Improving the asset pricing ability of the Consumption-Capital Asset Pricing Model?
DEFF Research Database (Denmark)
Rasmussen, Anne-Sofie Reng
This paper compares the asset pricing ability of the traditional consumption-based capital asset pricing model to models from two strands of literature attempting to improve on the poor empirical results of the C-CAPM. One strand is based on the intertemporal asset pricing model of Campbell (1993...... able to price assets conditionally as suggested by Cochrane (1996) and Lettau and Ludvigson (2001b). The unconditional C-CAPM is rewritten as a scaled factor model using the approximate log consumptionwealth ratio cay, developed by Lettau and Ludvigson (2001a), as scaling variable. The models...... and composite. Thus, there is no unambiguous solution to the pricing ability problems of the C-CAPM. Models from both the alternative literature strands are found to outperform the traditional C-CAPM on average pricing errors. However, when weighting pricing errors by the full variance-covariance matrix...
Arbitrage Pricing, Capital Asset Pricing, and Agricultural Assets
Louise M. Arthur; Colin A. Carter; Fay Abizadeh
1988-01-01
A new asset pricing model, the arbitrage pricing theory, has been developed as an alternative to the capital asset pricing model. The arbitrage pricing theory model is used to analyze the relationship between risk and return for agricultural assets. The major conclusion is that the arbitrage pricing theory results support previous capital asset pricing model findings that the estimated risk associated with agricultural assets is low. This conclusion is more robust for the arbitrage pricing th...
Fractional-moment Capital Asset Pricing model
International Nuclear Information System (INIS)
Li Hui; Wu Min; Wang Xiaotian
2009-01-01
In this paper, we introduce the definition of the 'α-covariance' and present the fractional-moment versions of Capital Asset Pricing Model,which can be used to price assets when asset return distributions are likely to be stable Levy (or Student-t) distribution during panics and stampedes in worldwide security markets in 2008. Furthermore, if asset returns are truly governed by the infinite-variance stable Levy distributions, life is fundamentally riskier than in a purely Gaussian world. Sudden price movements like the worldwide security market crash in 2008 turn into real-world possibilities.
The Earnings/Price Risk Factor in Capital Asset Pricing Models
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Rafael Falcão Noda
2015-01-01
Full Text Available This article integrates the ideas from two major lines of research on cost of equity and asset pricing: multi-factor models and ex ante accounting models. The earnings/price ratio is used as a proxy for the ex ante cost of equity, in order to explain realized returns of Brazilian companies within the period from 1995 to 2013. The initial finding was that stocks with high (low earnings/price ratios have higher (lower risk-adjusted realized returns, already controlled by the capital asset pricing model's beta. The results show that selecting stocks based on high earnings/price ratios has led to significantly higher risk-adjusted returns in the Brazilian market, with average abnormal returns close to 1.3% per month. We design asset pricing models including an earnings/price risk factor, i.e. high earnings minus low earnings, based on the Fama and French three-factor model. We conclude that such a risk factor is significant to explain returns on portfolios, even when controlled by size and market/book ratios. Models including the high earnings minus low earnings risk factor were better to explain stock returns in Brazil when compared to the capital asset pricing model and to the Fama and French three-factor model, having the lowest number of significant intercepts. These findings may be due to the impact of historically high inflation rates, which reduce the information content of book values, thus making the models based on earnings/price ratios better than those based on market/book ratios. Such results are different from those obtained in more developed markets and the superiority of the earnings/price ratio for asset pricing may also exist in other emerging markets.
Asset Pricing - A Brief Review
Li, Minqiang
2010-01-01
I first introduce the early-stage and modern classical asset pricing and portfolio theories. These include: the capital asset pricing model (CAPM), the arbitrage pricing theory (APT), the consumption capital asset pricing model (CCAPM), the intertemporal capital asset pricing model (ICAPM), and some other important modern concepts and techniques. Finally, I discuss the most recent development during the last decade and the outlook in the field of asset pricing.
Brownian motion model with stochastic parameters for asset prices
Ching, Soo Huei; Hin, Pooi Ah
2013-09-01
The Brownian motion model may not be a completely realistic model for asset prices because in real asset prices the drift μ and volatility σ may change over time. Presently we consider a model in which the parameter x = (μ,σ) is such that its value x (t + Δt) at a short time Δt ahead of the present time t depends on the value of the asset price at time t + Δt as well as the present parameter value x(t) and m-1 other parameter values before time t via a conditional distribution. The Malaysian stock prices are used to compare the performance of the Brownian motion model with fixed parameter with that of the model with stochastic parameter.
Rational Asset Pricing Bubbles Revisited
Jan Werner
2012-01-01
Price bubble arises when the price of an asset exceeds the asset's fundamental value, that is, the present value of future dividend payments. The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents as long as assets are in strictly positive supply and the present value of total future resources is finite. This paper explores the possibility of asset price bubbles when either one of ...
Assessing Asset Pricing Anomalies
W.A. de Groot (Wilma)
2017-01-01
markdownabstractOne of the most important challenges in the field of asset pricing is to understand anomalies: empirical patterns in asset returns that cannot be explained by standard asset pricing models. Currently, there is no consensus in the academic literature on the underlying causes of
The capital-asset-pricing model and arbitrage pricing theory: a unification.
Ali Khan, M; Sun, Y
1997-04-15
We present a model of a financial market in which naive diversification, based simply on portfolio size and obtained as a consequence of the law of large numbers, is distinguished from efficient diversification, based on mean-variance analysis. This distinction yields a valuation formula involving only the essential risk embodied in an asset's return, where the overall risk can be decomposed into a systematic and an unsystematic part, as in the arbitrage pricing theory; and the systematic component further decomposed into an essential and an inessential part, as in the capital-asset-pricing model. The two theories are thus unified, and their individual asset-pricing formulas shown to be equivalent to the pervasive economic principle of no arbitrage. The factors in the model are endogenously chosen by a procedure analogous to the Karhunen-Loéve expansion of continuous time stochastic processes; it has an optimality property justifying the use of a relatively small number of them to describe the underlying correlational structures. Our idealized limit model is based on a continuum of assets indexed by a hyperfinite Loeb measure space, and it is asymptotically implementable in a setting with a large but finite number of assets. Because the difficulties in the formulation of the law of large numbers with a standard continuum of random variables are well known, the model uncovers some basic phenomena not amenable to classical methods, and whose approximate counterparts are not already, or even readily, apparent in the asymptotic setting.
Nazliben, Kamil
2015-01-01
The dissertation consists of three chapters that represent separate papers in the area of asset pricing. The ﬁrst chapter studies investors optimal asset allocation problem in which mean reversion in stock prices is captured by explicitly modeling transitory and permanent shocks. The second chapter
Testing multi-factor asset pricing models in the Visegrad countries
Czech Academy of Sciences Publication Activity Database
Morgese Borys, Magdalena
2011-01-01
Roč. 61, č. 2 (2011), s. 118-139 ISSN 0015-1920 R&D Projects: GA MŠk LC542 Institutional research plan: CEZ:AV0Z70850503 Keywords : capital asset pricing model * macroeconomic factor models * asset pricing Subject RIV: AH - Economics Impact factor: 0.346, year: 2011 http://journal.fsv.cuni.cz/mag/article/show/id/1208
Theoretical and Empirical Review of Asset Pricing Models: A Structural Synthesis
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Saban Celik
2012-01-01
Full Text Available The purpose of this paper is to give a comprehensive theoretical review devoted to asset pricing models by emphasizing static and dynamic versions in the line with their empirical investigations. A considerable amount of financial economics literature devoted to the concept of asset pricing and their implications. The main task of asset pricing model can be seen as the way to evaluate the present value of the pay offs or cash flows discounted for risk and time lags. The difficulty coming from discounting process is that the relevant factors that affect the pay offs vary through the time whereas the theoretical framework is still useful to incorporate the changing factors into an asset pricing models. This paper fills the gap in literature by giving a comprehensive review of the models and evaluating the historical stream of empirical investigations in the form of structural empirical review.
A Robust Rational Route to in a Simple Asset Pricing Model
Hommes, C.H.; Huang, H.; Wang, D.
2002-01-01
We investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists, trend followers and a market maker. Agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free. Price adjustment is proportional to the excess demand in the asset market. Agents asynchronously update their strategy according to realized net profits in the recent past. As agents become more sensitive to differences in st...
Assessing Asset Pricing Models Using Revealed Preference
Jonathan B. Berk; Jules H. van Binsbergen
2014-01-01
We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the model that investors use in making their capital allocation decisions. Using this methodology, we find that of the models most commonly used in the literature,...
The capital-asset-pricing model and arbitrage pricing theory: A unification
Khan, M. Ali; Sun, Yeneng
1997-01-01
We present a model of a financial market in which naive diversification, based simply on portfolio size and obtained as a consequence of the law of large numbers, is distinguished from efficient diversification, based on mean-variance analysis. This distinction yields a valuation formula involving only the essential risk embodied in an asset’s return, where the overall risk can be decomposed into a systematic and an unsystematic part, as in the arbitrage pricing theory; and the systematic component further decomposed into an essential and an inessential part, as in the capital-asset-pricing model. The two theories are thus unified, and their individual asset-pricing formulas shown to be equivalent to the pervasive economic principle of no arbitrage. The factors in the model are endogenously chosen by a procedure analogous to the Karhunen–Loéve expansion of continuous time stochastic processes; it has an optimality property justifying the use of a relatively small number of them to describe the underlying correlational structures. Our idealized limit model is based on a continuum of assets indexed by a hyperfinite Loeb measure space, and it is asymptotically implementable in a setting with a large but finite number of assets. Because the difficulties in the formulation of the law of large numbers with a standard continuum of random variables are well known, the model uncovers some basic phenomena not amenable to classical methods, and whose approximate counterparts are not already, or even readily, apparent in the asymptotic setting. PMID:11038614
The estimation of time-varying risks in asset pricing modelling using B-Spline method
Nurjannah; Solimun; Rinaldo, Adji
2017-12-01
Asset pricing modelling has been extensively studied in the past few decades to explore the risk-return relationship. The asset pricing literature typically assumed a static risk-return relationship. However, several studies found few anomalies in the asset pricing modelling which captured the presence of the risk instability. The dynamic model is proposed to offer a better model. The main problem highlighted in the dynamic model literature is that the set of conditioning information is unobservable and therefore some assumptions have to be made. Hence, the estimation requires additional assumptions about the dynamics of risk. To overcome this problem, the nonparametric estimators can also be used as an alternative for estimating risk. The flexibility of the nonparametric setting avoids the problem of misspecification derived from selecting a functional form. This paper investigates the estimation of time-varying asset pricing model using B-Spline, as one of nonparametric approach. The advantages of spline method is its computational speed and simplicity, as well as the clarity of controlling curvature directly. The three popular asset pricing models will be investigated namely CAPM (Capital Asset Pricing Model), Fama-French 3-factors model and Carhart 4-factors model. The results suggest that the estimated risks are time-varying and not stable overtime which confirms the risk instability anomaly. The results is more pronounced in Carhart’s 4-factors model.
The Q theory of investment, the capital asset pricing model, and asset valuation: a synthesis.
McDonald, John F
2004-05-01
The paper combines Tobin's Q theory of real investment with the capital asset pricing model to produce a new and relatively simple procedure for the valuation of real assets using the income approach. Applications of the new method are provided.
Neoclassical and Behavioural Asset Pricing Models : The Case of Sri Lanka
Perera, Shenali Anne
2013-01-01
This study aims to provide a better understanding of the Sri Lankan stock market in terms of asset pricing models. In order to achieve this goal this research evaluates the Fama and French three-factor model and a behavioural asset pricing model to investigate which framework is better suited for security valuation in Sri Lanka. Accordingly findings reveal that small stocks with low book-to-market equity generate high realized returns. But results indicate that superior returns on these stock...
Directory of Open Access Journals (Sweden)
Felipe Dias Paiva
2005-06-01
Full Text Available This study analyzed the Capital Asset Pricing Model CAPM as well as the Downside Capital Asset Pricing Model D-CAPM and evaluated the latter as an efficient alternative asset pricing model. The returns of 40 companies on the São Paulo Stock Exchange BOVESPA were studied between December 1996 and August 2002. To test the models the study used as variables the Interbank Deposit Certificate CDI as a risk free asset and the Index of São Paulo Stock Exchange IBOVESPA as a proxy of the market portfolio. The D-CAPM was shown to be more useful in explaining the return of the stock market than the CAPM.O objetivo deste estudo é analisar o capital asset pricing model (CAPM e o downside capital asset pricing model (D-CAPM, bem como avaliar se este último modelo é uma eficiente alternativa de modelo de precificação de ativos. Os dados da pesquisa referem-se a 40 retornos de companhias listadas na Bolsa de Valores de São Paulo, de dezembro de 1996 a agosto de 2002. O artigo utilizou, para testar os modelos, as variáveis Certificado de Depósito Interbancário (CDI, como um ativo livre de risco, e o índice da Bolsa de Valores de Sao Paulo (Ibovespa, como proxy do portfólio de mercado. Conclui-se, então, que o D-CAPM possui uma maior capacidade explicativa dos retornos dos ativos se comparado ao CAPM.
Entropy-based financial asset pricing.
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Mihály Ormos
Full Text Available We investigate entropy as a financial risk measure. Entropy explains the equity premium of securities and portfolios in a simpler way and, at the same time, with higher explanatory power than the beta parameter of the capital asset pricing model. For asset pricing we define the continuous entropy as an alternative measure of risk. Our results show that entropy decreases in the function of the number of securities involved in a portfolio in a similar way to the standard deviation, and that efficient portfolios are situated on a hyperbola in the expected return-entropy system. For empirical investigation we use daily returns of 150 randomly selected securities for a period of 27 years. Our regression results show that entropy has a higher explanatory power for the expected return than the capital asset pricing model beta. Furthermore we show the time varying behavior of the beta along with entropy.
Entropy-based financial asset pricing.
Ormos, Mihály; Zibriczky, Dávid
2014-01-01
We investigate entropy as a financial risk measure. Entropy explains the equity premium of securities and portfolios in a simpler way and, at the same time, with higher explanatory power than the beta parameter of the capital asset pricing model. For asset pricing we define the continuous entropy as an alternative measure of risk. Our results show that entropy decreases in the function of the number of securities involved in a portfolio in a similar way to the standard deviation, and that efficient portfolios are situated on a hyperbola in the expected return-entropy system. For empirical investigation we use daily returns of 150 randomly selected securities for a period of 27 years. Our regression results show that entropy has a higher explanatory power for the expected return than the capital asset pricing model beta. Furthermore we show the time varying behavior of the beta along with entropy.
Some Divergence Properties of Asset Price Models
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Wolfgang Stummer
2001-12-01
Full Text Available Abstract: We consider asset price processes Xt which are weak solutions of one-dimensional stochastic differential equations of the form (equation (2 Such price models can be interpreted as non-lognormally-distributed generalizations of the geometric Brownian motion. We study properties of the IÃŽÂ±-divergence between the law of the solution Xt and the corresponding drift-less measure (the special case ÃŽÂ±=1 is the relative entropy. This will be applied to some context in statistical information theory as well as to arbitrage theory and contingent claim valuation. For instance, the seminal option pricing theorems of Black-Scholes and Merton appear as a special case.
Consumption-based macroeconomic models of asset pricing theory
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Đorđević Marija
2016-01-01
Full Text Available The family of consumptionbased asset pricing models yields a stochastic discount factor proportional to the marginal rate of intertemporal substitution of consumption. In examining the empirical performance of this class of models, several puzzles are discovered. In this literature review we present the canonical model, the corresponding empirical tests, and different extensions to this model that propose a resolution of these puzzles.
Incomplete Financial Markets and Jumps in Asset Prices
DEFF Research Database (Denmark)
Crès, Hervé; Markeprand, Tobias Ejnar; Tvede, Mich
A dynamic pure-exchange general equilibrium model with uncertainty is studied. Fundamentals are supposed to depend continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with states of nature, and; 2. if financial markets...... are incomplete, jumps in asset prices may be unavoidable. Consequently incomplete financial markets may increase volatility in asset prices significantly....
Brock, W.A.; Hommes, C.H.
