi.org/10.1108/afr-05-2014-0014.

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Purpose – The purpose of this paper is to develop an analytical model to value traits at different developmental phases and to determine the value of drought tolerance (DT) in wheat using GM technology. Design/methodology/approach – A stochastic binomial real-options model of GM traits was developed to estimate the value of a DT wheat trait. Findings – The results indicate that the value of DT wheat using GM technology is in-the-money at each development phase. The greatest value would accrue for the Prairie Gateway and Northern Great Plains regions in the USA. Research limitations/implication

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Pfnür, Andreas, and Stefan Armonat. "Modelling uncertain operational cash flows of real estate investments using simulations of stochastic processes." Journal of Property Investment & Finance 31, no. 5 (2013): 481–501. http://dx.doi.org/10.1108/jpif-12-2012-0061.

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26

BORMETTI, GIACOMO, VALENTINA CAZZOLA, and DANILO DELPINI. "OPTION PRICING UNDER ORNSTEIN-UHLENBECK STOCHASTIC VOLATILITY: A LINEAR MODEL." International Journal of Theoretical and Applied Finance 13, no. 07 (2010): 1047–63. http://dx.doi.org/10.1142/s0219024910006108.

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We consider the problem of option pricing under stochastic volatility models, focusing on the linear approximation of the two processes known as exponential Ornstein-Uhlenbeck and Stein-Stein. Indeed, we show they admit the same limit dynamics in the regime of low fluctuations of the volatility process, under which we derive the exact expression of the characteristic function associated to the risk neutral probability density. This expression allows us to compute option prices exploiting a formula derived by Lewis and Lipton. We analyze in detail the case of Plain Vanilla calls, being liquid i

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ZENG, PINGPING, YUE KUEN KWOK, and WENDONG ZHENG. "FAST HILBERT TRANSFORM ALGORITHMS FOR PRICING DISCRETE TIMER OPTIONS UNDER STOCHASTIC VOLATILITY MODELS." International Journal of Theoretical and Applied Finance 18, no. 07 (2015): 1550046. http://dx.doi.org/10.1142/s0219024915500466.

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Timer options are barrier style options in the volatility space. A typical timer option is similar to its European vanilla counterpart, except with uncertain expiration date. The finite-maturity timer option expires either when the accumulated realized variance of the underlying asset has reached a pre-specified level or on the mandated expiration date, whichever comes earlier. The challenge in the pricing procedure is the incorporation of the barrier feature in terms of the accumulated realized variance instead of the usual knock-out feature of hitting a barrier by the underlying asset price.

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Zhang, Jun. "Dynamic Index Optimal Investment Strategy Based on Stochastic Differential Equations in Financial Market Options." Wireless Communications and Mobile Computing 2021 (March 19, 2021): 1–9. http://dx.doi.org/10.1155/2021/5545956.

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With the gradual development and improvement of the financial market, financial derivatives such as futures and options have also become the objects of competition in the financial market. Therefore, how to make the most favorable and optimized investment and consumption when options are included? It has become a problem facing investors. Aiming at the optimal investment problem of investors, this paper studies the calculation of an optimal investment strategy in stochastic differential equations in financial market options on the basis of fuzzy theory. Now, stochastic calculus has become an i

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Takahashi, Akihiko, and Kohta Takehara. "An Asymptotic Expansion Approach to Currency Options with a Market Model of Interest Rates under Stochastic Volatility Processes of Spot Exchange Rates." Asia-Pacific Financial Markets 14, no. 1-2 (2007): 69–121. http://dx.doi.org/10.1007/s10690-007-9054-9.

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BENTH, FRED ESPEN, and JŪRATĖ ŠALTYTĖ-BENTH. "THE NORMAL INVERSE GAUSSIAN DISTRIBUTION AND SPOT PRICE MODELLING IN ENERGY MARKETS." International Journal of Theoretical and Applied Finance 07, no. 02 (2004): 177–92. http://dx.doi.org/10.1142/s0219024904002360.

