Martingale methods in financial modelling
This book is a comprehensive and up-to-date presentation of the martingale approach for pricing and hedging derivative securities. It consists of two main parts. The first half of the book deals with the classical concepts of pricing and hedging of contingent claims in financial markets. Chapter 1 briefly reviews important kinds of financial contracts. In a one-period model, the basic notions of arbitrage pricing theory, like replicating portfolios and martingale measures, are introduced. In the framework of the well-known Cox, Ross and Rubinstein (CRR) binomial model for an asset price process, Chapter 2 provides the valuation formula for European call- and put-options. The framework of Chapter 2 is the well-known CRR binomial model for an asset price process. The CRR option valuation formula for European call- and put-options are derived once by a replication argument and then by a purely probabilistic argument via the equivalent martingale measure. It is also shown that the famous Black-Scholes formula can be obtained from it by an asymptotic procedure using a properly chosen sequence of binomial tress. Then American call- and put-options are evaluated by no-arbitrage arguments. The chapter concludes with the evaluation of options in the presence of transaction costs. Chapter 3 deals with finite security markets, i.e., general discrete-time models with finite time horizon and finite probability space. Trading strategies and arbitrage opportunities are defined, and by elementary arguments a version of the fundamental theorem of asset pricing is proved. This states that the absence of arbitrage is equivalent to the existence of an equivalent martingale measure for discounted asset prices. Furthermore, it is shown that completeness of an arbitrage-free market model is equivalent to the uniqueness of the equivalent martingale measure. Chapter 4 examines various types of market imperfections in the finite security market model, and, i.e., completeness of the market, restrictions of short-selling of stocks and borrowing of cash, and finally the case of different borrowing and lending rates. The concept of mean-variance hedging is discussed. Chapter 5 establishes the classical Black-Scholes formula for European call- and put-options when the stock price follows a one-dimensional geometric Brownian motion. It is first derived via the partial differential equations approach and then via the equivalent martingale approach. A short sensitivity analysis of the market parameters is also included. Chapter 6 presents various modifications of the one-dimensional Black-Scholes model. The classical Black futures formula is derived, and the standard Black-Scholes formula is extended to the case of options on divided paying stocks. The last section briefly addresses problems and techniques related to the volatility of asset prices. Chapter 7 prices various foreign market derivatives by the martingale approach in the following framework: the foreign stock price and the exchange rate follow geometric Brownian motions, and the domestic and foreign risk-free interest rate are nonnegative constants. Chapter 8 addresses the pricing and hedging of American options and explains its link to the theory of optimal stopping for diffusion processes. Chapter 9 serves as an excellent reference for pricing exotic options as numerous examples of them are analyzed in the Black-Scholes framework. The first section of Chapter 10 deals with a general continuous-time model in which asset prices are driven by continuous semimartingales. Arbitrage opportunities and `reasonable' classes of admissible trading strategies are introduced in this general set-up. This section also contains a nice discussion on deep theoretical results concerning the fundamental theorem of asset pricing. The second section deals with the multi-dimensional Black-Scholes model. It focuses on the problem of market completeness and mean-variance hedging in incomplete markets. The second half of this book is devoted to fixed-income markets and more precisely to term structure models and the pricing of interest rate derivatives. In Chapter 11, various interest rate sensitive instruments such as zero-coupon bonds, coupon-bearing bonds, interest rate futures and interest rate swaps are introduced. Chapter 12 gives a survey of the most popular short-term interest rate models. In Chapter 13, the Heath-Jarrow-Morton (HJM) approach to term structure modelling is presented. There the dynamics of instantaneous continuously compounded forward rates are exogeneously specified. The forward measure approach is then applied to evaluate contingent claims by absence of arbitrage. Chapter 14 deals with models of bond prices and LIBOR rates. After presenting general properties of arbitrage-free families of bond prices, models of forward LIBOR rate and forward swap rates are extensively discussed. In Chapter 15, the forward measure methodology is employed in arbitrage pricing of interest rate derivatives in a Gaussian framework, i.e. in models in which the bond price volatilities are deterministic functions. In a Gaussian HJM framework and in the case of lognormal models of forward LIBOR and swap rates, Chapter 16 provides explicit valuation solutions for swap derivatives In Chapter 17, the arbitrage valuation of foreign market derivatives is extensively studied. On the whole this book provides a wide range of topics and will appeal to both practitioners and mathematicians. When only special cases or models are provided, the authors give useful references that will help researchers to obtain even more insight in the topics. Especially the second part gives an excellent introduction and survey of the state of the art in research and will clearly become a standard reference. Thus, this book can be strongly recommended to any reader learning, teaching or working in the field of mathematical finance.
- Completeness of security markets and backward stochastic differential equations with unbounded coefficients
- Exponential moments for HJM models with jumps
- Optimal reinsurance strategy under fixed cost and delay
- Fundamental solutions, transition densities and the integration of Lie symmetries
- Replication and shortfall risk in a binomial model with transaction costs
- Strong consistency of the empirical martingale simulation option price estimator
- Convexity bias in Eurodollar futures prices: A dimension-free HJM criterion
- Random field forward interest rate models, market price of risk and their statistics
- Optimal spreading when spreading is optimal
- General framework for pricing derivative securities
- Sufficient conditions for fast quasi-Monte Carlo convergence
- Constrained stochastic estimation algorithms for a class of hybrid stock market models
- Transition probability functions for martingale laws of bond prices.
- Mortality derivatives and the option to annuitise.
- Indifference pricing of insurance contracts in a product space model: Applications
- Fair valuation of path-dependent participating life insurance contracts.