2001-01-01
This paper discusses dynamic evolutionary multi-agent systems, as introduced by Brock and Hommes (1997). In particular the heterogeneous agent dynamic asset pricing model of Brock and Hommes (1998) is extended by introducing derivative securities by means of price contingent contracts. Numerical
Prediction of future asset prices
Seong, Ng Yew; Hin, Pooi Ah; Ching, Soo Huei
2014-12-01
This paper attempts to incorporate trading volumes as an additional predictor for predicting asset prices. Denoting r(t) as the vector consisting of the time-t values of the trading volume and price of a given asset, we model the time-(t+1) asset price to be dependent on the present and l-1 past values r(t), r(t-1), ....., r(t-1+1) via a conditional distribution which is derived from a (2l+1)-dimensional power-normal distribution. A prediction interval based on the 100(α/2)% and 100(1-α/2)% points of the conditional distribution is then obtained. By examining the average lengths of the prediction intervals found by using the composite indices of the Malaysia stock market for the period 2008 to 2013, we found that the value 2 appears to be a good choice for l. With the omission of the trading volume in the vector r(t), the corresponding prediction interval exhibits a slightly longer average length, showing that it might be desirable to keep trading volume as a predictor. From the above conditional distribution, the probability that the time-(t+1) asset price will be larger than the time-t asset price is next computed. When the probability differs from 0 (or 1) by less than 0.03, the observed time-(t+1) increase in price tends to be negative (or positive). Thus the above probability has a good potential of being used as a market indicator in technical analysis.
Modelling of capital asset pricing by considering the lagged effects
Sukono; Hidayat, Y.; Bon, A. Talib bin; Supian, S.
2017-01-01
In this paper the problem of modelling the Capital Asset Pricing Model (CAPM) with the effect of the lagged is discussed. It is assumed that asset returns are analysed influenced by the market return and the return of risk-free assets. To analyse the relationship between asset returns, the market return, and the return of risk-free assets, it is conducted by using a regression equation of CAPM, and regression equation of lagged distributed CAPM. Associated with the regression equation lagged CAPM distributed, this paper also developed a regression equation of Koyck transformation CAPM. Results of development show that the regression equation of Koyck transformation CAPM has advantages, namely simple as it only requires three parameters, compared with regression equation of lagged distributed CAPM.
Regret Theory and Equilibrium Asset Prices
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Jiliang Sheng
2014-01-01
Full Text Available Regret theory is a behavioral approach to decision making under uncertainty. In this paper we assume that there are two representative investors in a frictionless market, a representative active investor who selects his optimal portfolio based on regret theory and a representative passive investor who invests only in the benchmark portfolio. In a partial equilibrium setting, the objective of the representative active investor is modeled as minimization of the regret about final wealth relative to the benchmark portfolio. In equilibrium this optimal strategy gives rise to a behavioral asset priciting model. We show that the market beta and the benchmark beta that is related to the investor’s regret are the determinants of equilibrium asset prices. We also extend our model to a market with multibenchmark portfolios. Empirical tests using stock price data from Shanghai Stock Exchange show strong support to the asset pricing model based on regret theory.
The pricing of illiquidity and illiquid assets : Essays on empirical asset pricing
Tuijp, Patrick
2016-01-01
This dissertation studies the pricing of liquidity and illiquid assets. For this thesis, liquidity will generally refer to the ease with which an asset can be traded. The first chapter investigates the role of the investment horizon in the impact of illiquidity on stock prices. We obtain a clientele
Asset Pricing Model and the Liquidity Effect: Empirical Evidence in the Brazilian Stock Market
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Otávio Ribeiro de Medeiros
2011-09-01
Full Text Available This paper is aims to analyze whether a liquidity premium exists in the Brazilian stock market. As a second goal, we include liquidity as an extra risk factor in asset pricing models and test whether this factor is priced and whether stock returns were explained not only by systematic risk, as proposed by the CAPM, by Fama and French’s (1993 three-factor model, and by Carhart’s (1997 momentum-factor model, but also by liquidity, as suggested by Amihud and Mendelson (1986. To achieve this, we used stock portfolios and five measures of liquidity. Among the asset pricing models tested, the CAPM was the least capable of explaining returns. We found that the inclusion of size and book-to-market factors in the CAPM, a momentum factor in the three-factor model, and a liquidity factor in the four-factor model improve their explanatory power of portfolio returns. In addition, we found that the five-factor model is marginally superior to the other asset pricing models tested.
Asset pricing restrictions on predictability : Frictions matter
de Roon, F.A.; Szymanowska, M.
2012-01-01
U.S. stock portfolios sorted on size; momentum; transaction costs; market-to-book, investment-to-assets, and return-on-assets (ROA) ratios; and industry classification show considerable levels and variation of return predictability, inconsistent with asset pricing models. This means that a
Application of quantum master equation for long-term prognosis of asset-prices
Khrennikova, Polina
2016-05-01
This study combines the disciplines of behavioral finance and an extension of econophysics, namely the concepts and mathematical structure of quantum physics. We apply the formalism of quantum theory to model the dynamics of some correlated financial assets, where the proposed model can be potentially applied for developing a long-term prognosis of asset price formation. At the informational level, the asset price states interact with each other by the means of a ;financial bath;. The latter is composed of agents' expectations about the future developments of asset prices on the finance market, as well as financially important information from mass-media, society, and politicians. One of the essential behavioral factors leading to the quantum-like dynamics of asset prices is the irrationality of agents' expectations operating on the finance market. These expectations lead to a deeper type of uncertainty concerning the future price dynamics of the assets, than given by a classical probability theory, e.g., in the framework of the classical financial mathematics, which is based on the theory of stochastic processes. The quantum dimension of the uncertainty in price dynamics is expressed in the form of the price-states superposition and entanglement between the prices of the different financial assets. In our model, the resolution of this deep quantum uncertainty is mathematically captured with the aid of the quantum master equation (its quantum Markov approximation). We illustrate our model of preparation of a future asset price prognosis by a numerical simulation, involving two correlated assets. Their returns interact more intensively, than understood by a classical statistical correlation. The model predictions can be extended to more complex models to obtain price configuration for multiple assets and portfolios.
Testing multi-factor asset pricing models in the Visegrad countries
Czech Academy of Sciences Publication Activity Database
Morgese Borys, Magdalena
-, č. 323 (2007), s. 1-40 ISSN 1211-3298 R&D Projects: GA MŠk LC542 Institutional research plan: CEZ:AV0Z70850503 Keywords : capital asset pricing model * macroeconomic factor models * cost of capital Subject RIV: AH - Economics http://www.cerge-ei.cz/pdf/wp/Wp323.pdf
Asset Pricing in Markets with Illiquid Assets
Longstaff, Francis A
2005-01-01
Many important classes of assets are illiquid in the sense that they cannot always be traded immediately. Thus, a portfolio position in these types of illiquid investments becomes at least temporarily irreversible. We study the asset-pricing implications of illiquidity in a two-asset exchange economy with heterogeneous agents. In this market, one asset is always liquid. The other asset can be traded initially, but then not again until after a â€œblackoutâ€ period. Illiquidity has a dramatic e...
Corporate sustainability and asset pricing models: empirical evidence for the Brazilian stock market
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Vitor Gonçalves de Azevedo
2016-01-01
Full Text Available Abstract The paper investigates the impact of corporate sustainability on asset prices. For that purpose, we develop a novel corporate sustainability factor and test the extent to which this factor is priced in an augmented four-factor version of the traditional Fama & French (1993 asset pricing model. The corporate sustainability factor is based on a zero-investment portfolio which is long in stocks with high sustainability and short in stocks with low sustainability. We use data on the Brazilian stock market to estimate alternative model specifications with different combinations of four explanatory variables: the corporate sustainability premium, the market risk factor premium, the size factor premium and the book-to-market factor premium. Our results indicate that corporate sustainability is priced and helps to explain the variability in the cross-section of expected stock returns.
Asset Pricing and Monetary Policy
Bingbing Dong
2014-01-01
This paper examines the role of money in understanding the behavior of asset prices and whether and how monetary policy should react to asset prices such as stock prices and equity premiums. To do so, I introduce money via the form of transaction cost into a production economy with limited stock market participation where agents with lower inter-temporal elasticity of substitution (IES), called non-stockholders, have no access to stock market. In addition to facilitating transactions of consu...
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Adriana Bruscato Bortoluzzo
Full Text Available ABSTRACT This article examines three models for pricing risky assets, the capital asset pricing model (CAPM from Sharpe and Lintner, the three factor model from Fama and French, and the four factor model from Carhart, in the Brazilian mark et for the period from 2002 to 2013. The data is composed of shares traded on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBOVESPA on a monthly basis, excluding financial sector shares, those with negative net equity, and those without consecutive monthly quotations. The proxy for market return is the Brazil Index (IBrX and for riskless assets savings accounts are used. The 2008 crisis, an event of immense proportions and market losses, may have caused alterations in the relationship structure of risky assets, causing changes in pricing model results. Division of the total period into pre-crisis and post-crisis sub-periods is the strategy used in order to achieve the main objective: to analyze the effects of the crisis on asset pricing model results and their predictive power. It is verified that the factors considered are relevant in the Brazilian market in both periods, but between the periods, changes occur in the statistical relevance of sensitivities to the market premium and to the value factor. Moreover, the predictive ability of the pricing models is greater in the post-crisis period, especially for the multifactor models, with the four factor model able to improve predictions of portfolio returns in this period by up to 80%, when compared to the CAPM.
Pricing Volatility Referenced Assets
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Alan De Genaro Dario
2006-12-01
Full Text Available Volatility swaps are contingent claims on future realized volatility. Variance swaps are similar instruments on future realized variance, the square of future realized volatility. Unlike a plain vanilla option, whose volatility exposure is contaminated by its asset price dependence, volatility and variance swaps provide a pure exposure to volatility alone. This article discusses the risk-neutral valuation of volatility and variance swaps based on the framework outlined in the Heston (1993 stochastic volatility model. Additionally, the Heston (1993 model is calibrated for foreign currency options traded at BMF and its parameters are used to price swaps on volatility and variance of the BRL / USD exchange rate.
Downside Risk And Empirical Asset Pricing
P. van Vliet (Pim)
2004-01-01
textabstractCurrently, the Nobel prize winning Capital Asset Pricing Model (CAPM) celebrates its 40th birthday. Although widely applied in financial management, this model does not fully capture the empirical riskreturn relation of stocks; witness the beta, size, value and momentum effects. These
The capital-asset pricing model reconsidered: tests in real terms on ...
African Journals Online (AJOL)
This paper extends previous work of the authors to reconsider the capital-asset pricing model (CAPM) in South Africa in real terms. As in that work, the main question this study aimed to answer remains: Can the CAPM be accepted in the South African market for the purposes of the stochastic modelling of investment returns ...
PEMILIHAN SAHAM YANG OPTIMAL MENGGUNAKAN CAPITAL ASSET PRICING MODEL (CAPM
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Dioda Ardi Wibisono
2017-08-01
Full Text Available Optimal portfolio is the basis for investors to invest in stock. Capital Asset Pricing Model (CAPM is a method to determine the value of the risk and return of a company stock. This research uses a secondary data from the closing price of the monthly stock price (monthly closing price, Stock Price Index (SPI, and the monthly SBI rate. The samples of this research are 41 stocks in LQ45 February-July 2015 on the Indonesian Stock Exchange (ISE. The study period is during 5 year from October 2010 - October 2015. The result of analysis shows that the optimal portfolio consists of 18 companies. The average return of the optimal portfolio is higher than the average risk-free return (SBI rate and the average market return. This proves that investing in stocks is more profitable than a risk-free investment. � Keywords: Stock, CAPM, return, risk�
Asset prices and priceless assets
Penasse, J.N.G.
2014-01-01
The doctoral thesis studies several aspects of asset returns dynamics. The first three chapters focus on returns in the fine art market. The first chapter provides evidence for the existence of a slow-moving fad component in art prices that induces short-term return predictability. The article has
Empirical test of Capital Asset Pricing Model on Selected Banking Shares from Borsa Istanbul
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Fuzuli Aliyev
2018-03-01
Full Text Available In this paper we tested Capital Asset Pricing Model (shortly CAPM hereafter on the selected banking stocks of Borsa Istanbul. Here we tried to explain how to price financial assets based on their risks in the case of BIST-100 index. CAPM is an important model in the portfolio management theory used by economic agents for the selection of financial assets. We used 12 random banking stocks’ monthly return data for 2001–2010 periods. To test the validity of the CAPM, we first derived the regression equation for the risk-free interest rate and risk premium relationship using January 2001–December 2009 data. Then, estimated January–December 2010 returns with the equation. Comparing forecasted return with the actual return, we concluded that the CAPM is valid for the portfolio consisting of the 12 banks traded in the ISE, i.e. The model could predict the overall outcome of portfolio of selected banking shares
Ambiguity and Volatility : Asset Pricing Implications
Pataracchia, B.
2011-01-01
Using a simple dynamic consumption-based asset pricing model, this paper explores the implications of a representative investor with smooth ambiguity averse preferences [Klibano¤, Marinacci and Mukerji, Econometrica (2005)] and provides a comparative analysis of risk aversion and ambiguity aversion.
Prediction future asset price which is non-concordant with the historical distribution
Seong, Ng Yew; Hin, Pooi Ah
2015-12-01
This paper attempts to predict the major characteristics of the future asset price which is non-concordant with the distribution estimated from the price today and the prices on a large number of previous days. The three major characteristics of the i-th non-concordant asset price are the length of the interval between the occurrence time of the previous non-concordant asset price and that of the present non-concordant asset price, the indicator which denotes that the non-concordant price is extremely small or large by its values -1 and 1 respectively, and the degree of non-concordance given by the negative logarithm of the probability of the left tail or right tail of which one of the end points is given by the observed future price. The vector of three major characteristics of the next non-concordant price is modelled to be dependent on the vectors corresponding to the present and l - 1 previous non-concordant prices via a 3-dimensional conditional distribution which is derived from a 3(l + 1)-dimensional power-normal mixture distribution. The marginal distribution for each of the three major characteristics can then be derived from the conditional distribution. The mean of the j-th marginal distribution is an estimate of the value of the j-th characteristics of the next non-concordant price. Meanwhile, the 100(α/2) % and 100(1 - α/2) % points of the j-th marginal distribution can be used to form a prediction interval for the j-th characteristic of the next non-concordant price. The performance measures of the above estimates and prediction intervals indicate that the fitted conditional distribution is satisfactory. Thus the incorporation of the distribution of the characteristics of the next non-concordant price in the model for asset price has a good potential of yielding a more realistic model.
Higher Order Expectations in Asset Pricing
Philippe BACCHETTA; Eric VAN WINCOOP
2004-01-01
We examine formally Keynes' idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs. Higher order expectations add an additional term to a standard asset pricing equation. We call this the higher order wedge, which depends on the difference between higher and first order expectations of future payoffs. We analyze the determinants of this wedge and its impact on the equilibrium price. In the context of a dynamic noisy r...
Bayesian Analysis of Bubbles in Asset Prices
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Andras Fulop
2017-10-01
Full Text Available We develop a new model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. The second regime reflects the bubble period with explosive behavior. Stochastic switches between two regimes and non-constant probabilities of exit from the bubble regime are both allowed. A Bayesian learning approach is employed to jointly estimate the latent states and the model parameters in real time. An important feature of our Bayesian method is that we are able to deal with parameter uncertainty and at the same time, to learn about the states and the parameters sequentially, allowing for real time model analysis. This feature is particularly useful for market surveillance. Analysis using simulated data reveals that our method has good power properties for detecting bubbles. Empirical analysis using price-dividend ratios of S&P500 highlights the advantages of our method.
Fractal asset returns, arbitrage and option pricing
International Nuclear Information System (INIS)
Potgieter, Petrus H.
2009-01-01
In the discrete-time fractional random walk model a market with one risky asset affords an arbitrage opportunity as described by Cutland et al. [Cutland NJ, Kopp PE, Willinger W. Stock price returns and the Joseph effect: a fractional version of the Black-Scholes model. In: Russo Francesco, Bolthausen Erwin, Dozzi Marco, editors. Seminar on 6 stochastic analysis, random fields and applications, pp. 327-351. Seminar on stochastic analysis, random fields and applications. Ascona: Centro Stefano Franscini; 1993, Progress in probability 36. Birkhauser Verlag; 1995.] and Sottinen [Sottinen Tommi. Fractional Brownian motion, random walks and binary market models. Finance Stoch 2001;5(3):343-355]. We briefly discuss these results and compute a numerical example in a fractional binomial model as illustration and mention an option pricing model for assets the returns of which are driven by a fractional Brownian motion [Yaozhong Hu, Bernt Oksendal. Fractional white noise calculus and applications to finance. Infin Dimens Anal Quant Probability Rel Top 2003;6:1-32, ISSN 0219-0257; Fajardo J, Cajueiro DO. Volatility estimation and option pricing with fractional Brownian motion, October 2003. Available from: (http://ideas.repec.org/p/ibm/finlab/flwp53.html)].