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We model spot prices in energy markets with exponential non-Gaussian Ornstein–Uhlenbeck processes. We generalize the classical geometric Brownian motion and Schwartz' mean-reversion model by introducing Lévy processes as the driving noise rather than Brownian motion. Instead of modelling the spot price dynamics as the solution of a stochastic differential equation with jumps, it is advantageous from a statistical point of view to model the price process directly. Imposing the normal inverse Gaussian distribution as the statistical model for the Lévy increments, we obtain a superior fit compare

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LUDKOVSKI, MICHAEL. "FINANCIAL HEDGING OF OPERATIONAL FLEXIBILITY." International Journal of Theoretical and Applied Finance 11, no. 08 (2008): 799–839. http://dx.doi.org/10.1142/s0219024908005044.

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We extend the framework of real options to value the compound timing option owned by a manager of an industrial asset. The operator has control over the production modes, but faces operational constraints which introduce path-dependency. Moreover, the operator is only able to imperfectly hedge her income on the futures market. Using an exponential indifference valuation approach we construct a combined stochastic control formulation that merges the problems of optimal switching and indifference pricing in incomplete markets. We then present an iterative scheme for valuing operational flexibili

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Zhang, Jianling, Zhongzhan Zhang, and Weizhen Wang. "Testing against second-order stochastic dominance of multiple distributions." International Journal of Biomathematics 08, no. 03 (2015): 1550040. http://dx.doi.org/10.1142/s1793524515500400.

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Second-order stochastic dominance plays an important role in reliability and various branches of economics such as finance and decision-making under risk, and statistical testing for the stochastic dominance is often useful in practice. In this paper, we present a test of stochastic equality under the constraint of second-order stochastic dominance based on the theory of empirical processes. The asymptotic distribution of the test statistic is obtained, and a simple method to compute the critical value is derived. Simulation results and real data examples are presented to illustrate the propos

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ALFEUS, MESIAS, and ERIK SCHLÖGL. "ON SPREAD OPTION PRICING USING TWO-DIMENSIONAL FOURIER TRANSFORM." International Journal of Theoretical and Applied Finance 22, no. 05 (2019): 1950023. http://dx.doi.org/10.1142/s0219024919500237.

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Spread options are multi-asset options with payoffs dependent on the difference of two underlying financial variables. In most cases, analytically closed form solutions for pricing such payoffs are not available, and the application of numerical pricing methods turns out to be nontrivial. We consider several such nontrivial cases and explore the performance of the highly efficient numerical technique of Hurd & Zhou[(2010) A Fourier transform method for spread option pricing, SIAM J. Financial Math. 1(1), 142–157], comparing this with Monte Carlo simulation and the lower bound approximation

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Hicks, Will. "PT Symmetry, Non-Gaussian Path Integrals, and the Quantum Black–Scholes Equation." Entropy 21, no. 2 (2019): 105. http://dx.doi.org/10.3390/e21020105.

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The Accardi–Boukas quantum Black–Scholes framework, provides a means by which one can apply the Hudson–Parthasarathy quantum stochastic calculus to problems in finance. Solutions to these equations can be modelled using nonlocal diffusion processes, via a Kramers–Moyal expansion, and this provides useful tools to understand their behaviour. In this paper we develop further links between quantum stochastic processes, and nonlocal diffusions, by inverting the question, and showing how certain nonlocal diffusions can be written as quantum stochastic processes. We then go on to show how one can us

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Grissom, Terry V., James N. Berry, and Lay Cheng J. Lim. "Economics of development strategies utilising option and portfolio analytics." Journal of European Real Estate Research 3, no. 2 (2010): 117–37. http://dx.doi.org/10.1108/17539261011062600.

