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- Costs of goods transportation; economies of scale; real exchange rate; purchasing power parity; nonlinearity. (1)
- Financial Integration (1)
- Financial history (1)
- Financial integration (1)
- Interest-Rate Equalization (1)
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- International money (1)
- Jumps; continuous martingale; option pricing; L´evy density; double tails; local time. (1)
- Jumps; option pricing; static hedging; Monte Carlo; S&P 500 index options; stochastic volatility (1)
- Random time change; L´evy processes; characteristic functions; option pricing; exponential martingales; measure change (1)
- Real Interest Rates (1)
- Real interest rates real stock returns (1)
- Term structure; yield curve; interest rate caps; implied volatility; residual factors; extended Kalman Filter; quasi-maximum likelihood estimation. (1)
- Volatility smirk; central limit theorem; L´evy a-stable motion; self-similarity; option pricing (1)
Articles 1 - 11 of 11
Full-Text Articles in Business
Has International Financial Integration Increased?, Lawrence G. Goldberg, James R. Lothian, John Okunev
Has International Financial Integration Increased?, Lawrence G. Goldberg, James R. Lothian, John Okunev
CRIF Working Paper series
This paper compares the behavior of real interest rate differentials across the major countries under the Bretton Woods regime and the regime of floating exchanges that replaced it. The primary object is to investigate both the extent of market integration and its changes over time. For all fifteen possible country pairs real interest differentials are mean reverting, and in two-thirds of these cases indistinguishable from zero statistically. For all country pairs on average and for most such pairs individually, moreover, the estimated differentials are not appreciably different in absolute value than the differentials that we estimate for various money-market rates …
Static Hedging Of Standard Options, Peter Carr, Liuren Wu
Static Hedging Of Standard Options, Peter Carr, Liuren Wu
CRIF Working Paper series
We consider the hedging of derivative securities when the price movement of the underlying asset can exhibit random jumps. Under a one factor Markovian setting, we derive a spanning relation between a long term option and a continuum of short term options. We then apply this spanning relation to the static hedging of long term options with a finite choice of short term, more liquid options based on a quadrature rule. We use Monte Carlo simulation to determine the hedging error introduced by the quadrature approximation and compare this hedging error to the hedging error from a delta hedging strategy …
Term Structure Of Interest Rates, Yield Curve Residuals, And The Consistent Pricing Of Interest Rates And Interest Rate Derivatives, Massoud Heidari, Liuren Wu
Term Structure Of Interest Rates, Yield Curve Residuals, And The Consistent Pricing Of Interest Rates And Interest Rate Derivatives, Massoud Heidari, Liuren Wu
CRIF Working Paper series
Dynamic term structure models (DTSMs) price interest rate derivatives based on the modelimplied fair values of the yield curve, ignoring any pricing residuals on the yield curve that are either from model approximations or market imperfections. In contrast, option pricing in practice often takes the market observed yield curve as given and focuses exclusively on the specification of the volatility structure of forward rates. Thus, if any errors exist on the observed yield curve, they will be carried over permanently. This paper proposes a new framework that consistently prices both interest rates and interest rate derivatives. In particular, under such …
Time-Changed L´Evy Processes And Option Pricing, Pete Carr, Liuren Wu
Time-Changed L´Evy Processes And Option Pricing, Pete Carr, Liuren Wu
CRIF Working Paper series
As is well known, the classic Black-Scholes option pricing model assumes that returns follow Brownian motion. It is widely recognized that return processes differ from this benchmark in at least three important ways. First, asset prices jump, leading to non-normal return innovations. Second, return volatilities vary stochastically over time. Third, returns and their volatilities are correlated, often negatively for equities. We propose that time-changed L´evy processes be used to simultaneously address these three facets of the underlying asset return process. We show that our framework encompasses almost all of the models proposed in the option pricing literature. Despite the generality …
What Type Of Process Underlies Options? A Simple Robust Test, Peter Carr, Liuren Wu
What Type Of Process Underlies Options? A Simple Robust Test, Peter Carr, Liuren Wu
CRIF Working Paper series