Initial cash/asset ratio and asset prices: an experimental study.
Caginalp, G; Porter, D; Smith, V
1998-01-20
A series of experiments, in which nine participants trade an asset over 15 periods, test the hypothesis that an initial imbalance of asset/cash will influence the trading price over an extended time. Participants know at the outset that the asset or "stock" pays a single dividend with fixed expectation value at the end of the 15th period. In experiments with a greater total value of cash at the start, the mean prices during the trading periods are higher, compared with those with greater amount of asset, with a high degree of statistical significance. The difference is most significant at the outset and gradually tapers near the end of the experiment. The results are very surprising from a rational expectations and classical game theory perspective, because the possession of a large amount of cash does not lead to a simple motivation for a trader to bid excessively on a financial instrument. The gradual erosion of the difference toward the end of trading, however, suggests that fundamental value is approached belatedly, offering some consolation to the rational expectations theory. It also suggests that there is a time scale on which an evolution toward fundamental value occurs. The experimental results are qualitatively compatible with the price dynamics predicted by a system of differential equations based on asset flow. The results have broad implications for the marketing of securities, particularly initial and secondary public offerings, government bonds, etc., where excess supply has been conjectured to suppress prices.
Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Behavior
Xiaohong Chen; Sydney C. Ludvigson
2004-01-01
This paper studies the ability of a general class of habit-based asset pricing models to match the conditional moment restrictions implied by asset pricing theory. We treat the functional form of the habit as unknown, and to estimate it along with the rest of the model's finite dimensional parameters. Using quarterly data on consumption growth, assets returns and instruments, our empirical results indicate that the estimated habit function is nonlinear, the habit formation is better described...
A behavioral asset pricing model with a time-varying second moment
International Nuclear Information System (INIS)
Chiarella, Carl; He Xuezhong; Wang, Duo
2006-01-01
We develop a simple behavioral asset pricing model with fundamentalists and chartists in order to study price behavior in financial markets when chartists estimate both conditional mean and variance by using a weighted averaging process. Through a stability, bifurcation, and normal form analysis, the market impact of the weighting process and time-varying second moment are examined. It is found that the fundamental price becomes stable (unstable) when the activities from both types of traders are balanced (unbalanced). When the fundamental price becomes unstable, the weighting process leads to different price dynamics, depending on whether the chartists act as either trend followers or contrarians. It is also found that a time-varying second moment of the chartists does not change the stability of the fundamental price, but it does influence the stability of the bifurcations. The bifurcation becomes stable (unstable) when the chartists are more (less) concerned about the market risk characterized by the time-varying second moment. Different routes to complicated price dynamics are also observed. The analysis provides an analytical foundation for the statistical analysis of the corresponding stochastic version of this type of behavioral model
Essays on International Finance and Asset Pricing
Eiling, E.
2007-01-01
The second part of this dissertation takes a more general asset pricing perspective. In particular, it investigates the impact of human capital on asset pricing. Investors' portfolio decisions may be affected by their human capital. For instance, an investor who works in the IT sector may want to
Willem H. Buiter
1987-01-01
Excess volatility tests for financial market efficiency maintain the hypothesis of risk-neutrality. This permits the specification of the benchmark efficient market price as the present discounted value of expected future dividends. By departing from the risk-neutrality assumption in a stripped-down version of Lucas's general equilibrium asset pricing model, I show that asset prices determined in a competitive asset market and efficient by construction can nevertheless violate the variance bo...
Asset Prices and Trading Volume under Fixed Transactions Costs.
Lo, Andrew W.; Mamaysky, Harry; Wang, Jiang
2004-01-01
We propose a dynamic equilibrium model of asset prices and trading volume when agents face fixed transactions costs. We show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy. The inability to trade more frequently reduces the agents' asset demand and in equilibrium gives rise to a…
Loss Aversion, Adaptive Beliefs, and Asset Pricing Dynamics
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Kamal Samy Selim
2015-01-01
Full Text Available We study asset pricing dynamics in artificial financial markets model. The financial market is populated with agents following two heterogeneous trading beliefs, the technical and the fundamental prediction rules. Agents switch between trading rules with respect to their past performance. The agents are loss averse over asset price fluctuations. Loss aversion behaviour depends on the past performance of the trading strategies in terms of an evolutionary fitness measure. We propose a novel application of the prospect theory to agent-based modelling, and by simulation, the effect of evolutionary fitness measure on adaptive belief system is investigated. For comparison, we study pricing dynamics of a financial market populated with chartists perceive losses and gains symmetrically. One of our contributions is validating the agent-based models using real financial data of the Egyptian Stock Exchange. We find that our framework can explain important stylized facts in financial time series, such as random walk price behaviour, bubbles and crashes, fat-tailed return distributions, power-law tails in the distribution of returns, excess volatility, volatility clustering, the absence of autocorrelation in raw returns, and the power-law autocorrelations in absolute returns. In addition to this, we find that loss aversion improves market quality and market stability.
Asset Pricing Implications of Firms' Financing Constraints
Gomes, Joao F; Yaron, Amir; Zhang, Lu
2002-01-01
We incorporate costly external finance in a production based asset pricing model and investigate whether financing frictions are quantitatively important for pricing a cross-section of expected returns. We show that the common assumptions about the nature of the financing frictions are captured by a simple ‘financing cost’ function, equal to the product of the financing premium and the amount of external finance. This approach provides a tractable framework to examine the role of financing fr...
Essays in Empirical Asset Pricing
DEFF Research Database (Denmark)
Rzeznik, Aleksandra
This thesis consists of three essays investigating financial and real estate markets and identifying a relationship between them. A 2008 financial crises provides a perfect example of sizeable interactions between US housing market and equity prices, where a negative shock to house prices trigger...... a word-wide recession. Therefore, understanding forces driving investors behaviour and preferences, which in turn affect asset prices in both equity and housing market are of great interest....
Habit-based Asset Pricing with Limited Participation Consumption
DEFF Research Database (Denmark)
Bach, Christian; Møller, Stig Vinther
We calibrate and estimate a consumption-based asset pricing model with habit formation using limited participation consumption data. Based on survey data of a representative sample of American households, we distinguish between assetholder and non-assetholder consumption, as well as the standard...
Habit-based asset pricing with limited participation consumption
DEFF Research Database (Denmark)
Møller, Stig Vinther; Bach, Christian
2011-01-01
We calibrate and estimate a consumption-based asset pricing model with habit formation using limited participation consumption data. Based on survey data of a representative sample of American households, we distinguish between assetholder and non-assetholder consumption, as well as the standard...
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Zainul Hasan Quthbi
2017-10-01
Artikel ini bermaksud untuk menganalisis saham syariah yang tergolong efisien untuk keputusan investasi dengan menggunakan SCAPM (Shari’a Compliant Asset Pricing Model. SCAPM adalah bentuk modifikasi dari CAPM (Capital Asset Pricing Model yang bertujuan agar kerangka model analisis masih dalam kerangka syariah. Teknik pengumpulan data adalah dokumentasi dari data yang bersifat sekunder. Digunakan 13 sampel saham syariah pada penelitian ini dengan kriteria saham syariah yang konsisten masuk pada JII (Jakarta Islamic Index periode penelitian Desember 2013 hingga November 2016 dan memiliki pengembalian saham individual positif. Hasil dari penelitian menunjukkan terdapat 9 saham syariah yang tergolong efisien dan 4 sisanya tidak efisien. Saham PT. Adaro Energy memiliki nilai RVAR terbesar yang berarti memiliki kinerja saham paling baik.
DEFF Research Database (Denmark)
Dreyer, Johannes Kabderian; Schneider, Johannes; T. Smith, William
2013-01-01
This paper explores the implications of a novel class of preferences for the behavior of asset prices. Following a suggestion by Marshall (1920), we entertain the possibility that people derive utility not only from consumption, but also from the very act of saving. These ‘‘saving-based’’ prefere...
DEFF Research Database (Denmark)
Stadtmann, Georg; Moritzen; Jörgensen
2012-01-01
According to the news model of asset price determination, only the unexpected component of an information should drive the stock price. We use the Danish publicly listed football club Brøndby IF to analyse how match outcome impacts the stock price. To disentangle gross news from net news, betting...
Energy Technology Data Exchange (ETDEWEB)
Pinto, Rinaldo Caldeira; Parente, Virginia [Universidade de Sao Paulo (USP), SP (Brazil)], emails: rinaldo@iee.usp.br, vparente@iee.usp.br
2010-07-01
The aim of this paper is to analyse the use of Capital Asset Pricing Model (CAPM) Beta in the Brazilian electric distribution sector tariffs review. The betas applied by the Regulatory Agency are defined using data from the American, English and Brazilian markets. These betas will then be compared to the betas obtained in the domestic market. The betas were directly obtained from an economic-financial databank largely employed by the market. The sample is composed of companies' shares, priced at Sao Paulo Stock Market. Their main activity is the distribution of electric energy between July 2002 and July 2007. The results of mean betas obtained for the distribution segment, with values close to the ones applied by the regulatory agency for the cycle of tariff reviews between 2007-2010. (author)
Energy Technology Data Exchange (ETDEWEB)
Pinto, Rinaldo Caldeira; Parente, Virginia, E-mail: rinaldo@iee.usp.br, E-mail: vparente@iee.usp.br [Universidade de Sao Paulo (USP), SP (Brazil)
2010-07-01
The aim of this paper is to analyse the use of Capital Asset Pricing Model (CAPM) Beta in the Brazilian electric distribution sector tariffs review. The betas applied by the Regulatory Agency are defined using data from the American, English and Brazilian markets. These betas will then be compared to the betas obtained in the domestic market. The betas were directly obtained from an economic-financial databank largely employed by the market. The sample is composed of companies' shares, priced at Sao Paulo Stock Market. Their main activity is the distribution of electric energy between July 2002 and July 2007. The results of mean betas obtained for the distribution segment, with values close to the ones applied by the regulatory agency for the cycle of tariff reviews between 2007-2010. (author)
Self-consistent asset pricing models
Malevergne, Y.; Sornette, D.
2007-08-01
We discuss the foundations of factor or regression models in the light of the self-consistency condition that the market portfolio (and more generally the risk factors) is (are) constituted of the assets whose returns it is (they are) supposed to explain. As already reported in several articles, self-consistency implies correlations between the return disturbances. As a consequence, the alphas and betas of the factor model are unobservable. Self-consistency leads to renormalized betas with zero effective alphas, which are observable with standard OLS regressions. When the conditions derived from internal consistency are not met, the model is necessarily incomplete, which means that some sources of risk cannot be replicated (or hedged) by a portfolio of stocks traded on the market, even for infinite economies. Analytical derivations and numerical simulations show that, for arbitrary choices of the proxy which are different from the true market portfolio, a modified linear regression holds with a non-zero value αi at the origin between an asset i's return and the proxy's return. Self-consistency also introduces “orthogonality” and “normality” conditions linking the betas, alphas (as well as the residuals) and the weights of the proxy portfolio. Two diagnostics based on these orthogonality and normality conditions are implemented on a basket of 323 assets which have been components of the S&P500 in the period from January 1990 to February 2005. These two diagnostics show interesting departures from dynamical self-consistency starting about 2 years before the end of the Internet bubble. Assuming that the CAPM holds with the self-consistency condition, the OLS method automatically obeys the resulting orthogonality and normality conditions and therefore provides a simple way to self-consistently assess the parameters of the model by using proxy portfolios made only of the assets which are used in the CAPM regressions. Finally, the factor decomposition with the
Creator of the capital asset pricing model
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Pantelić Svetlana
2014-01-01
Full Text Available Harry M. Markowite, Merton H. Miller and William F. Sharpe were awarded the Nobel Prize in Economic Sciences in 1990, for their pioneering work in the theory of financial economics. Harry Markowite gave the most significant contribution in portfolio selection, William Sharpe in establishing the equilibrium theory of capital asset pricing (CAPM, and Merton Miller in corporate finance. Their work revolutionized finance through the introduction and implementation of quantitative methods in financial analysis. Sharpe was born in 1934 in Boston, Massachusetts. He received the Bachelor of Arts degree in 1955, the Master of Arts degree in 1956, and PhD degree in Economics in 1961 at the UCLA. In his doctoral dissertation he explored a series of aspects of portfolio analysis, based on a model proposed by Markowite. He spent his working career as a lecturer and professor, taking active part in numerous research projects. He authored many scientific papers and books, having won several awards and being a member of many institutions. He established his own financial consulting firm in 1989.
Pricing of path dependent derivatives with discretely monitored underlying assets
Choi, Hyomin
This dissertation presents two different approaches to path dependent option pricing with discrete sampling. Provided the underlying asset of a path dependent derivative contract follows an affine process, we use the forward characteristic method to evaluate its fair price. Our study shows that the valuation method is numerically accessible as long as the contract payoff is a linear combination of log return of its underlying asset price. We compute various examples of such contracts and give contract-tailored formulas that we use in these examples. In the second part, we consider variance options under stochastic volatility model. We analyze the difference between variance option prices with discrete and continuous sampling as a function of N, the number of observations made in the former. We find the series expansion of the difference with respect to 1/N and find its leading term. By adding this leading term to the value of continuously sampled variance option, we obtain a simple and well-understood approximation of discretely sample variance option price.
Expectations and bubbles in asset pricing experiments
Hommes, C.; Sonnemans, J.; Tuinstra, J.; van de Velden, H.
2008-01-01
We present results on expectation formation in a controlled experimental environment. In each period subjects are asked to predict the next price of a risky asset. The realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts. In most
"Overreaction" of Asset Prices in General Equilibrium
Aiyagari, S.R.; Gertler, M.
1998-01-01
We attempt to explain the overreaction of asset prices to movements in short-term interest rates, dividends, and asset supplies. The key element of our explanation is a margin constraint that traders face which limits their leverage to a fraction of the value of their assets. Traders may lever themselves, further, either directly by borrowing short term or indirectly by engaging in futures and options trading, so that the scenario is relevant to contemporary financial markets. When some shock...
The capital asset pricing model versus the three factor model: A United Kingdom Perspective
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Chandra Shekhar Bhatnagar
2013-07-01
Full Text Available The Sharpe (1964, Lintner (1965 and Black (1972 Capital Asset Pricing Model (CAPM postulates that the equilibrium rates of return on all risky assets are a linear function of their covariance with the market portfolio. Recent work by Fama and French (1996, 2006 introduce a Three Factor Model that questions the “real world application” of the CAPM Theorem and its ability to explain stock returns as well as value premium effects in the United States market. This paper provides an out-of-sample perspective to the work of Fama and French (1996, 2006. Multiple regression is used to compare the performance of the CAPM, a split sample CAPM and the Three Factor Model in explaining observed stock returns and value premium effects in the United Kingdom market. The methodology of Fama and French (2006 was used as the framework for this study. The findings show that the Three Factor Model holds for the United Kingdom Market and is superior to the CAPM and the split sample CAPM in explaining both stock returns and value premium effects. The “real world application” of the CAPM is therefore not supported by the United Kingdom data.
Price Manipulation in an Experimental Asset Market
Veiga Helena; Vorsatz Marc
2006-01-01
We analyze in the laboratory whether an uninformed trader is able to manipulate the price of a financial asset. To do so, we compare the results of two different experimental treatments. In the Benchmark Treatment, twelve subjects trade a common value asset that takes either a high or a low value. Information is distributed asymmetrically, only three outof twelve subjects know the actual value of the asset. The Manipulation Treatment is identical to the Benchmark Treatment apart from the fact...
CAPM (Capital Asset Pricing Model) and regulation in Brazilian electric distribution sector
International Nuclear Information System (INIS)
Pinto, Rinaldo Caldeira; Parente, Virginia
2010-01-01
The aim of this paper is to analyse the use of Capital Asset Pricing Model (CAPM) Beta in the Brazilian electric distribution sector tariffs review. The betas applied by the Regulatory Agency are defined using data from the American, English and Brazilian markets. These betas will then be compared to the betas obtained in the domestic market. The betas were directly obtained from an economic-financial databank largely employed by the market. The sample is composed of companies' shares, priced at Sao Paulo Stock Market. Their main activity is the distribution of electric energy between July 2002 and July 2007. The results of mean betas obtained for the distribution segment, with values close to the ones applied by the regulatory agency for the cycle of tariff reviews between 2007-2010. (author)
Directory of Open Access Journals (Sweden)
Fakhri Husein
2017-03-01
Full Text Available Shariah Compliant Asset Pricing Model (SCAPM is a modification of the model Capital Asset Pricing Model (CAPM. This research is quantitative descriptive study of theories of optimal portfolio analysis applied to trading stocks, especially in stocks Jakarta Islamic Index. Sampling technique used was purposive sampling and obtained 26 shares. The analysis tool used is MatLab R2010a. The results of this study are not prove theMarkowitz portfolio theory. This is explained by the amount of Beta market (β_m a value beta below 1 indicates that the fluctuation of stocks returns do not follow the movement of market fluctuations. Investors are likely to want a high profit, the investors are advised to choose a second portfolio groups, with rate of 0.176722% and investors are likely to enjoy a substantial risk in the investment portfolio are advised to choose the first group with a great risk of 0.8501%.