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PurposeThe purpose of this paper is to integrate land use and option pricing theories using case study analyses to compare a portfolio of uses comprising single and mixed‐use development on the same site and assess the effects on the risk‐return profile of potential development schemes. The integration of land use development based on highest and best use (HBU) is tested against a combination of uses on the selected sites at a point in time in the downswing of the real estate cycle.Design/methodology/approachThe proposed methodology integrates the development valuation approach with option the

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Pan, Hong Yu Xin, and Jun Song. "Volatility cones and volatility arbitrage strategies – empirical study based on SSE ETF option." China Finance Review International 7, no. 2 (2017): 203–27. http://dx.doi.org/10.1108/cfri-05-2016-0041.

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Purpose Using volatility cones as the estimate of actual volatility instead of GARCH models, the purpose of this paper is to explore whether volatility arbitrage strategy can provide positive profits and how the transaction costs existed in the real market affect the effectiveness of volatility arbitrage strategy. Design/methodology/approach A number of hedging approaches proposed to improve the hedging results and final returns of Black-Scholes model are analyzed and compared. Findings The general finding is that volatility arbitrage strategy can provide satisfactory returns based on the samp

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Huang, Jianbo, Jian Liu, and Yulei Rao. "Binary Tree Pricing to Convertible Bonds with Credit Risk under Stochastic Interest Rates." Abstract and Applied Analysis 2013 (2013): 1–8. http://dx.doi.org/10.1155/2013/270467.

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The convertible bonds usually have multiple additional provisions that make their pricing problem more difficult than straight bonds and options. This paper uses the binary tree method to model the finance market. As the underlying stock prices and the interest rates are important to the convertible bonds, we describe their dynamic processes by different binary tree. Moreover, we consider the influence of the credit risks on the convertible bonds that is described by the default rate and the recovery rate; then the two-factor binary tree model involving the credit risk is established. On the b

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Jaeger, Peter. "Introduction to Stopping Time in Stochastic Finance Theory." Formalized Mathematics 25, no. 2 (2017): 101–5. http://dx.doi.org/10.1515/forma-2017-0010.

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Summary We start with the definition of stopping time according to [4], p.283. We prove, that different definitions for stopping time can coincide. We give examples of stopping time using constant-functions or functions defined with the operator max or min (defined in [6], pp.37–38). Finally we give an example with some given filtration. Stopping time is very important for stochastic finance. A stopping time is the moment, where a certain event occurs ([7], p.372) and can be used together with stochastic processes ([4], p.283). Look at the following example: we install a function ST: {1,2,3,4}

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Lekander, Jon R. G. M. "How do institutional pension managers consider real estate." Journal of Property Investment & Finance 35, no. 1 (2017): 26–43. http://dx.doi.org/10.1108/jpif-05-2016-0033.

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Purpose The asset allocation decision for a pension portfolio needs to consider several, sometimes conflicting, aspects. Most pension managers use models and processes that are developed for the traditional asset classes for analyzing this problem. The purpose of this paper is to investigate how real estate is included in this process, for what purpose and how the real estate portfolio is constructed. Design/methodology/approach Seven individuals responsible for the asset allocation process were interviewed, and their responses were analyzed with regards to organizational options and their rea

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Power, Gabriel J., Charli D. Tandja M., Josée Bastien, and Philippe Grégoire. "Measuring infrastructure investment option value." Journal of Risk Finance 16, no. 1 (2015): 49–72. http://dx.doi.org/10.1108/jrf-05-2014-0072.

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Purpose – The purpose of this paper is to propose a risk-based framework to estimate the option value of infrastructure investment, accounting for the stochastic behavior of both financial and physical (engineering) variables. Design/methodology/approach – This study uses a real-options approach and computes the optimal investment dates and option values using Least Squares Monte Carlo, both the original Longstaff – Schwartz algorithm and the constrained Least Squares approach of Le tourneau – Stentoft. Findings – Real-option value for infrastructure investment is substantial. It is beneficial

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BOYARCHENKO, SVETLANA, and SERGEI LEVENDORSKIĬ. "SINH-ACCELERATION: EFFICIENT EVALUATION OF PROBABILITY DISTRIBUTIONS, OPTION PRICING, AND MONTE CARLO SIMULATIONS." International Journal of Theoretical and Applied Finance 22, no. 03 (2019): 1950011. http://dx.doi.org/10.1142/s0219024919500110.