- Pricing of multi-period rate of return guarantees.
- Pricing and hedging guaranteed annuity options via static option replication.
- A PDE based implementation of the Hull\,\&\,White model for cash flow derivatives
- Pricing European options based on the fuzzy pattern of Black-Scholes formula.
- Consistent fitting of one-factor models to interest rate data.
- The Brownian bridge does not offer a consistent advantage in quasi-Monte Carlo integration
- Pricing of basket options in subdiffusive fractional Black-Scholes model
- Pricing European options under uncertainty with application of Lévy processes and the minimal L^q equivalent martingale measure
- Asymptotic equivalence of estimating a Poisson intensity and a positive diffusion drift
- Barrier options and touch-and-out options under regular Lévy processes of exponential type
- Derivative pricing with non-linear Fokker-Planck dynamics
- A partial introduction to financial asset pricing theory.
- Stochastic mortality in life insurance: market reserves and mortality-linked insurance contracts
- Credit risk and asymmetric information: a simplified approach
- A weighted finite difference method for subdiffusive Black-Scholes model
- Application of Lévy processes and Esscher transformed martingale measures for option pricing in fuzzy framework
- Optimal robust mean-variance hedging in incomplete financial markets
- Backward stochastic partial differential equations related to utility maximization and hedging
- Dynamic asset allocation under VaR constraint with stochastic interest rates
- Game-theoretic derivation of upper hedging prices of multivariate contingent claims and submodularity
- Pricing of general European options on discrete dividend-paying assets with jump-diffusion dynamics
- Term structure modelling for multiple curves with stochastic discontinuities
- Mean-reverting additive energy forward curves in a Heath-Jarrow-Morton framework
- Optimal hedging with basis risk under mean-variance criterion
- A note on portfolios with risk-free internal gains
- Lapse risk in life insurance: correlation and contagion effects among policyholders' behaviors
- Multiscale analysis on the pricing of intensity-based defaultable bonds
- Pricing electricity derivatives within a Markov regime-switching model: a risk premium approach
- What is the natural scale for a Lévy process in modelling term structure of interest rates?
- Model misspecification analysis for bond options and Markovian hedging strategies
- Space-time adaptive finite difference method for European multi-asset options
- Default-risky bond prices with jumps, liquidity risk and incomplete information
- Valuing finite-lived Russian options
- Completeness of security markets and solvability of linear backward stochastic differential equations
- Maturity randomization for stochastic control problems
- Optimal stock liquidation in a regime switching model with finite time horizon
- Forward interest rate curves in discrete time settings driven by random fields
- A private management strategy for the crop yield insurer: a theoretical approach and tests
- A generalization of exotic options pricing formulae
- A course in derivative securities. Introduction to theory and computation.
- On the martingale framework for futures prices.
- Understanding the implied volatility surface for options on a diversified index
- Shortfall risk minimization in a discrete regime switching model
- Applications of the martingale method in pricing of contingent claims
- Martingales versus PDEs in finance: an equivalence result with examples
- ON SAVINGS ACCOUNTS IN SEMIMARTINGALE TERM STRUCTURE MODELS
- Martingale measures and hedging for discrete-time financial markets
- Mathematical methods for foreign exchange. A financial engineer's approach
- Quantitative analysis in financial markets. Collected papers of the New York University Mathematical Finance Seminar. Vol. 3
- Rating based Lévy Libor model
- The affine LIBOR models
- Hedging derivatives with model error
- An affine two-factor heteroskedastic macro-finance term structure model
- American Option Valuation with Particle Filters
- Multiscale stochastic volatility model for derivatives on futures
- Ambit processes, their volatility determination and their applications
- Stochastic methods in finance. II
- Weak and strong Taylor methods for numerical solutions of stochastic differential equations
- Chances and limitations of a short-term overreaction effect - stochastic considerations and empirical results
- TANGENT MODELS AS A MATHEMATICAL FRAMEWORK FOR DYNAMIC CALIBRATION
- An integral equation for American put options on assets with general dividend processes
- Monte Carlo construction of hedging strategies against multi-asset European claims
- Risk Minimizing Option Pricing for a Class of Exotic Options in a Markov-Modulated Market
- Pricing equity swaps in an economy with jumps
- An optimal mean-reversion trading rule under a Markov chain model
- A Model with Interacting Assets Driven by Poisson Processes
- Evaluating Multivariate GARCH Models in the Nordic Electricity Markets
- LIFTING QUADRATIC TERM STRUCTURE MODELS TO INFINITE DIMENSION
- Pricing a European Basket Option in the Presence of Proportional Transaction Costs
- A digitalized employee option
- Continuous-time methods in the study of discretely sampled functionals of Lévy processes. I. The positive process case
- The multi-curve potential model
- THE EIGENFUNCTION EXPANSION METHOD IN MULTI‐FACTOR QUADRATIC TERM STRUCTURE MODELS
- Pricing Derivatives Incorporating Structural Market Changes and in Time Correlation
- Electricity price modeling and asset valuation: a multi-fuel structural approach
- Explicit Martingale Representations for Brownian Functionals and Applications to Option Hedging
- Capacity expansion under a service-level constraint for uncertain demand with lead times
- Introduction to the stochastics of financial markets
- Multiscale intensity models and name grouping for valuation of multi-name credit derivatives
- Explicit solutions for an optimal stock selling problem under a Markov chain model
- scientific article; zbMATH DE number 1234541 (Why is no real title available?)
- Minimal martingale measure: pricing and hedging in a pure jump model under restricted information
- Valuation and hedging of contingent claims in the HJM model with deterministic volatilities
- Interest rate theory
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