Using an inflation-augmented price-earnings ratio to guide tactical asset allocation
Adrian Saville
2011-01-01
Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study rev...
Just value of the Tactebel energy: an valuation from the main models of pricing asset
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Renato Campos
2010-01-01
Full Text Available This study aimed to determine the current fair value of Tractebel Energia, from the main asset pricing models. The company was taken as the object due to its stable growth and the ease of obtaining data, since it is located in the city of Florianopolis. Nevertheless, the volatility in its shares has been priced aroused interest. Therefore, this study intended to provide subsidy for the decision making of investors regarding the purchase or sale of company stock. For this, the theoretical treat on the concept of asset valuation and the main models available, emphasizing their applications and limitations, which are: assessment book on, discounted dividend model and discounted cash flow. Regarding the methodological aspect, the research fits into exploratory, descriptive, highly quantitative field study and case. Moreover, it was made use of desk research, literature, interview and program Economática. Thus, the analysis of data initially sought to raise the assumptions demanded by each of the models surveyed ad apply them. The results were then compared and adjusted so that there is consistency. He was later adopted an arithmetic mean to assign a fair value to the company. From this average was defined as an acceptance range, depending on the variability of results and uncertainty in the estimates.
Intangible Capital, Corporate Valuation and Asset Pricing
Danthine, Jean-Pierre; Jin, Xiangrong
2006-01-01
Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main fi...
THE ASSET PRICE CHANNEL AND ITS ROLE IN MONETARY POLICY TRANSMISSION
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Dan Horatiu
2013-07-01
Full Text Available his paper addresses the subject of the monetary policy transmission mechanism by focusing on the asset price channel, which is the monetary transmission channel responsible for the propagation of the effects induced by the monetary policy decisions made by the central bank that affect the price of assets. We will analyze the asset price channel by taking a close look at its structure, internal processes and the way it delivers monetary policy throughout the economy, ultimately influencing key variables such as the unemployment rate and the levels of consumption and production. After an introduction dealing with the entire monetary transmission mechanism, its role and purposes, we will focus on the particularities of the asset price channel and the two main ways in which it delivers monetary policy decision effects: through changes in Tobin’s q value, which is the ratio between the market value of a given company and its replacement cost of capital, and through the effect of wealth, both of financial and housing nature, on consumption. In our study, we will consider theoretical aspects and observations, but also empirical evidence that highlights that the exact way in which the asset price channel functions may differ from one economy to another due to differences in the structures of the respective economies and differences in psychology and cultural values of consumers. The deep understanding of the asset price transmission channel is very important for any central bank, as this is the channel that governs key aspects of monetary policy transmission linked to the market value of assets and individual wealth. These values have, as we will see in more detail throughout the paper, an important impact on both consumption and investment, two economic actions that can help the economy, but can also prove to be a crucial element in starting and perpetuating an economic crisis.
Using an inflation-augmented price-earnings ratio to guide tactical asset allocation
Directory of Open Access Journals (Sweden)
Adrian Saville
2011-08-01
Full Text Available Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy.
Using an inflation-augmented price-earnings ratio to guide tactical asset allocation
Directory of Open Access Journals (Sweden)
Adrian Saville
2011-04-01
Full Text Available Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation. This study reviews these arguments as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio. Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy.
A Multiperiod Equilibrium Pricing Model
Directory of Open Access Journals (Sweden)
Minsuk Kwak
2014-01-01
Full Text Available We propose an equilibrium pricing model in a dynamic multiperiod stochastic framework with uncertain income. There are one tradable risky asset (stock/commodity, one nontradable underlying (temperature, and also a contingent claim (weather derivative written on the tradable risky asset and the nontradable underlying in the market. The price of the contingent claim is priced in equilibrium by optimal strategies of representative agent and market clearing condition. The risk preferences are of exponential type with a stochastic coefficient of risk aversion. Both subgame perfect strategy and naive strategy are considered and the corresponding equilibrium prices are derived. From the numerical result we examine how the equilibrium prices vary in response to changes in model parameters and highlight the importance of our equilibrium pricing principle.
Essays on banking and asset pricing
Roscovan, V.
2008-01-01
This dissertation contains three studies on banking and asset pricing. It analyzes questions related to informational content of bank loan announcements and trading activity. The first two chapters examine theoretically and empirically how stock and bond holders react to bank loan announcements as a
Generation unit selection via capital asset pricing model for generation planning
Energy Technology Data Exchange (ETDEWEB)
Romy Cahyadi; K. Jo Min; Chung-Hsiao Wang; Nick Abi-Samra [College of Engineering, Ames, IA (USA)
2003-11-01
The USA's electric power industry is undergoing substantial regulatory and organizational changes. Such changes introduce substantial financial risk in generation planning. In order to incorporate the financial risk into the capital investment decision process of generation planning, this paper develops and analyses a generation unit selection process via the capital asset pricing model (CAPM). In particular, utilizing realistic data on gas-fired, coal-fired, and wind power generation units, the authors show which and how concrete steps can be taken for generation planning purposes. It is hoped that the generation unit selection process will help utilities in the area of effective and efficient generation planning when financial risks are considered. 20 refs., 14 tabs.
Adaptive wavelet method for pricing two-asset Asian options with floating strike
Černá, Dana
2017-12-01
Asian options are path-dependent option contracts which payoff depends on the average value of the asset price over some period of time. We focus on pricing of Asian options on two assets. The model for pricing these options is represented by a parabolic equation with time variable and three state variables, but using substitution it can be reduced to the equation with only two state variables. For time discretization we use the θ-scheme. We propose a wavelet basis that is adapted to boundary conditions and use an adaptive scheme with this basis for discretization on the given time level. The main advantage of this scheme is small number of degrees of freedom. We present numerical experiments for the Asian put option with floating strike and compare the results for the proposed adaptive method and the Galerkin method.
The Capital Asset Pricing Model: An Evaluation of its Potential as a Strategic Planning Tool
Thomas H. Naylor; Francis Tapon
1982-01-01
In this paper we provide a summary of the capital asset pricing model (CAPM) and point out how it might possibly be used as a tool for strategic planning by corporations that own a portfolio of businesses. We also point out some of the assumptions underlying the CAPM which must be satisfied if it is to be used for strategic planning. Next we include a critical appraisal of the CAPM as a strategic planning tool. Finally, we state the case for linking competitive strategy models, CAPM models, a...
The Pricing of Options on Assets with Stochastic Volatilities.
Hull, John C; White, Alan D
1987-01-01
One option-pricing problem which has hitherto been unsolved is the pricing of European call on an asset which has a stochastic volatility. This paper examines this problem. The option price is determined in series form for the case in which the stochastic volatility is independent of the stock price. Numerical solutions are also produced for the case in which the volatility is correlated with the stock price. It is found that the Black-Scholes price frequently overprices options and that the ...
Portfolio choice and asset pricing with endogenous beliefs and skewness preference
Karehnke, P.
2014-01-01
This thesis studies portfolio choice and asset pricing with preferences which go beyond the standard expected utility and mean-variance preferences. The first part of this thesis analyses a decision model in which the decision maker forms endogenous beliefs given his anticipation utility and his
A Note on the Fundamental Theorem of Asset Pricing under Model Uncertainty
Directory of Open Access Journals (Sweden)
Erhan Bayraktar
2014-10-01
Full Text Available We show that the recent results on the Fundamental Theorem of Asset Pricing and the super-hedging theorem in the context of model uncertainty can be extended to the case in which the options available for static hedging (hedging options are quoted with bid-ask spreads. In this set-up, we need to work with the notion of robust no-arbitrage which turns out to be equivalent to no-arbitrage under the additional assumption that hedging options with non-zero spread are non-redundant. A key result is the closedness of the set of attainable claims, which requires a new proof in our setting.
Lectures on financial mathematics discrete asset pricing
Anderson, Greg
2010-01-01
This is a short book on the fundamental concepts of the no-arbitrage theory of pricing financial derivatives. Its scope is limited to the general discrete setting of models for which the set of possible states is finite and so is the set of possible trading times--this includes the popular binomial tree model. This setting has the advantage of being fairly general while not requiring a sophisticated understanding of analysis at the graduate level. Topics include understanding the several variants of "arbitrage", the fundamental theorems of asset pricing in terms of martingale measures, and applications to forwards and futures. The authors' motivation is to present the material in a way that clarifies as much as possible why the often confusing basic facts are true. Therefore the ideas are organized from a mathematical point of view with the emphasis on understanding exactly what is under the hood and how it works. Every effort is made to include complete explanations and proofs, and the reader is encouraged t...
Generation unit selection via capital asset pricing model for generation planning
Energy Technology Data Exchange (ETDEWEB)
Cahyadi, Romy; Jo Min, K. [College of Engineering, Ames, IA (United States); Chunghsiao Wang [LG and E Energy Corp., Louisville, KY (United States); Abi-Samra, Nick [Electric Power Research Inst., Palo Alto, CA (United States)
2003-07-01
The electric power industry in many parts of U.S.A. is undergoing substantial regulatory and organizational changes. Such changes introduce substantial financial risk in generation planning. In order to incorporate the financial risk into the capital investment decision process of generation planning, in this paper, we develop and analyse a generation unit selection process via the capital asset pricing model (CAPM). In particular, utilizing realistic data on gas-fired, coal-fired, and wind power generation units, we show which and how concrete steps can be taken for generation planning purposes. It is hoped that the generation unit selection process developed in this paper will help utilities in the area of effective and efficient generation planning when financial risks are considered. (Author)
Directory of Open Access Journals (Sweden)
Jacek Lipiec
2014-07-01
Full Text Available In this article, we test the capital asset pricing model (CAPM on the Warsaw Stock Exchange (WSE by measuring the performance of two portfolios composed of construction firms: family-controlled and nonfamily controlled. These portfolios were selected from the WIG-Construction (WIG—Warszawski Indeks Giełdowy—Warsaw Stock Exchange Index. The performance of both portfolios was measured in the period from 2006 to 2012 with respect to three sub-periods: (1 pre-crisis period: 2006–2007; (2 crisis period: 2008–2009; and (3 post-crisis period: 2010–2012. This division was constructed in this way to find out how family firms performed in crisis times in relation to nonfamily firms. In addition, the construction portfolio was chosen due to its sensitivity to recessions. When an economy faces a downturn, construction firms are among the first to be exposed to risk. The performance was measured by using the capital asset pricing model with statistical inference. We find that public family firms significantly outperformed non-family peers in the crisis times.
Directory of Open Access Journals (Sweden)
Chi Xie
2017-01-01
Full Text Available With the quick development of the Internet, online platforms that provide financial news and opinions have attracted more and more attention from investors. The question whether investor sentiment expressed on the Internet platforms has an impact on asset return has not been fully addressed. To this end, this paper uses the Baidu Searching Index as the agent variable to detect the effect of online investor sentiment on the asset price movement in the Chinese stock market. The empirical study shows that although there is a cointegration relationship between online investor sentiment and asset return, the sentiment has a poor ability to predict the price, return, and volatility of asset price. Meanwhile, the structural break points of online investor sentiment do not lead to changes in the asset price movement. Based on the empirical mode decomposition of online investor sentiment, we find that high frequency components of online investor sentiment can be used to predict the asset price movement. Thus, the obtained results could be useful for risk supervision and asset portfolio management.
Olga Klinkowska
2009-01-01
In this paper I develop the asset pricing model in which the wealth portfolio is enriched with human capital and housing capital. These two types of capital account for a significant portion of the total wealth. Additionally I introduce dynamics into the model and represent conditioning information by common factors estimated with dynamic factor methodology. In this way I can use more accurate representative of the unobservable information set of the investors. Obtained results prove that ind...
Directory of Open Access Journals (Sweden)
Erol Muzır
2010-09-01
Full Text Available This paper is prepared to test the common opinion that the multifactor asset pricing models produce superior predictions as compared to the single factor models and to evaluate the performance of Arbitrage Pricing Theory (APT and Capital Asset Pricing Model (CAPM. For this purpose, the monthly return data from January 1996 and December 2004 of the stocks of 45 firms listed at Istanbul Stock Exchange were used. Our factor analysis results show that 68,3 % of the return variation can be explained by five factors. Although the APT model has generated a low coefficient of determination, 28,3 %, it proves to be more competent in explaining stock return changes when compared to CAPM which has an inferior explanation power, 5,4 %. Furthermore, we have observed that APT is more robust also in capturing the effects of any economic crisis on return variations.
THE EQUITY PREMIUM PUZZLE AND EMOTIONAL ASSET PRICING
MARC GÜRTLER; NORA HARTMANN
2007-01-01
"Since the equity premium as well as the risk-free rate puzzle question the concepts central to financial and economic modeling, we apply behavioral decision theory to asset pricing in view of solving these puzzles. U.S. stock market data for the period 1960-2003 and German stock market data for the period 1977-2003 show that emotional investors who act in accordance to Bell's (1985) disappointment theory -a special case of prospect theory- and additionally administer mental accounts demand a...
Efficiently Inefficient Markets for Assets and Assets Management
DEFF Research Database (Denmark)
Garleanu, Nicolae; Heje Pedersen, Lasse
We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily......, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Finally, we show why large...
Essays on Empirical Asset Pricing
DEFF Research Database (Denmark)
Gormsen, Niels Joachim
that the expected return to the distant-future cash flows increases by more in bad times than the expected return to near-future cash flows does. This new stylized fact is important for understanding why the expected return on the market portfolio as a whole varies over time. In addition, it has strong implications...... for which economic model that drives the return to stocks. Indeed, I find that none of the canonical asset pricing models can explain this new stylized fact while also explaining the previously documented facts about stock returns. The second chapter, called Conditional Risk, studies how the expected return...... on individual stocks is influenced by the fact that their riskiness varies over time. We introduce a new ”conditional-risk factor”, which is a simple method for determining how much of the expected return to individual stocks that can be explained by time variation in their market risk, i.e. market betas. Using...
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Nila Cahyati
2015-04-01
Full Text Available Investasi mempunyai karakteristik antara return dan resiko. Pembentukan portofolio optimal digunakan untuk memaksimalkan keuntungan dan meminimumkan resiko. Liquidity Adjusted Capital Asset Pricing Model (LCAPM merupakan metode pengembangan baru dari CAPM yang dipengaruhi likuiditas. Indikator likuiditas apabila digabungkan dengan metode CAPM dapat membantu memaksimalkan return dan meminimumkan resiko. Tujuan penelitian adalah membandingkan expected retun dan resiko saham serta mengetahui proporsi pada portofolio optimal. Sampel yang digunakan merupakan saham JII (Jakarta Islamic Index periode Januari 2013 – November 2014. Hasil penelitian menunjukkan bahwa expected return portofolio LCAPM sebesar 0,0956 dengan resiko 0,0043 yang membentuk proporsi saham AALI (55,19% dan saham PGAS (44,81%.
Skewed Normal Distribution Of Return Assets In Call European Option Pricing
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Evy Sulistianingsih
2011-12-01
Full Text Available Option is one of security derivates. In financial market, option is a contract that gives a right (notthe obligation for its owner to buy or sell a particular asset for a certain price at a certain time.Option can give a guarantee for a risk that can be faced in a market.This paper studies about theuse of Skewed Normal Distribution (SN in call europeanoption pricing. The SN provides aflexible framework that captures the skewness of log return. We obtain aclosed form solution forthe european call option pricing when log return follow the SN. Then, we will compare optionprices that is obtained by the SN and the Black-Scholes model with the option prices of market.Â Keywords: skewed normaldistribution, log return, options.
Empirical Asset Pricing: Eugene Fama, Lars Peter Hansen, and Robert Shiller
Campbell, John Y.
2016-01-01
The Nobel Memorial Prize in Economic Sciences for 2013 was awarded to Eugene Fama, Lars Peter Hansen, and Robert Shiller for their contributions to the empirical study of asset pricing. Some observers have found it hard to understand the common elements of the laureates research, preferring to highlight areas of disagreement among them. This paper argues that empirical asset pricing is a coherent enterprise, which owes much to the laureates seminal contributions, and that important themes in ...