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Characteristic functions of several popular classes of distributions and processes admit analytic continuation into unions of strips and open coni around [Formula: see text]. The Fourier transform techniques reduce calculation of probability distributions and option prices in the evaluation of integrals whose integrands are analytic in domains enjoying these properties. In the paper, we suggest to use changes of variables of the form [Formula: see text] and the simplified trapezoid rule to evaluate the integrals accurately and fast. We formulate the general scheme, and apply the scheme for cal

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DULOV, EUGENE V., HUMBERTO SARRIA ZAPATA, and NATALIA A. ANDRIANOVA. "GENERALIZED SINGULAR VALUE DECOMPOSITION AND ITS APPLICATIONS IN MODEL ANALYSIS." International Journal of Theoretical and Applied Finance 09, no. 02 (2006): 171–84. http://dx.doi.org/10.1142/s0219024906003500.

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For a variety of processes we can observe and register their characteristics, making up a sequence of measurement vectors or matrices (rectangular in general). Our goal is to extract some model dependent information using the available information. Such approaches are typical in technology (for a neat chemistry example, see [7,9]) and model analysis like parameter identification of linear stochastic dynamic systems. Since a stochastic nature of financial and economic data is evident, we can extend this data analysis technique to a number of new applications. If we are successful, some kind of

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KEEL, SIMON, FLORIAN HERZOG, HANS P. GEERING, and LORENZ M. SCHUMANN. "OPTIMAL PORTFOLIO CONSTRUCTION UNDER PARTIAL INFORMATION FOR A BALANCED FUND." International Journal of Theoretical and Applied Finance 10, no. 06 (2007): 1015–42. http://dx.doi.org/10.1142/s0219024907004536.

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The model parameters in optimal asset allocation problems are often assumed to be deterministic. This is not a realistic assumption since most parameters are not known exactly and therefore have to be estimated. We consider investment opportunities which are modeled as local geometric Brownian motions whose drift terms may be stochastic and not necessarily measurable. The drift terms of the risky assets are assumed to be affine functions of some arbitrary factors. These factors themselves may be stochastic processes. They are modeled to have a mean-reverting behavior. We consider two types of

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Bladt, Mogens. "A Review on Phase-type Distributions and their Use in Risk Theory." ASTIN Bulletin 35, no. 01 (2005): 145–61. http://dx.doi.org/10.2143/ast.35.1.583170.

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Phase-type distributions, defined as the distributions of absorption times of certain Markov jump processes, constitute a class of distributions on the positive real axis which seems to strike a balance between generality and tractability. Indeed, any positive distribution may be approximated arbitrarily closely by phase-type distributions whereas exact solutions to many complex problems in stochastic modeling can be obtained either explicitly or numerically. In this paper we introduce phase-type distributions and retrieve some of their basic properties through appealing probabilistic argument

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CARR, PETER, and WIM SCHOUTENS. "HEDGING UNDER THE HESTON MODEL WITH JUMP-TO-DEFAULT." International Journal of Theoretical and Applied Finance 11, no. 04 (2008): 403–14. http://dx.doi.org/10.1142/s0219024908004865.

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In this paper, we will explain how to perfectly hedge under Heston's stochastic volatility model with jump-to-default, which is in itself a generalization of the Merton jump-to-default model and a special case of the Heston model with jumps. The hedging instruments we use to build the hedge will be as usual the stock and the bond, but also the Variance Swap (VS) and a Credit Default Swap (CDS). These instruments are very natural choices in this setting as the VS hedges against changes in the instantaneous variance rate, while the CDS protects against the occurrence of the default event. First,

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Marelli, Enrico Piero, Maria Laura Parisi, and Marcello Signorelli. "Economic convergence in the EU and Eurozone." Journal of Economic Studies 46, no. 7 (2019): 1332–44. http://dx.doi.org/10.1108/jes-03-2019-0139.

