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Full-Text Articles in Social and Behavioral Sciences
Simulation-Based Estimation Of Contingent-Claims Prices, Peter C. B. Phillips, Jun Yu
Simulation-Based Estimation Of Contingent-Claims Prices, Peter C. B. Phillips, Jun Yu
Research Collection School Of Economics
A new methodology is proposed to estimate theoretical prices of financial contingent claims whose values are dependent on some other underlying financial assets. In the literature, the preferred choice of estimator is usually maximum likelihood (ML). ML has strong asymptotic justification but is not necessarily the best method in finite samples. This paper proposes a simulation-based method. When it is used in connection with ML, it can improve the finite-sample performance of the ML estimator while maintaining its good asymptotic properties. The method is implemented and evaluated here in the Black-Scholes option pricing model and in the Vasicek bond and …
Jackknifing Bond Option Prices, Peter C. B. Phillips, Jun Yu
Jackknifing Bond Option Prices, Peter C. B. Phillips, Jun Yu
Research Collection School Of Economics
Prices of interest rate derivative securities depend crucially on the mean reversion parameters of the underlying diffusions. These parameters are subject to estimation bias when standard methods are used. The estimation bias can be substantial even in very large samples and much more serious than the discretization bias, and it translates into a bias in pricing bond options and other derivative securities that is important in practical work. This article proposes a very general and computationally inexpensive method of bias reduction that is based on Quenouille's (1956; Biometrika, 43, 353-360) jackknife. We show how the method can be applied directly …