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Suripto Suripto
2017-03-01
Full Text Available This research tested the influence of characteristics of the firms and of EVA (Eco-nomic Value Added to stock of returns. This Research sample was company Self-100 ValueCreator of year 2001 until 2006. Result of research indicated that company size measure,profitability, capital structure (characteristics of the firms and EVA by stimulant had aneffect on significant to stock of returns, but by partial only characteristics company. Condi-tion of company fundamentals had an effect on significance to stock of returns. This indica-tion that investor still considered factors of fundamentals was having investment. EVA didnot have an effect on significant to stock of returns. This finding indicated that Model deter-mination of stock of returns (CAPM Irrelevant determined the level of EVA and also indicatedthat CAPM (Capital Assets Pricing Model was not relevant in determining stock of returns inIndonesian Stock Exchange.
Pareto Improving Price Regulation when the Asset Market is Incomplete
Herings, P.J.J.; Polemarchakis, H.M.
1999-01-01
When the asset market is incomplete, competitive equilibria are constrained suboptimal, which provides a scope for pareto improving interventions. Price regulation can be such a pareto improving policy, even when the welfare effects of rationing are taken into account. An appealing aspect of price
Does Central Bank Tone Move Asset Prices?
DEFF Research Database (Denmark)
Schmeling, Maik; Wagner, Christian
the next press conference. Moreover, we find that positive tone changes are associated with increasing government bond yields, lower implied equity volatility, lower variance risk premia, and lower corporate credit spreads. Since we also show that tone changes are unrelated to current and future economic...... fundamentals, these results support the conjecture that central bank tone matters for asset prices through a risk-based channel. Our main findings also apply to U.S. markets, where stock prices and Treasury yields increase when the Fed chair’s tone in the Congressional Testimony becomes more positive....
Excess co-movement in asset prices: The case of South Africa
Ocran, Mathew; Mlambo, Chipo
2009-01-01
The paper investigates excess co-movement in asset prices in South Africa between 1995 and 2005 using the definition of excess comovement as correlation between two asset prices beyond what could be explained by key economic fundamentals. The results of the study suggest that there is excess co-movement between returns on equities and bonds in South Africa. The findings suggest that there are considerable noise traders on the financial market in South Africa. The result of this behaviour woul...
Asset price and trade volume relation in artificial market impacted by value investors
Tangmongkollert, K.; Suwanna, S.
2016-05-01
The relationship between return and trade volume has been of great interests in a financial market. The appearance of asymmetry in the price-volume relation in the bull and bear market is still unsettled. We present a model of the value investor traders (VIs) in the double auction system, in which agents make trading decision based on the pseudo fundamental price modelled by sawtooth oscillations. We investigate the system by two different time series for the asset fundamental price: one corresponds to the fundamental price in a growing phase; and the other corresponds to that in a declining phase. The simulation results show that the trade volume is proportional to the difference between the market price and the fundamental price, and that there is asymmetry between the buying and selling phases. Furthermore, the selling phase has more significant impact of price on the trade volume than the buying phase.
Elvira, Nasika
2014-01-01
The objective of research is to explain the analysis against the performance of stocks of the companies listed in Indonesia Stock Exchange based on their return and risk, and to explain the analysis of the determination of efficient stock group based on Capital Asset Pricing Model (CAPM) over the stocks of the companies listed in Indonesia Stock Exchange for portfolio establishment in period 2010-2012. The USAge of Capital Asset Pricing Model (CAPM) in this research is that CAPM method can ex...
Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Models
Sydney Ludvigson; Xiaohong Chen
2004-01-01
A leading explanation of aggregate stock market behavior suggests that assets are priced as if there were a representative investor whose utility is a power function of the difference between aggregate consumption and a "habit" level, where the habit is some function of lagged and (possibly) contemporaneous consumption. But theory does not provide precise guidelines about the parametric functional relationship between the habit and aggregate consumption. This makes formal estimation and testi...
International Asset Pricing, Currency Risk and Integration of Markets
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Sema BAYRAKTAR
2014-11-01
Full Text Available This study attempts to test the conditional version of the international asset-pricing model proposed in Bayraktar (2000, 2009 by using a parsimonious multivariate GARCH process. The theoretical model, contrary to previous empirical studies that have used random selection of currency risks, determines which currencies should be included in an empirical test, thus avoids this kind of random selection bias. The results from both full and sub-samples regressions provide some weak evidence for the existence of exchange rate risks, thus partially support the theory. However, exchange rate risks' premia are found considerably smaller than that of market risk.
A Dealer Model of Foreign Exchange Market with Finite Assets
Hamano, Tomoya; Kanazawa, Kiyoshi; Takayasu, Hideki; Takayasu, Misako
An agent-based model is introduced to study the finite-asset effect in foreign exchange markets. We find that the transacted price asymptotically approaches an equilibrium price, which is determined by the monetary balance between the pair of currencies. We phenomenologically derive a formula to estimate the equilibrium price, and we model its relaxation dynamics around the equilibrium price on the basis of a Langevin-like equation.
Global Asset Pricing: Is There a Role for Long-run Consumption Risk?
DEFF Research Database (Denmark)
Rangvid, Jesper; Schmelling, Maik; Schrimpf, Andreas
We estimate long-run consumption-based asset pricing models using a comprehensive set of international test assets, including broad equity market portfolios, international value/growth portfolios, and international bond portfolios. We find that differences in returns across assets within a countr...... that consumption growth is more predictable over short to medium-run horizons than over longer horizons and that empirical evidence of a de- clining risk aversion parameter estimate in long-run risk models has to be interpreted with care....... are sometimes (and most prominently for the U.S.) better captured by the assets' exposure to long-run consumption risk as opposed to their exposure to one-period changes in consumption (the canonical consumption CAPM). Across countries, however, exposure to long-run consumption risk does not provide a better...... fit than the canonical consumption CAPM. Thus, when characterizing the cross-country distribution of returns, long-run consumption risk does not seem to play any particular role, even if long-run risk is important for explaining the cross section of expected returns in the U.S. Furthermore, we show...
International asset pricing under segmentation and PPP deviations
Chaieb, I.; Errunza, V.
2007-01-01
We analyze the impact of both purchasing power parity (PPP) deviations and market segmentation on asset pricing and investor's portfolio holdings. The freely traded securities command a world market risk premium and an inflation risk premium. The securities that can be held by only a subset of
Modeling the coupled return-spread high frequency dynamics of large tick assets
Curato, Gianbiagio; Lillo, Fabrizio
2015-01-01
Large tick assets, i.e. assets where one tick movement is a significant fraction of the price and bid-ask spread is almost always equal to one tick, display a dynamics in which price changes and spread are strongly coupled. We present an approach based on the hidden Markov model, also known in econometrics as the Markov switching model, for the dynamics of price changes, where the latent Markov process is described by the transitions between spreads. We then use a finite Markov mixture of logit regressions on past squared price changes to describe temporal dependencies in the dynamics of price changes. The model can thus be seen as a double chain Markov model. We show that the model describes the shape of the price change distribution at different time scales, volatility clustering, and the anomalous decrease of kurtosis. We calibrate our models based on Nasdaq stocks and we show that this model reproduces remarkably well the statistical properties of real data.
Efficiently Inefficient Markets for Assets and Asset Management
DEFF Research Database (Denmark)
Garleanu, Nicolae; Pedersen, Lasse Heje
We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily......, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Small investors should...... be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform....
Testing Capital Asset Pricing Model: Empirical Evidences from Indian Equity Market
Directory of Open Access Journals (Sweden)
Kapil CHOUDHARY
2010-11-01
Full Text Available The present study examines the Capital Asset Pricing Model (CAPM for the Indian stock market using monthly stock returns from 278 companies of BSE 500 Index listed on the Bombay stock exchange for the period of January 1996 to December 2009. The findings of this study are not substantiating the theory’s basic result that higher risk (beta is associated with higher levels of return. The model does explain, however, excess returns and thus lends support to the linear structure of the CAPM equation. The theory’s prediction for the intercept is that it should equal zero and the slope should equal the excess returns on the market portfolio. The results of the study lead to negate the above hypotheses and offer evidence against the CAPM. The tests conducted to examine the nonlinearity of the relationship between return and betas bolster the hypothesis that the expected return-beta relationship is linear. Additionally, this study investigates whether the CAPM adequately captures all-important determinants of returns including the residual variance of stocks. The results exhibit that residual risk has no effect on the expected returns of portfolios.
Learning about rare disasters: implications for consumption and asset prices
Czech Academy of Sciences Publication Activity Database
Gillman, Max; Kejak, Michal; Pakoš, Michal
2015-01-01
Roč. 19, č. 3 (2015), s. 1053-1104 ISSN 1572-3097 Institutional support: RVO:67985998 Keywords : rare diasasters * asset prices * consumption Subject RIV: AH - Economics Impact factor: 2.080, year: 2015
Discounted Cash Flow and Modern Asset Pricing Methods - Project Selection and Policy Implications
Energy Technology Data Exchange (ETDEWEB)
Emhjellen, Magne; Alaouze, Chris M
2002-07-01
We examine the differences in the net present values (NPV's) of North Sea oil projects obtained using the Weighted Average Cost of Capital (WACC) and a Modern Asset Pricing (MAP) method which involves the separate discounting of project cash flow components. NPV differences of more than $1 Om were found for some oil projects. Thus, the choice of valuation method will affect the development decisions of oil companies. The results of the MAP method are very sensitive to the choice of parameter values for the stochastic process used to model oil prices. Further research is recommended before the MAP method is used as the sole valuation model. (author)
Discounted Cash Flow and Modern Asset Pricing Methods - Project Selection and Policy Implications
Energy Technology Data Exchange (ETDEWEB)
Emhjellen, Magne; Alaouze, Chris M.
2002-07-01
We examine the differences in the net present values (NPV's) of North Sea oil projects obtained using the Weighted Average Cost of Capital (WACC) and a Modern Asset Pricing (MAP) method which involves the separate discounting of project cash flow components. NPV differences of more than $1 Om were found for some oil projects. Thus, the choice of valuation method will affect the development decisions of oil companies. The results of the MAP method are very sensitive to the choice of parameter values for the stochastic process used to model oil prices. Further research is recommended before the MAP method is used as the sole valuation model. (author)
Discounted Cash Flow and Modern Asset Pricing Methods - Project Selection and Policy Implications
International Nuclear Information System (INIS)
Emhjellen, Magne; Alaouze, Chris M.
2002-01-01
We examine the differences in the net present values (NPV's) of North Sea oil projects obtained using the Weighted Average Cost of Capital (WACC) and a Modern Asset Pricing (MAP) method which involves the separate discounting of project cash flow components. NPV differences of more than $1 Om were found for some oil projects. Thus, the choice of valuation method will affect the development decisions of oil companies. The results of the MAP method are very sensitive to the choice of parameter values for the stochastic process used to model oil prices. Further research is recommended before the MAP method is used as the sole valuation model. (author)
THE APPLICATION OF THE CAPITAL ASSET PRICING MODEL ON THE CROATIAN CAPITAL MARKET
Directory of Open Access Journals (Sweden)
Bojan Tomic
2013-12-01
Full Text Available The paper describes and analyzes the application of the capital asset pricing model (CAPM and the single-index model on the Zagreb stock exchange during the drop in the total trade turnover, and mostly in the trade of equity securities. This model shows through the analysis techniques used to estimate the systematic risk per share compared to the market portfolio. Also, the model quantifies the environment in which a company and its stocks exist, expressing it as risk, or a beta coefficient. Furthermore, with respect to the market stagnation, one can also discuss the usefulness of the model, especially if the quality of the input data is questionable. In this regard, the importance of the proper application and interpretation of the results obtained based on the model during the stagnation of the market, and especially during the stagnation of the trade of equity securities, is gaining even greater importance and significance. On the other hand, the results obtained through the analysis of data point to problems arising during the application of the model. It turns out the main problem of applying the CAPM model is the market index with negative returns during the observation period.
Essays on Empirical Asset Pricing : Essays over het empirisch prijzen van financiele producten
R.W.M. Verbeek (Roy)
2017-01-01
textabstractThis dissertation consists of three essays on empirical asset pricing. In the first essay, I investigate whether common risk factors are priced across investment horizons. I show that only the market and size factors are priced, but only up to sixteen months. The results highlight the
Efficient Pricing of Derivatives on Assets with Discrete Dividends
Vellekoop, M.H.; Nieuwenhuis, J.W.
2006-01-01
It is argued that due to inconsistencies in existing methods to approximate the prices of equity options on assets which pay out fixed cash dividends at future dates, a new approach to this problem may be useful. Logically consistent methods which are guaranteed to exclude arbitrage exist, but they
Intangible asset valuation, damages, and transfer price analyses in the health care industry.
Reilly, Robert F
2010-01-01
Most health care industry participants own and operate intangible assets. These intangible assets can be industry-specific (e.g., patient charts and records, certificates of need, professional and other licenses), or they can be general commercial intangible assets (e.g., trademarks, systems and procedures, an assembled workforce). Many industry participants have valued their intangible assets for financial accounting or other purposes. This article summarizes the intangible assets that are common to health care industry participants. This article describes the different types of intangible asset analyses (including valuation, transfer price, damages estimates, etc.), and explains the many different transaction, accounting, taxation, regulatory, litigation, and other reasons why industry participants may wish to value (or otherwise analyze) health care intangible assets.
Retrading, production, and asset market performance.
Gjerstad, Steven D; Porter, David; Smith, Vernon L; Winn, Abel
2015-11-24
Prior studies have shown that traders quickly converge to the price-quantity equilibrium in markets for goods that are immediately consumed, but they produce speculative price bubbles in resalable asset markets. We present a stock-flow model of durable assets in which the existing stock of assets is subject to depreciation and producers may produce additional units of the asset. In our laboratory experiments inexperienced consumers who can resell their units disregard the consumption value of the assets and compete vigorously with producers, depressing prices and production. Consumers who have first participated in experiments without resale learn to heed their consumption values and, when they are given the option to resell, trade at equilibrium prices. Reproducibility is therefore the most natural and most effective treatment for suppression of bubbles in asset market experiments.
The pricing of European options on two underlying assets with delays
Lin, Lisha; Li, Yaqiong; Wu, Jing
2018-04-01
In the paper, the pricing of European options on two underlying assets with delays is discussed. By using the approach of equivalent martingale measure transformation, the market is proved to be complete. With exchange option as a particular example, we obtain the explicit pricing formula in a subinterval of option period. The robust Euler-Maruyama method is combined with the Monte Carlo simulation to compute exchange option prices within the whole option period. Numerical experiments indicate that there is an increasing possibility of the difference between the delayed and Black-Scholes option prices with the increase of delay.
Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution
DEFF Research Database (Denmark)
Andreasen, Martin Møller; Jørgensen, Kasper
model to explain asset prices with a low relative risk aversion (RRA) of 9.8 and a low intertemporal elasticity of substitution (IES) of 0:11. We also show that the proposed preferences allow an otherwise standard New Keynesian model to match the equity premium, the bond premium, and the risk-free rate......This paper extends the class of Epstein-Zin-Weil preferences with a new utility kernel that disentangles uncertainty about the consumption trend (long-run risk) from short-term variation around this trend (cyclical risk). Our estimation results show that these preferences enable the long-run risk...
DEFF Research Database (Denmark)
Busato, Francesco; Addessi, William
The paper investigates the nexus between labor and financial markets, focusing on the interaction between labor union behavior in setting wages, firms' investment strategy and asset prices. The way unions set wage claims after observing firm's financial performance increases the volatility of firms......' returns and the riskiness of corporate ownership. To remunerate this higher volatility and stronger risk, firms' equities have to grant high return. This mechanism is able to offer an explanation of for the "equity puzzle", that is it can explain the difference between equity returns and the risk free...... rate. It is a welcome result that the simulated excess return is about the empirical estimate and this result is obtained with a logarithmic specification of the shareholders preferences....
Multi-factor energy price models and exotic derivatives pricing
Hikspoors, Samuel
The high pace at which many of the world's energy markets have gradually been opened to competition have generated a significant amount of new financial activity. Both academicians and practitioners alike recently started to develop the tools of energy derivatives pricing/hedging as a quantitative topic of its own. The energy contract structures as well as their underlying asset properties set the energy risk management industry apart from its more standard equity and fixed income counterparts. This thesis naturally contributes to these broad market developments in participating to the advances of the mathematical tools aiming at a better theory of energy contingent claim pricing/hedging. We propose many realistic two-factor and three-factor models for spot and forward price processes that generalize some well known and standard modeling assumptions. We develop the associated pricing methodologies and propose stable calibration algorithms that motivate the application of the relevant modeling schemes.