We develop a simple robust test for the presence of continuous and discontinuous (jump) components in the price of an asset underlying an option. Our test examines the prices of at-the-money and out-of-the-money options as the option maturity approaches zero. We show that these prices converge to zero at speeds which depend upon whether the sample path of the underlying asset price process is purely continuous, purely discontinuous, or a mixture of both. By applying the test to S&P 500 index options data, we conclude that the sample path behavior of this index contains both a continuous component and a …
The Internationalization Of Money And Finance And The Globalization Of Financial Markets, James R. Lothian
The Internationalization Of Money And Finance And The Globalization Of Financial Markets, James R. Lothian
CRIF Working Paper series
In this paper I combine long multi-country time series data for interest rates and stock returns with the institutional evidence for much earlier centuries amassed by economic historians to study the question of financial globalization and how it has altered since the late classical era. At their longest, for Dutch and English short-term interest rates, the quantitative data that I use extend back slightly more than three centuries. The institutional history provides information on an additional millennium’s worth of experience. The conclusion that I reach is that the internationalization of money and finance and the globalization of financial markets are …
International Money And Common Currencies In Historical Perspective, Gerald P. Dwyer Jr., James R. Lothian
International Money And Common Currencies In Historical Perspective, Gerald P. Dwyer Jr., James R. Lothian
CRIF Working Paper series
We review the history of international monies and the theory related to their adoption and use. There are four key characteristics of these currencies: high unitary value; relatively low inflation rates for long periods; issuance by major economic and trading powers; and spontaneous, as opposed to planned, adoption internationally. The economic theory of the demand for money provides support for the importance of these characteristics. The value of a unit is arbitrary for a fiat money, but the other characteristics are likely to be important for determining any fiat money that will be the international money in the future. If …
The Finite Moment Log Stable Process And Option Pricing, Peter Carr, Liuren Wu
The Finite Moment Log Stable Process And Option Pricing, Peter Carr, Liuren Wu
CRIF Working Paper series
We document a surprising pattern in market prices of S&P 500 index options. When implied volatilities are graphed against a standard measure of moneyness, the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years. This behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem (CLT). We develop a parsimonious model which deliberately violates the CLT assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon. Calibration exercises demonstrate its superior performance against several widely …
Time-Varying Arrival Rates Of Informed And Uninformed Trades, David Easley, Robert F. Engle, Maureen O’Hara, Liuren Wu
Time-Varying Arrival Rates Of Informed And Uninformed Trades, David Easley, Robert F. Engle, Maureen O’Hara, Liuren Wu
CRIF Working Paper series
In this paper we extend the model of Easley and O’Hara (1992) to allow the arrival rates of informed and uninformed trades to be time-varying and forecastable. We specify a generalized autoregressive bivariate process for the arrival rates of informed and uninformed trades and estimate the model on 16 actively traded stocks on the New York Stock Exchange over 15 years of transaction data. Our results show that uninformed trades are highly persistent. Uninformed order arrivals clump together, with high uninformed volume days likely to follow high uninformed volume days, and conversely. This behavior is consistent with the passive characterization …
A Dynamic Equilibrium Model Of Real Exchange Rates With General Transaction Costs, Gautam Goswami, Milind Shrikhande, Liuren Wu
A Dynamic Equilibrium Model Of Real Exchange Rates With General Transaction Costs, Gautam Goswami, Milind Shrikhande, Liuren Wu
CRIF Working Paper series
We study the behavior of real exchange rates in a two-country dynamic equilibrium model. In this model, consumers can only consume domestic goods but can invest costlessly in capital stocks of both countries. Nevertheless, transporting goods between the two countries is costly and, hence, the rebalancing of the capital stock can only happen finitely often. We propose a realistic cost structure for goods transportation, wherein the total cost increases with the amount of shipment but the unit cost decreases with it due to economies of scale. Given such a cost structure, the optimal decisions on when and how much to …
Asset Pricing Under The Quadratic Class, Markus Leippold, Liuren Wu
Asset Pricing Under The Quadratic Class, Markus Leippold, Liuren Wu
CRIF Working Paper series
We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi-closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.