Probing option prices for information
Signal detection and filtering (aspects of stochastic processes) (60G35) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Auctions, bargaining, bidding and selling, and other market models (91B26) Derivative securities (option pricing, hedging, etc.) (91G20)
The authors investigate the problem: how option prices may be employed to recover additional information, when the market is considered as possibly reflecting this additional information. The stock price is modeled in the first instance as a risk neutral martingale. Then the authors develop option pricing formulae by conditioning on specific information about future events that is the subject of the probe. Typically when one conditions the probability law for the underlying asset price or its volatility on future events, one obtains new probabilities that are generally referred to as bridge laws. The proposed methodology is based on identifying and applying such bridge laws and is focused on applications of bridge laws to equity markets as mechanisms for designing specific informational probes. The authors consider conditioning in the context of models that are employed in pricing equity options. The classical models of \textit{F. Black} and \textit{M. Scholes} [J. Polit. Econ. 81, 637--654 (1973; Zbl 1092.91524)] and \textit{R. C. Merton} [Econometrica 41, 867--887 (1973; Zbl 0283.90003)] are taken up first. This is followed by a variety of stochastic volatility models that permit conditioning on future volatility and include \textit{S. Heston} [``A closed-form solution for options with stochastic volatility with applications to bond and currency options, Rev. Financ. Stud. 6, No. 2, 327--343 (1993; \url{doi:10.1093/rfs/6.2.327})], \textit{E. Nicolato} and \textit{E. Venardos} [Math. Finance 13, No. 4, 445--466 (2003; Zbl 1105.91020)] and \textit{P. Carr} et al. [Math. Finance 13, No. 3, 345--382 (2003; Zbl 1092.91022)]. There are also considered conditioning on an asymptotic dividend stream, under two assumed asymptotic dividend policies, but only within the classical context of the geometric Brownian motion model. In all cases the authors develop either in explicit form the density for the underlying asset price under a specific bridge assumption, or when this is not tractable, an explicit form for the characteristic function of the logarithm of the stock price. Finally it is mentioned that some of the bridge laws developed here are also useful in simulating stochastic volatility model using stratified sampling methods that condition on the level of the final stock price.
- A closed-form solution for options with stochastic volatility with applications to bond and currency options
- A decomposition of Bessel Bridges
- A theory of the term structure of interest rates
- scientific article; zbMATH DE number 3736754 (Why is no real title available?)
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- scientific article; zbMATH DE number 486467 (Why is no real title available?)
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- Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics. (With discussion)
- On the feasibility of arbitrage-based option pricing when stochastic bond price processes are involved
- Option Pricing in Stochastic Volatility Models of the Ornstein‐Uhlenbeck type
- Pricing stock options in a jump-diffusion model with stochastic volatility and interest rates: Applications of Fourier inversion methods
- Semi-stable Markov processes. I
- Stochastic Volatility for Lévy Processes
- Systematic equity-based credit risk: A CEV model with jump to default
- The Distribution of a Perpetuity, with Applications to Risk Theory and Pension Funding
- The pricing of options and corporate liabilities
- THE RANGE OF TRADED OPTION PRICES
- Transform Analysis and Asset Pricing for Affine Jump-diffusions
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