Learning about rare disasters: implications for consumption and asset prices
Czech Academy of Sciences Publication Activity Database
Gillman, M.; Kejak, Michal; Pakoš, Michal
2015-01-01
Roč. 19, č. 3 (2015), s. 1053-1104 ISSN 1572-3097 R&D Projects: GA ČR(CZ) GBP402/12/G097 Institutional support: PRVOUK-P23 Keywords : rare diasasters * asset prices * consumption Subject RIV: AH - Economics Impact factor: 2.080, year: 2015
Measuring Risk Structure Using the Capital Asset Pricing Model
Directory of Open Access Journals (Sweden)
Zdeněk Konečný
2015-01-01
Full Text Available This article is aimed at proposing of an inovative method for calculating the shares of operational and financial risks. This methodological tool will support managers while monitoring the risk structure. The method is based on the capital asset pricing model (CAPM for calculation of equity cost, namely on determination of the beta coefficient, which is the only variable, that is dependent on entrepreneurial risk. There are combined both alternative approaches for calculation betas, which means, that there are accounting data used and there is distinguished unlevered beta and levered beta. The novelty of the proposed method is based on including of quantities for measuring operational and financial risks in beta calculation. The volatility of cash flow, as a quantity for measuring of operational risk, is included in the unlevered beta. Return on equity based on the cash flow and the indebtedness are variables used in calculation of the levered beta. This modification makes it possible to calculate the share of operational risk as the proportion of the unlevered/levered beta and the share of financial risk, which is the remainder of levered beta. The modified method is applied on companies from two sectors of the Czech economy. In the data set there are companies from one cyclical sector and from one neutral sector to find out potential differences in the risk structure. The findings show, that in both sectors the share of operational risk is over 50%, however, in the neutral sector is this more dominant.
International Nuclear Information System (INIS)
Emhjellen, Magne; Alaouze, Chris M.
2003-01-01
We examine the differences in the net present values (NPVs) of North Sea oil projects obtained using the weighted average cost of capital and a modern asset pricing (MAP) method which involves the separate discounting of project cashflow components. NPV differences of more than $10 million were found for some oil projects. Thus, the choice of valuation method will affect the development decisions of oil companies and could influence tax policy. The results of the MAP method are very sensitive to the choice of parameter values for the stochastic process used to model oil prices. Further research is recommended before the MAP method is used as the sole valuation model
Inflation risk and international asset returns
G.A. Moerman (Gerard); M.A. van Dijk (Mathijs)
2010-01-01
textabstractWe show that inflation risk is priced in international asset returns. We analyze inflation risk in a framework that encompasses the International Capital Asset Pricing Model (ICAPM) of Adler and Dumas (1983). In contrast to the extant empirical literature on the ICAPM, we relax the
26 CFR 1.338-4 - Aggregate deemed sale price; various aspects of taxation of the deemed asset sale.
2010-04-01
... 26 Internal Revenue 4 2010-04-01 2010-04-01 false Aggregate deemed sale price; various aspects of taxation of the deemed asset sale. 1.338-4 Section 1.338-4 Internal Revenue INTERNAL REVENUE SERVICE... Aggregate deemed sale price; various aspects of taxation of the deemed asset sale. (a) Scope. This section...
Dynamic Relationships between Price and Net Asset Value for Asian Real Estate Stocks
Directory of Open Access Journals (Sweden)
Kim Hiang LIOW
2018-03-01
Full Text Available This paper examines short- and long-term behavior of the price-to net asset value ratio in six Asian public real estate markets. We find mean-reverting behavior of the ratio and spillover effects, where each of the examined public real estate markets correlates with other markets. Additionally, the unexpected shock correlating with the price-to-net asset value ratio in one market has a positive or negative correlation with the ratios of other markets. Our results offer fresh insights to portfolio managers, policymakers, and academic researchers into the regional and country market dynamics of public real estate valuation and cross-country interaction from the long-term and short-term perspectives.
Customer perspectives on district heating price models
Directory of Open Access Journals (Sweden)
Kerstin Sernhed
2017-01-01
Full Text Available In Sweden there has been a move towards more cost reflective price models for district heating in order to reduce economic risks that comes with variable heat demand and high shares of fixed assets. The keywords in the new price models are higher shares of fixed cost, seasonal energy prices and charging for capacity. Also components that are meant to serve as incentives to affect behaviour are introduced, for example peak load components and flow components. In this study customer responses to these more complex price models have been investigated through focus group interviews and through interviews with companies that have changed their price models. The results show that several important customer requirements are suffering with the new price models. The most important ones are when energy savings do not provide financial savings, when costs are hard to predict and are perceived to be out of control.
Electricity spot price dynamics: Beyond financial models
International Nuclear Information System (INIS)
Guthrie, Graeme; Videbeck, Steen
2007-01-01
We reveal properties of electricity spot prices that cannot be captured by the statistical models, commonly used to model financial asset prices, that are increasingly used to model electricity prices. Using more than eight years of half-hourly spot price data from the New Zealand Electricity Market, we find that the half-hourly trading periods fall naturally into five groups corresponding to the overnight off-peak, the morning peak, daytime off-peak, evening peak, and evening off-peak. The prices in different trading periods within each group are highly correlated with each other, yet the correlations between prices in different groups are lower. Models, adopted from the modeling of security prices, that are currently applied to electricity spot prices are incapable of capturing this behavior. We use a periodic autoregression to model prices instead, showing that shocks in the peak periods are larger and less persistent than those in off-peak periods, and that they often reappear in the following peak period. In contrast, shocks in the off-peak periods are smaller, more persistent, and die out (perhaps temporarily) during the peak periods. Current approaches to modeling spot prices cannot capture this behavior either. (author)
An empirical examination of restructured electricity prices
International Nuclear Information System (INIS)
Knittel, C.R.; Roberts, M.R.
2005-01-01
We present an empirical analysis of restructured electricity prices. We study the distributional and temporal properties of the price process in a non-parametric framework, after which we parametrically model the price process using several common asset price specifications from the asset-pricing literature, as well as several less conventional models motivated by the peculiarities of electricity prices. The findings reveal several characteristics unique to electricity prices including several deterministic components of the price series at different frequencies. An 'inverse leverage effect' is also found, where positive shocks to the price series result in larger increases in volatility than negative shocks. We find that forecasting performance in dramatically improved when we incorporate features of electricity prices not commonly modelled in other asset prices. Our findings have implications for how empiricists model electricity prices, as well as how theorists specify models of energy pricing. (author)
An asset pricing approach to liquidity effects in corporate bond markets
Bongaerts, Dion; de Jong, Frank; Driessen, Joost
We use an asset pricing approach to compare the effects of expected liquidity and liquidity risk on expected U.S. corporate bond returns. Liquidity measures are constructed for bond portfolios using a Bayesian approach to estimate Roll’s measure. The results show that expected bond liquidity and
Real Implications of Bursting Asset Price Bubbles in Economies with Bank Credit
Czech Academy of Sciences Publication Activity Database
Derviz, Alexis
2011-01-01
Roč. 61, č. 1 (2011), s. 92-116 ISSN 0015-1920 Institutional research plan: CEZ:AV0Z10750506 Keywords : bank * credit * asset price * bubble * macroprudential policy Subject RIV: AH - Economics Impact factor: 0.346, year: 2011
Directory of Open Access Journals (Sweden)
Francis M HUTABARAT
2016-08-01
Full Text Available The industry in Indonesia is an interesting business to capitalize. In Indonesia many companies were established since it is profitable. The capital market serves as an economic pillar in most countries. Indonesia is a rich country, rich in many ways especially in natural resources. However, the industry has its ups and downs in the stock market. It is interesting to see the performance of the companies listed in the Indonesia Stock Exchange. This study aimed to measure and analyze companies listed in Pefindo25 at Indonesian Stock Exchange using Capital Asset Pricing Model. The sample used is 25 companies listed at Pefindo25 index. Based on the results of the study, it can conclude that after analyzing the companies listed in the Indonesian Stock Exchange using Capital Asset Pricing Model that based on Beta analysis, the companies have the type of stocks that are aggressive and defensive. With positive and negative return. The company with aggressive beta shows that the company tend to face higher risk, as JPFA find itself with positif return 15.47% expected return. And companies with defensive type of stocks tend to have positive return such as: FISH, STTP, AISA, APLN, and others since they are not sensitive to market changes. It is recommended for further research to look on this CAPM method in analyzing the stock investment.
Higher-order co-moments in asset pricing on the stock exchange in Brazil
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Paulo Vitor Jordão da Gama Silva
2015-12-01
Full Text Available This study seeks to identify the behavior of systemic asymmetry (coskewness and systemic kurtosis (cokurtosis in asset pricing on the Brazilian stock exchange (in BM&F Bovespa. The methodology explored by Harvey and Siddique (2000 was used to estimate the degree of coskewness and cokurtosis for stocks in each month t, following the CAPM regression. The three-factor model was used according to Fama and French (1993, with modifications to the calculation of the factors following the methodology exploited by Neves (2003. The results show that for the Brazilian market, assets with negative coskewness and cokurtosis tend to yield more than assets with positive coskewness and cokurtosis. According to observations in the American and London markets, as investors expect higher returns for the high risk, a preference was found for negative coskewness and positive cokurtosis. In Brazil, it was found that in the case of coskewness, it repeats itself, but not for cokurtosis, where the reverse is true, which can lead to the conclusion of a typically risk-averse behavior.
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Sayed H. Saghaian
2014-04-01
Full Text Available In this study, we evaluate the effects of the recent Federal Reserve’s purchases of longterm assets on prices of agricultural commodities. The first large-scale asset purchases began at the end of 2008, after the Great Recession, and the second purchases began in November of 2010. The commodities included in this analysis are meats (beef, pork, and broilers, cereal grains (corn, soybeans, wheat, and rice, and softs (sugar, coffee, cocoa, and cotton. Using historical decompositions, we find significant increases in the nominal agricultural prices of ten out of 12 agricultural commodities under investigation from the second large-scale asset purchases (in 2010 but the first set large-scale asset purchases had only two positive effects.
Ambiguity Aversion, Asset Prices, and the Welfare Costs of Aggregate Fluctuations
DEFF Research Database (Denmark)
Alonso, Irasema; Prado, Mauricio
2015-01-01
with a representative agent facing consumption fluctuations calibrated to match U.S. data from 1889 to 2008. Our experiment is to restrict preference parameters in order to as well as possible match some asset-price facts—the average returns on equity and a short-term risk-free bond—and then compute the welfare...
A Jump-Diffusion Model for Option Pricing
S. G. Kou
2002-01-01
Brownian motion and normal distribution have been widely used in the Black--Scholes option-pricing framework to model the return of assets. However, two puzzles emerge from many empirical investigations: the leptokurtic feature that the return distribution of assets may have a higher peak and two (asymmetric) heavier tails than those of the normal distribution, and an empirical phenomenon called "volatility smile" in option markets. To incorporate both of them and to strike a balance between ...
CAM Stochastic Volatility Model for Option Pricing
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Wanwan Huang
2016-01-01
Full Text Available The coupled additive and multiplicative (CAM noises model is a stochastic volatility model for derivative pricing. Unlike the other stochastic volatility models in the literature, the CAM model uses two Brownian motions, one multiplicative and one additive, to model the volatility process. We provide empirical evidence that suggests a nontrivial relationship between the kurtosis and skewness of asset prices and that the CAM model is able to capture this relationship, whereas the traditional stochastic volatility models cannot. We introduce a control variate method and Monte Carlo estimators for some of the sensitivities (Greeks of the model. We also derive an approximation for the characteristic function of the model.
Multivariate Option Pricing Using Dynamic Copula Models
van den Goorbergh, R.W.J.; Genest, C.; Werker, B.J.M.
2003-01-01
This paper examines the behavior of multivariate option prices in the presence of association between the underlying assets.Parametric families of copulas offering various alternatives to the normal dependence structure are used to model this association, which is explicitly assumed to vary over
Asymptotic approach to the pricing of geometric asian options under the CEV model
International Nuclear Information System (INIS)
Lee, Min-Ku
2016-01-01
This paper studies the pricing of Asian options whose payoffs depend on the average value of an underlying asset during the period to a maturity. Since the Asian option is not so sensitive to the value of underlying asset, the possibility of manipulation is relatively small than the other options such as European vanilla and barrier options. We derive the pricing formula of geometric Asian options under the constant elasticity of variance (CEV) model that is one of local volatility models, and investigate the implication of the CEV model for geometric Asian options.
Enhanced capital-asset pricing model for the reconstruction of bipartite financial networks
Squartini, Tiziano; Almog, Assaf; Caldarelli, Guido; van Lelyveld, Iman; Garlaschelli, Diego; Cimini, Giulio
2017-09-01
Reconstructing patterns of interconnections from partial information is one of the most important issues in the statistical physics of complex networks. A paramount example is provided by financial networks. In fact, the spreading and amplification of financial distress in capital markets are strongly affected by the interconnections among financial institutions. Yet, while the aggregate balance sheets of institutions are publicly disclosed, information on single positions is mostly confidential and, as such, unavailable. Standard approaches to reconstruct the network of financial interconnection produce unrealistically dense topologies, leading to a biased estimation of systemic risk. Moreover, reconstruction techniques are generally designed for monopartite networks of bilateral exposures between financial institutions, thus failing in reproducing bipartite networks of security holdings (e.g., investment portfolios). Here we propose a reconstruction method based on constrained entropy maximization, tailored for bipartite financial networks. Such a procedure enhances the traditional capital-asset pricing model (CAPM) and allows us to reproduce the correct topology of the network. We test this enhanced CAPM (ECAPM) method on a dataset, collected by the European Central Bank, of detailed security holdings of European institutional sectors over a period of six years (2009-2015). Our approach outperforms the traditional CAPM and the recently proposed maximum-entropy CAPM both in reproducing the network topology and in estimating systemic risk due to fire sales spillovers. In general, ECAPM can be applied to the whole class of weighted bipartite networks described by the fitness model.
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Charles P. Kindleberger
2009-12-01
Full Text Available L’inflazione degli asset, a differenza dell’inflazione ordinaria, che si riferisce a l'aumento dei prezzi dei beni di consumo, merci all'ingrosso, o il deflatore del reddito nazionale, è un termine che non è in uso in occidente, ma corrente in Giappone. Ci sono momenti in cui gli assets aumenteranno di prezzo in modo inflazionistico, un boom o anche una bolla, mentre i prezzi dell’output sono relativamente stabili o addirittura in calo. Asset inflation, as distinguished from ordinary inflation, the latter referring to rising prices of consumer goods, wholesale commodities, or the national-income deflator, is a phrase not in use in the west, but current in Japan. There are times when assets rise in price in an inflationary way, a boom or even a bubble, while output prices are relatively stable or even declining. JEL Codes: F3, G1, N1, B5
The asset pricing model of musharakah factors
Simon, Shahril; Omar, Mohd; Lazam, Norazliani Md
2015-02-01
The existing three-factor model developed by Fama and French for conventional investment was formulated based on risk-free rates element in which contradict with Shariah principles. We note that the underlying principles that govern Shariah investment were mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions were based on an underlying asset. In addition, the three-factor model did not exclude stock that was not permissible by Shariah such as financial services based on riba (interest), gambling operator, manufacture or sale of non-halal products or related products and other activities deemed non-permissible according to Shariah. Our approach to construct the factor model for Shariah investment was based on the basic tenets of musharakah in tabulating the factors. We start by noting that Islamic stocks with similar characteristics should have similar returns and risks. This similarity between Islamic stocks was defined by the similarity of musharakah attributes such as business, management, profitability and capital. These attributes define factor exposures (or betas) to factors. The main takeaways were that musharakah attributes we chose had explain stock returns well in cross section and were significant in different market environments. The management factor seemed to be responsible for the general dynamics of the explanatory power.
A Consistent Pricing Model for Index Options and Volatility Derivatives
DEFF Research Database (Denmark)
Kokholm, Thomas
to be priced consistently, while allowing for jumps in volatility and returns. An affine specification using Lévy processes as building blocks leads to analytically tractable pricing formulas for volatility derivatives, such as VIX options, as well as efficient numerical methods for pricing of European options...... on the underlying asset. The model has the convenient feature of decoupling the vanilla skews from spot/volatility correlations and allowing for different conditional correlations in large and small spot/volatility moves. We show that our model can simultaneously fit prices of European options on S&P 500 across...