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Purpose The purpose of this paper is to analyse whether several groups of European countries are on track for real “conditional” economic convergence in per capita income and the likely speed of convergence. The paper focusses also on the changes of the convergence processes over time. Design/methodology/approach Unlike the simple “absolute convergence”, it explores the concept of “conditional” or “club” convergence. Moreover, it adopts the approach of extending the univariate model to take into account the panel dimension over an extended time interval and endogeneity. Findings A process of r

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BRODY, DORJE C., LANE P. HUGHSTON, and ANDREA MACRINA. "INFORMATION-BASED ASSET PRICING." International Journal of Theoretical and Applied Finance 11, no. 01 (2008): 107–42. http://dx.doi.org/10.1142/s0219024908004749.

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A new framework for asset price dynamics is introduced in which the concept of noisy information about future cash flows is used to derive the corresponding price processes. In this framework an asset is defined by its cash-flow structure. Each cash flow is modelled by a random variable that can be expressed as a function of a collection of independent random variables called market factors. With each such "X-factor" we associate a market information process, the values of which we assume are accessible to market participants. Each information process consists of a sum of two terms; one contai

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Liang, Yunping, and Baabak Ashuri. "Option Value of Contingent Finance Support in Transportation Public–Private Partnership Projects." Transportation Research Record: Journal of the Transportation Research Board 2674, no. 7 (2020): 555–65. http://dx.doi.org/10.1177/0361198120923668.

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Uncertainties about construction cost and operational revenues are two major risks in transportation public–private partnership (P3) projects. These uncertainties put projects at risk of being unable to fulfill annual debt repayment obligations. When a project generates insufficient cash flow to service the debt in a certain year, it normally has to go for short-term financing by borrowing short-term loans. With the help of revenue risk-sharing mechanisms, supported projects may be able to get rid of unexpected interest disbursement. The objectives of this paper are twofold: ( 1 ) evaluate the

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Fregonara, Elena, and Diego Ferrando. "How to Model Uncertain Service Life and Durability of Components in Life Cycle Cost Analysis Applications? The Stochastic Approach to the Factor Method." Sustainability 10, no. 10 (2018): 3642. http://dx.doi.org/10.3390/su10103642.

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The durability of components is characterized by uncertainty, and, consequently, their estimated service life is critical for building project evaluation. Data on the durability of components used as life cycle cost analysis (LCCA) model input are able to influence model construction, model outputs, and residual value calculations. This implies dealing with uncertainty in cost estimates, according to the real estate market dynamics and the economic trends of the construction sector, and in service life estimates during the project time-horizon. This paper acknowledges the methodology presented

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Ibaibarriaga, Leire, Carmen Fernández, Andrés Uriarte, and Beatriz A. Roel. "A two-stage biomass dynamic model for Bay of Biscay anchovy: a Bayesian approach." ICES Journal of Marine Science 65, no. 2 (2008): 191–205. http://dx.doi.org/10.1093/icesjms/fsn002.

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Abstract Ibaibarriaga, L., Fernández, C., Uriarte, A., and Roel, B. A. 2008. A two-stage biomass dynamic model for Bay of Biscay anchovy: a Bayesian approach. – ICES Journal of Marine Science, 65: 191–205. A two-stage biomass-based state-space model with stochastic recruitment processes and deterministic dynamics was developed for the Bay of Biscay anchovy population. It is fitted in a Bayesian context with posterior computations carried out using Markov chain Monte Carlo techniques. The model is tested first on a simulated dataset and the effects of different modelling assumptions and of miss

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