Search results for "Rational pricing"
showing 4 items of 4 documents
Building a Consistent Pricing Model from Observed Option Prices
1999
This paper constructs a model for the evolution of a risky security that is consistent with a set of observed call option prices. It explicitly treats the fact that only a discrete data set can be observed in practice. The framework is general and allows for state dependent volatility and jumps. The theoretical properties are studied. An easy procedure to check for arbitrage opportunities in market data is proved and then used to ensure the feasibility of our approach. The implementation is discussed: testing on market data reveals a U-shaped form for the "local volatility" depending on the state and, surprisingly, a large probability for strong price movements.
Pricing Sovereign Contingent Convertible Debt
2016
We develop a pricing model for sovereign contingent convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's credit default swap CDS spread. One innovation is the modeling of CDS spread regime switching which is prevalent during crises. Regime switching is modeled as a hidden Markov process and is integrated with a stochastic process of spread levels to obtain S-CoCo prices through simulation. The paper goes a step further and uses the pricing model in a Longstaff-Schwartz. American option pricing framework to compute state contingent S-CoCo prices at some risk horizon, thus facilitating risk management. Dual trigger pricing is also discussed using the idiosyncratic CD…
On the evolution of monopoly pricing in Internet-assisted search markets
2014
This study examines the evolution of prices in markets with Internet price-comparison search engines. The empirical study analyzes laboratory data of prices available to informed consumers, for two industry sizes and two conditions on the sample (complete and incomplete). Distributions are typically bimodal. One of the two modes of distribution, corresponding to monopoly pricing, tends to attract such pricing strategies increasingly over time. The second one, corresponding to interior pricing, follows a decreasing trend. Monopoly pricing can serve as a means of insurance against more competitive (but riskier) behavior. In fact, experimental subjects who initially earn low profits due to int…
On the Irrelevance of Expected Stock Returns in the Pricing of Options in the Binomial Model: A Pedagogical Note
2005
The option pricing theory is now either a standard or a main part of many financial courses on both intermediate and advanced levels. All the textbooks that include the option pricing theory present a detailed treatment of the binomial model. However, the binomial model, although quite simple and intuitive in appearance, is rather tricky when it comes to its practical implementations and applications. In fact, it is amazing that the students often get totally confused when it finally comes to the issue of the choice of the parameters of the binomial model. The reason for all this confusion lies in the fact that all the textbooks emphasize the irrelevance of the binomial option price from th…