A Consistent Pricing Model for Index Options and Volatility Derivatives
DEFF Research Database (Denmark)
Cont, Rama; Kokholm, Thomas
2013-01-01
to be priced consistently, while allowing for jumps in volatility and returns. An affine specification using Lévy processes as building blocks leads to analytically tractable pricing formulas for volatility derivatives, such as VIX options, as well as efficient numerical methods for pricing of European options...... on the underlying asset. The model has the convenient feature of decoupling the vanilla skews from spot/volatility correlations and allowing for different conditional correlations in large and small spot/volatility moves. We show that our model can simultaneously fit prices of European options on S&P 500 across...
Sun, Ou; Liu, Zhixin
2016-01-01
We examine the different effects of monetary policy actions and central bank communication on China's stock market bubbles with a Time-varying Parameter SVAR model. We find that with negative responses of fundamental component and positive responses of bubble component of asset prices, contractionary monetary policy induces the observed stock prices to rise during periods of large bubbles. By contrast, central bank communication acts on the market through expectation guidance and has more significant effects on stock prices in the long run, which implies that central bank communication be used as an effective long-term instrument for the central bank's policymaking.
Risk and return in oilfield asset holdings
International Nuclear Information System (INIS)
Kretzschmar, Gavin L.; Kirchner, Axel; Reusch, Hans
2008-01-01
Convention suggests that emerging market investment should provide commensurately lower risk or higher returns than comparable assets in developed countries. This study demonstrates that emerging markets contain regulatory specificities that challenge asset valuation model convergence and potentially invert risk return convention. 292 oilfield assets are used to provide evidence that, under upward oil prices, emerging markets are characterized by progressive state participation in oilfield cash flows. Specifically, this work advances the low oil price paradigm of prior oil and gas asset valuation studies and provides evidence that emerging market state participation terms limit the corporate value of globalization for the sector. (author)
Risk and return in oilfield asset holdings
Energy Technology Data Exchange (ETDEWEB)
Kretzschmar, Gavin L.; Kirchner, Axel; Reusch, Hans [University of Edinburgh, College of Humanities and Social Sciences, The Management School (United Kingdom)
2008-11-15
Convention suggests that emerging market investment should provide commensurately lower risk or higher returns than comparable assets in developed countries. This study demonstrates that emerging markets contain regulatory specificities that challenge asset valuation model convergence and potentially invert risk return convention. 292 oilfield assets are used to provide evidence that, under upward oil prices, emerging markets are characterized by progressive state participation in oilfield cash flows. Specifically, this work advances the low oil price paradigm of prior oil and gas asset valuation studies and provides evidence that emerging market state participation terms limit the corporate value of globalization for the sector. (author)
Pricing Liquidity Risk with Heterogeneous Investment Horizons
Beber, A.; Driessen, J.; Tuijp, P.F.A.
2012-01-01
We develop a new asset pricing model with stochastic transaction costs and investors with heterogenous horizons. Short-term investors hold only liquid assets in equilibrium. This generates segmentation effects in the pricing of liquid versus illiquid assets. Specifically, the liquidity (risk) premia
Directory of Open Access Journals (Sweden)
Muhammad Hanif
2011-12-01
Full Text Available A speedy emerging area of finance is the Shari’a compliant financial system. In first decade of 21st century Islamic financing has shown tremendous increase and global volume has reached to US $ 1,041 billion by the end of 2009. Being financial intermediaries Islamic Financial Institutions (IFIs have shown commendable progress in deposit collection under profit and loss sharing schemes however investment avenues are limited in comparison of conventional banks. Although a large number of financing modes are available to IFIs, yet maintenance of required liquidity is serious issue because money market and capital market is dominated by interest based instruments and conventional practices (some are clearly prohibited by Shari’a. Recently Al-meezan Investment Management Ltd. (AIML has started screening of Shari’a compliant stocks on KSE, and provided an avenue for Shari’a Compliant Investors/IFIs to invest in equities. This study is conducted to understand conventional asset pricing models, document any mismatching with Shari’a financial system, and suggest amendments if required. Findings suggest existing models of equity pricing (CAPM, APT/MFM are very much practicable under Shari’a framework with slight modification of risk free return because under Shari’a frame work risk free returns do not exist.
A Heterogeneous Agent Model of Asspet Price with Three Time Delays
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Akio Matsumoto
2016-09-01
Full Text Available This paper considers a continuous-time heterogeneous agent model ofa ...nancial market with one risky asset, two types of agents (i.e., thefundamentalists and the chartists, and three time delays. The chartistdemand is determined through a nonlinear function of the di¤erence be-tween the current price and a weighted moving average of the delayedprices whereas the fundamentalist demand is governed by the di¤erencebetween the current price and the fundamental value. The asset price dy-namics is described by a nonlinear delay di¤erential equation. Two mainresults are analytically and numerically shown:(i the delay destabilizes the market price and generates cyclic oscillationsaround the equilibrium;(ii under multiple delays, stability loss and gain repeatedly occurs as alength of the delay increases.
Fabozzi, F.; Vink, D.
2012-01-01
In this paper, we empirically investigate what credit factors investors rely upon when pricing the spread at issue for European asset-backed securities. More specifically, we investigate how credit factors affect new issuance spreads after taking into account credit rating. We do so by investigating
Behavioral heterogeneity in stock prices
Boswijk, H.P.; Hommes, C.H.; Manzan, S.
2007-01-01
We estimate a dynamic asset pricing model characterized by heterogeneous boundedly rational agents. The fundamental value of the risky asset is publicly available to all agents, but they have different beliefs about the persistence of deviations of stock prices from the fundamental benchmark. An
Test Of Capital Asset Pricing Model On Stocks At Karachi Stock Exchange
Directory of Open Access Journals (Sweden)
Arbab Khalid Cheema
2010-12-01
Full Text Available This paper attempts to empirically test the single-factor CAPM developed by Sharpe (1964, Lintner (1965 and Jan Mossin (1966 and others, which proposes that the expected returns of capital assets are dependent on their risk relative to the entire market which is quantified by a correlation co-efficient between asset returns and market returns. The test of 20 stocks at Karachi Stock Exchange have shown that though, the beta co-efficients are significant, their strength is considerably weak. Therefore, other factors which are unaccounted for in this model are important in determining risk and return. In addition, betas are less relevant in a volatile emerging capital markets like the KSE. Thus, the multi-factor models are better than the classical CAPM at determining the risk-return relationship. However, the single-factor CAPM remains in practice beacause of its simplicity.
Nonlinear price impact from linear models
Patzelt, Felix; Bouchaud, Jean-Philippe
2017-12-01
The impact of trades on asset prices is a crucial aspect of market dynamics for academics, regulators, and practitioners alike. Recently, universal and highly nonlinear master curves were observed for price impacts aggregated on all intra-day scales (Patzelt and Bouchaud 2017 arXiv:1706.04163). Here we investigate how well these curves, their scaling, and the underlying return dynamics are captured by linear ‘propagator’ models. We find that the classification of trades as price-changing versus non-price-changing can explain the price impact nonlinearities and short-term return dynamics to a very high degree. The explanatory power provided by the change indicator in addition to the order sign history increases with increasing tick size. To obtain these results, several long-standing technical issues for model calibration and testing are addressed. We present new spectral estimators for two- and three-point cross-correlations, removing the need for previously used approximations. We also show when calibration is unbiased and how to accurately reveal previously overlooked biases. Therefore, our results contribute significantly to understanding both recent empirical results and the properties of a popular class of impact models.
European Option Pricing with Transaction Costs in Lévy Jump Environment
Directory of Open Access Journals (Sweden)
Jiayin Li
2014-01-01
Full Text Available The European option pricing problem with transaction costs is investigated for a risky asset price model with Lévy jump. By the aid of arbitrage pricing theory and the generalized Itô formula (which includes Poisson jump, the explicit solution to the risk asset price model is given. According to arbitrage-free principle, we first discretize the continuous-time model. Then, in each small time interval, the transaction costs are introduced. By using the Δ-hedging strategy, the explicit solutions of the European options pricing formula with transaction costs are given for the risky asset price model with Lévy jump.
Compensation schemes, liquidity provision, and asset prices: An experimental analysis
Baghestanian, Sascha; Gortner, Paul; Massenot, Baptiste
2015-01-01
In an experimental setting in which investors can entrust their money to traders, we investigate how compensation schemes affect liquidity provision and asset prices. Investors face a trade-off between risk and return. At the benefit of a potentially higher return, they can entrust their money to a trader. However this investment is risky, as the trader might not be trustworthy. Alternatively, they can opt for a safe but low return. We study how subjects solve this trade-off when traders are ...
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Meelis Angerma
2013-09-01
Full Text Available Developments in the real world depends on human reaction to economic events which is also determined by dominating economic thought. Dominance of neoliberal and monetarist thinking was the main cause of ignoring asset price bubbles and their effects on real economy. New keynesian economic thinking provides an alternative. Hyman Minsky’s model of financial instability was more effectively able to explain super-bubbles in US economy and subsequent ‚Great Recession’. Ignorance of momentum-bias of traders and banks contributed to this crises. Emerging markets and Baltic countries were strongly influenced by credit oversupply in US. Instabilities were so sizeable that IMF approved using capital control and proposal for tax on financial transactions was made. Policymakers and individuals should abandon ignorance of speculative asset price bubbles and improve their analytical skills to recognize bubbles and change their behaviour
Asset prices and rents in a GE model with imperfect competition
Pierre Lafourcade
2003-01-01
This paper analyses the general equilibrium effects on asset valuation and capital accumulation of an exogenous drop in the rate of return required by investors in a model of production with imperfectly competitive product markets. The model improves substantially on the standard perfectly competitive neo-classical framework, by dissociating the behavior of marginal and average q. It tracks more closely current observed data on the ratio of stock-market value to the economy's capital base, wh...
Equilibrium Asset and Option Pricing under Jump-Diffusion Model with Stochastic Volatility
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Xinfeng Ruan
2013-01-01
Full Text Available We study the equity premium and option pricing under jump-diffusion model with stochastic volatility based on the model in Zhang et al. 2012. We obtain the pricing kernel which acts like the physical and risk-neutral densities and the moments in the economy. Moreover, the exact expression of option valuation is derived by the Fourier transformation method. We also discuss the relationship of central moments between the physical measure and the risk-neutral measure. Our numerical results show that our model is more realistic than the previous model.
Sun, Ou; Liu, Zhixin
2016-01-01
We examine the different effects of monetary policy actions and central bank communication on China’s stock market bubbles with a Time-varying Parameter SVAR model. We find that with negative responses of fundamental component and positive responses of bubble component of asset prices, contractionary monetary policy induces the observed stock prices to rise during periods of large bubbles. By contrast, central bank communication acts on the market through expectation guidance and has more significant effects on stock prices in the long run, which implies that central bank communication be used as an effective long-term instrument for the central bank’s policymaking. PMID:27851796
Dynamics Model Applied to Pricing Options with Uncertain Volatility
Directory of Open Access Journals (Sweden)
Lorella Fatone
2012-01-01
model is proposed. The data used to test the calibration problem included observations of asset prices over a finite set of (known equispaced discrete time values. Statistical tests were used to estimate the statistical significance of the two parameters of the Black-Scholes model: the volatility and the drift. The effects of these estimates on the option pricing problem were investigated. In particular, the pricing of an option with uncertain volatility in the Black-Scholes framework was revisited, and a statistical significance was associated with the price intervals determined using the Black-Scholes-Barenblatt equations. Numerical experiments involving synthetic and real data were presented. The real data considered were the daily closing values of the S&P500 index and the associated European call and put option prices in the year 2005. The method proposed here for calibrating the Black-Scholes dynamics model could be extended to other science and engineering models that may be expressed in terms of stochastic dynamical systems.
A tree-based method to price American options in the Heston model
Vellekoop, M.; Nieuwenhuis, H.
2009-01-01
We develop an algorithm to price American options on assets that follow the stochastic volatility model defined by Heston. We use an approach which is based on a modification of a combined tree for stock prices and volatilities, where the number of nodes grows quadratically in the number of time
Pricing Exotic Options under a High-Order Markovian Regime Switching Model
Directory of Open Access Journals (Sweden)
Wai-Ki Ching
2007-10-01
Full Text Available We consider the pricing of exotic options when the price dynamics of the underlying risky asset are governed by a discrete-time Markovian regime-switching process driven by an observable, high-order Markov model (HOMM. We assume that the market interest rate, the drift, and the volatility of the underlying risky asset's return switch over time according to the states of the HOMM, which are interpreted as the states of an economy. We will then employ the well-known tool in actuarial science, namely, the Esscher transform to determine an equivalent martingale measure for option valuation. Moreover, we will also investigate the impact of the high-order effect of the states of the economy on the prices of some path-dependent exotic options, such as Asian options, lookback options, and barrier options.
Was Bernanke right? Targeting asset prices may not be a good idea after all
Assenza, T.; Berardi, M.; Delli Gatti, D.
2011-01-01
Should the central bank prevent "excessive" asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene only afterwards? The debate over this issue goes back at least to the exchange between Bernanke-Gertler (BG) and Cecchetti but has not settled yet. In
Are stock prices too volatile to be justified by the dividend discount model?
Akdeniz, Levent; Salih, Aslıhan Altay; Ok, Süleyman Tuluğ
2007-03-01
This study investigates excess stock price volatility using the variance bound framework of LeRoy and Porter [The present-value relation: tests based on implied variance bounds, Econometrica 49 (1981) 555-574] and of Shiller [Do stock prices move too much to be justified by subsequent changes in dividends? Am. Econ. Rev. 71 (1981) 421-436.]. The conditional variance bound relationship is examined using cross-sectional data simulated from the general equilibrium asset pricing model of Brock [Asset prices in a production economy, in: J.J. McCall (Ed.), The Economics of Information and Uncertainty, University of Chicago Press, Chicago (for N.B.E.R.), 1982]. Results show that the conditional variance bounds hold, hence, our hypothesis of the validity of the dividend discount model cannot be rejected. Moreover, in our setting, markets are efficient and stock prices are neither affected by herd psychology nor by the outcome of noise trading by naive investors; thus, we are able to control for market efficiency. Consequently, we show that one cannot infer any conclusions about market efficiency from the unconditional variance bounds tests.
Daily House Price Indices: Construction, Modeling, and Longer-Run Predictions
DEFF Research Database (Denmark)
Bollerslev, Tim; Patton, Andrew J.; Wang, Wenjing
We construct daily house price indices for ten major U.S. metropolitan areas. Our calculations are based on a comprehensive database of several million residential property transactions and a standard repeat-sales method that closely mimics the methodology of the popular monthly Case-Shiller house...... price indices. Our new daily house price indices exhibit dynamic features similar to those of other daily asset prices, with mild autocorrelation and strong conditional heteroskedasticity of the corresponding daily returns. A relatively simple multivariate time series model for the daily house price...... index returns, explicitly allowing for commonalities across cities and GARCH effects, produces forecasts of monthly house price changes that are superior to various alternative forecast procedures based on lower frequency data....
Option pricing under stochastic volatility: the exponential Ornstein–Uhlenbeck model
International Nuclear Information System (INIS)
Perelló, Josep; Masoliver, Jaume; Sircar, Ronnie
2008-01-01
We study the pricing problem for a European call option when the volatility of the underlying asset is random and follows the exponential Ornstein–Uhlenbeck model. The random diffusion model proposed is a two-dimensional market process that takes a log-Brownian motion to describe price dynamics and an Ornstein–Uhlenbeck subordinated process describing the randomness of the log-volatility. We derive an approximate option price that is valid when (i) the fluctuations of the volatility are larger than its normal level, (ii) the volatility presents a slow driving force, toward its normal level and, finally, (iii) the market price of risk is a linear function of the log-volatility. We study the resulting European call price and its implied volatility for a range of parameters consistent with daily Dow Jones index data
A Consistent Pricing Model for Index Options and Volatility Derivatives
DEFF Research Database (Denmark)
Cont, Rama; Kokholm, Thomas
observed properties of variance swap dynamics and allows for jumps in volatility and returns. An affine specification using L´evy processes as building blocks leads to analytically tractable pricing formulas for options on variance swaps as well as efficient numerical methods for pricing of European......We propose and study a flexible modeling framework for the joint dynamics of an index and a set of forward variance swap rates written on this index, allowing options on forward variance swaps and options on the underlying index to be priced consistently. Our model reproduces various empirically...... options on the underlying asset. The model has the convenient feature of decoupling the vanilla skews from spot/volatility correlations and allowing for different conditional correlations in large and small spot/volatility moves. We show that our model can simultaneously fit prices of European options...
Monetary Policy and Financial Asset Prices: Empirical Evidence from Pakistan
Directory of Open Access Journals (Sweden)
Imran Umer Chhapra
2018-03-01
Full Text Available Monetary transmission mechanism assumed to be significantly influenced by the effect of policy decisions on financial markets. However, various previous studies have come up with different outcomes. The purpose of this study is to examine the impact of monetary policy on different asset classes (shares and bonds in Pakistan. This study using stock price and bond yield as dependent variable and discount rate, money supply, inflation, and exchange rate are independent variables. Data of all variables have collected from 2010 to 2016, and Vector Autoregressive (VAR technique has applied. The empirical results indicate that there is an impact of monetary policy components on both stock and bond market as an increase in policy rate causes decline in stocks prices and bonds yields. The findings of this study will help the potential investors in making long-term (in general and short-term (in particular investment strategies concerning monetary policy.DOI: 10.15408/sjie.v7i2.7099
Saputra, Wildan Deny
2015-01-01
Capital Asset Pricing Model (CAPM) is method that used to make an estimate of the expected returns of an investment. CAPM explain about relation between expected returns and risk of shares. The research is descriptive research with the quantitative analysis which aims to know the performance of shares listed in the index kompas100 2010-2013 period based on the return and the risk of shares and know of efficient shares and inefficient shares based on CAPM method. Sample of the research are 37 ...
Financial Super-Markets: Size Matters for Asset Trade.
Philippe Martin and Hélène Rey.
2000-01-01
This paper presents a new theoretical framework to analyze financial markets in an international context. We build a two-country macroeconomic model in which agents are risk averse, assets are imperfect substitutes, the number of financial assets is endogenous, and cross-border asset trade entails transaction costs. We show that demand effects have important implications for the link between market size, asset prices and financial market development. These effects are consistent with the exis...
Modelling electricity futures prices using seasonal path-dependent volatility
International Nuclear Information System (INIS)
Fanelli, Viviana; Maddalena, Lucia; Musti, Silvana
2016-01-01
Highlights: • A no-arbitrage term structure model is applied to the electricity market. • Volatility parameters of the HJM model are estimated by using German data. • The model captures the seasonal price behaviour. • Electricity futures prices are forecasted. • Call options are evaluated according to different strike prices. - Abstract: The liberalization of electricity markets gave rise to new patterns of futures prices and the need of models that could efficiently describe price dynamics grew exponentially, in order to improve decision making for all of the agents involved in energy issues. Although there are papers focused on modelling electricity as a flow commodity by using Heath et al. (1992) approach in order to price futures contracts, the literature is scarce on attempts to consider a seasonal volatility as input to models. In this paper, we propose a futures price model that allows looking into observed stylized facts in the electricity market, in particular stochastic price variability, and periodic behavior. We consider a seasonal path-dependent volatility for futures returns that are modelled in Heath et al. (1992) framework and we obtain the dynamics of futures prices. We use these series to price the underlying asset of a call option in a risk management perspective. We test the model on the German electricity market, and we find that it is accurate in futures and option value estimates. In addition, the obtained results and the proposed methodology can be useful as a starting point for risk management or portfolio optimization under uncertainty in the current context of energy markets.
Ochiai, T.; Nacher, J. C.
2011-09-01
The prices of financial products in markets are determined by the behavior of investors, who are influenced by positive and negative news. Here, we present a mathematical model to reproduce the price movements in real financial markets affected by news. The model has both positive and negative feed-back mechanisms. Furthermore, the behavior of the model is examined by considering two types of noise. Our results show that the dynamic balance of positive and negative feed-back mechanisms with the noise effect determines the asset price movement.
Financial Super-Markets: Size Matters for Asset Trade
Philippe Martin; Helene Rey
2001-01-01
This paper presents a new theoretical framework to analyze=20 financial markets in an international context. We build a two-country=20 macroeconomic model in which agents are risk averse, assets are imperfect=20 substitutes, the number of financial assets is endogenous, and cross-border= =20 asset trade entails transaction costs. We show that demand effects have=20 important implications for the link between market size, asset prices and=20 financial market development. These effects are cons...
Asset Attribution Stability and Portfolio Construction: An Educational Example
Chong, James T.; Jennings, William P.; Phillips, G. Michael
2014-01-01
This paper illustrates how a third statistic from asset pricing models, the R-squared statistic, may have information that can help in portfolio construction. Using a traditional CAPM model in comparison to an 18-factor Arbitrage Pricing Style Model, a portfolio separation test is conducted. Portfolio returns and risk metrics are compared using…
Heterogeneous traders, price-volume signals, and complex asset price dynamics
Directory of Open Access Journals (Sweden)
Frank H. Westerhoff
2005-01-01
model reveal that interactions between fundamentalists and chartists may cause intricate endogenous price fluctuations. Contrary to the intuition, we find that chart trading may increase market stability.
Kurniawan, Fauzi Adi
2015-01-01
This research purpose to determine the performance of stock based on the return and risk to determine the group of efficient stocks and inefficient stock by the use of methods of Capital Asset Pricing Model (CAPM). The sample used in this study were 15 company shares consumer goods industry sector listed in Indonesia Stock Exchange 2011-2013 that selected based on certain criteria. The analysis showed there is 1 stock companies included in the group of inefficient stock (overvalued) and 14 st...
The Arbitrage Pricing Model: A Pedagogic Derivation and a Spreadsheet-Based Illustration
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Clarence C. Y. Kwan
2016-05-01
Full Text Available This paper derives, from a pedagogic perspective, the Arbitrage Pricing Model, which is an important asset pricing model in modern finance. The derivation is based on the idea that, if a self-financed investment has no risk exposures, the payoff from the investment can only be zero. Microsoft Excel plays an important pedagogic role in this paper. The Excel illustration not only helps students recognize more fully the various nuances in the model derivation, but also serves as a good starting point for students to explore on their own the relevance of the noise issue in the model derivation.
Applicability of Investment and Profitability Effects in Asset Pricing Models
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Márcio André Veras Machado
2017-11-01
Full Text Available This study aims to investigate whether investment and profitability are priced and if they partially explain the variations of stock returns in the Brazilian stock market, according to the Fama and French’s (2015 five-factor model. By using time series and cross-section regression, we found that book-to-market, momentum and liquidity are associated with stock returns whereas investment and profitability were not significant. We also found that there is no investment premium in Brazil. Therefore, motivated by the importance of B/M, momentum and liquidity to the Brazilian stock market, as well as by the poor performance of profitability and investment, we document that Keene and Peterson’s (2007 five-factor model is superior to all other models, especially the five-factor model by Fama and French (2015.
Directory of Open Access Journals (Sweden)
Dionigi Gerace
2015-06-01
Full Text Available Despite the capital asset pricing model being one of the most inﬂuential mod¬els in modern portfolio theory, it has also been a victim of criticism in numerous academic papers. Its assumptions which seem to be rather unre¬alistic, have caused many academics to improve the model by relaxing some of its restrictive statements. In this journal article, we compare the performance of an optimal portfolio of securities in the Australian securities market by constructing two theoretical portfolios; one using the capital asset pricing model which uses a single beta throughout a static investment horizon; and another, which allows the op¬timal portfolio to be rebalanced each week with an adjusted beta. The performance of the two theoretical portfolios is compared to determine the superior model. Overall, findings showed that due to rebalancing of the portfolio, the multiple period model was the superior model based on before and after transaction cost returns.
Grøm, Halvdan Alexander
2013-01-01
In this thesis I have analysed the relationship between renewable energy stocks and the price of crude oil. As a part of my analysis I have provided a basic economic overview of the research period and how the value of renewable energy stocks and crude oil is determined. In order to analyse this relationship I have utilized a Vector Autoregressive Model (VAR) in addition to a Vector Error Correction Model (VECM). My findings indicate that the aforementioned assets follow a simi...
A stochastic model for the financial market with discontinuous prices
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Leda D. Minkova
1996-01-01
Full Text Available This paper models some situations occurring in the financial market. The asset prices evolve according to a stochastic integral equation driven by a Gaussian martingale. A portfolio process is constrained in such a way that the wealth process covers some obligation. A solution to a linear stochastic integral equation is obtained in a class of cadlag stochastic processes.
Intraday Price Discovery in Fragmented Markets
S.R. Ozturk (Sait); M. van der Wel (Michel); D.J.C. van Dijk (Dick)
2014-01-01
textabstractFor many assets, trading is fragmented across multiple exchanges. Price discovery measures summarize the informativeness of trading on each venue for discovering the asset’s true underlying value. We explore intraday variation in price discovery using a structural model with
Pricing Liquidity Risk with Heterogeneous Investment Horizons
Beber, Alessandro; Driessen, Joost; Neuberger, A.; Tuijp, P
We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk)
Double hedge aids commercial terms of upstream asset purchase
International Nuclear Information System (INIS)
Wood, D.
1993-01-01
In recent years many major oil companies have elected to rationalize their producing assets. Mature production--particularly onshore in developed countries, associated with high costs and small profit margins--has been the major target. The current weakness in oil prices has resulted in many such properties being on the market. However, much production marginal to a major can be highly profitable to a cost-effective independent, particularly if the production fits strategically with the independent's asset portfolio. Although many independents recognize that some of the producing assets on the market could be of potential value to them, in a period of volatile prices two important valuations have to be technically justified and negotiated to enable or persuade them to conclude a purchase agreement for a specific asset. These are: A purchase value for an asset that is acceptable to both seller and buyer; and A loan value for the asset to establish the level of debt that the asset can support for the buyer. In defining these two important values (both of which are usually established as ranges rather than single values) the independent has to protect itself against a downturn in commodity prices and exposing itself to an unserviceable level of debt. The paper discusses reducing risks, purchase price hedge, an example of a hedged purchase price, price elements, loan value analysis, agreement structure, loan value hedge, and an example of a hedged loan value
Optimal Dynamic Pricing for Perishable Assets with Nonhomogeneous Demand
Wen Zhao; Yu-Sheng Zheng
2000-01-01
We consider a dynamic pricing model for selling a given stock of a perishable product over a finite time horizon. Customers, whose reservation price distribution changes over time, arrive according to a nonhomogeneous Poisson process. We show that at any given time, the optimal price decreases with inventory. We also identify a sufficient condition under which the optimal price decreases over time for a given inventory level. This sufficient condition requires that the willingness of a custom...
Susanti, Ariska Yuli
2014-01-01
This research aims to classify efficient stocks and inefficient stock using the Capital Asset Pricing Model approach (CAPM), it really helps the investors to make the right investment decisions. The object of research is done in the manufacturing sector shares which are listed in the Stock Exchange 2009-2012 . Based on the research result and the analysis that have been done, it can be seen that from the 11 manufacturing company shares which are used as the research sample, there are two comp...
Demography, Capital Flows and Asset Allocation over the Life-cycle
Mann, Katja; Davenport, Margaret
2016-01-01
This paper studies the effect of population aging on portfolio choice, asset prices and international asset trades. In a multi-period OLG model, we analyze how an increase in longevity or a decrease in fertility in a country affects the demand for safe and risky assets. In a closed economy, given a fixed supply, the riskfree rate falls and the risk premium rises, because retirees prefer to hold a larger share of safe assets in their portfolio than working-age households. In a financially inte...
Basel III and Asset Securitization
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M. Mpundu
2013-01-01
Full Text Available Asset securitization via special purpose entities involves the process of transforming assets into securities that are issued to investors. These investors hold the rights to payments supported by the cash flows from an asset pool held by the said entity. In this paper, we discuss the mechanism by which low- and high-quality entities securitize low- and high-quality assets, respectively, into collateralized debt obligations. During the 2007–2009 financial crisis, asset securitization was seriously inhibited. In response to this, for instance, new Basel III capital and liquidity regulations were introduced. Here, we find that we can explicitly determine the transaction costs related to low-quality asset securitization. Also, in the case of dynamic and static multipliers, the effects of unexpected negative shocks such as rating downgrades on asset price and input, debt obligation price and output, and profit will be quantified. In this case, we note that Basel III has been designed to provide countercyclical capital buffers to negate procyclicality. Moreover, we will develop an illustrative example of low-quality asset securitization for subprime mortgages. Furthermore, numerical examples to illustrate the key results will be provided. In addition, connections between Basel III and asset securitization will be highlighted.
Booms, busts and behavioural heterogeneity in stock prices
Hommes, C.; in 't Veld, D.
2014-01-01
The global financial crisis indicated the limitations of representative rational agent models for asset pricing solely based on economic fundamentals. We estimate a simple behavioural heterogeneous agents model with boundedly rational traders in which the fundamental value of the stock prices is
Nasuha, Rizky
2013-01-01
The research was motivated by the development of the business world, where companies rely heavily on investment. Before investing, stock investment in this case, it is necessary to consider the possibilities that will be faced by investors. One method used to assess investment decisions is the CAPM (Capital Asset Pricing Model). This study aims to analyze the CAPM method related to stock investment decisions. Types of research used in this research is descriptive research with quantitative ap...
Determinants Of Equity Prices In The Stock Market
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Muhammad Usman Javaid
2010-12-01
Full Text Available This study examines the effect of market variables on the movement stock prices in Pakistan. Asset pricing is considered as efficient if the asset prices reflect all available market information. This study examined the extent to which some "information factors" or market indices affect the stock price. A simple regression model has been used to develop a relation between the variables (stock prices, earnings per share, gross domestic product, dividend, inflation and KIBOR after testing for multi-collinearity among the independent variables. All the variables have shown positive correlation with stock prices with some exceptions of GDP and inflation. This study has enriched the existing literature while it would help policy makers who are interested in deploying instruments of monetary policy and other economic indices for the growth of the capital market.
2005-12-01
asset pricing model ( CAPM ). “According to the CAPM theory, investors determine their required return by adding a risk premium to the interest rate...NUMBER OF PAGES 77 14. SUBJECT TERMS Capital Budgeting; GAO; DOD; Capital Assets ; Risk, OMB; NPV, IRR 16. PRICE CODE 17. SECURITY...needs of the mission, as defined by the strategic plan, and limit the number of “nice to haves” (OMB, 1997). d. Alternatives to Capital Assets
STUDY REGARDING THE ASSETS EVALUATION ON THE FINANCIAL MARKET THROUGH THE C.A.P.M. MODEL
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Nicolae Baltes
2014-11-01
Full Text Available Capital Asset Pricing Model (CAPM was introduced through the works of William Sharpe (1964, John Lintner (1965 and Jan Mossin (1966 based on the research of Henry Markovitz. Due to the independent formulation of the model by these three american researchers, there are in the literature references to the Security Market Line (SML model of financial assets evaluation. CAPM model, revolutionized the financial theory, highlighting the link between the rentability of the individual securities and the rentability of the financial market. The first fundamental hypothesis of the model is that investors are concerned about the expected rentability closely related to the risk associated with it. Consequently, under equilibrium conditions of the financial market, the CAPM model highlights a linear relationship between the expected rentability of the portfolio and the amount of risk assumed by investors.
The Existence of Equilibrium Asset Price Under Diverse Information
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R. Agus Sartono
2005-09-01
Our model shows that the more diverse the information, the higher the lambda coefficient which means the market becomes less liquid. The models consistent with Miller (1977 who found that the bigger the gap of private information is, the less liquid the market will be. If both informed traders have the same information they will demand the same amount of risky asset and it turns out to be similar as in the Kyle (1985 model.
Derivative pricing with liquidity risk : Theory and evidence from the credit default swap market
Bongaerts, D.; de Jong, F.C.J.M.; Driessen, J.J.A.G.
2011-01-01
We derive an equilibrium asset pricing model incorporating liquidity risk, derivatives, and short-selling due to hedging of nontraded risk. We show that illiquid assets can have lower expected returns if the short-sellers have more wealth, lower risk aversion, or shorter horizon. The pricing of
Asset Return Dynamics and Learning
William A. Branch; George W. Evans
2010-01-01
This article advocates a theory of expectation formation that incorporates many of the central motivations of behavioral finance theory while retaining much of the discipline of the rational expectations approach. We provide a framework in which agents, in an asset pricing model, underparameterize their forecasting model in a spirit similar to Hong, Stein, and Yu (2007) and Barberis, Shleifer, and Vishny (1998), except that the parameters of the forecasting model and the choice of predictor a...
An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks
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Grant E. Muller
2018-01-01
Full Text Available We employ the method of stochastic optimal control to derive the optimal investment strategy for maximizing an expected exponential utility of a commercial bank’s capital at some future date T>0. In addition, we derive a multiperiod deposit insurance (DI pricing model that incorporates the explicit solution of the optimal control problem and an asset value reset rule comparable to the typical practice of insolvency resolution by insuring agencies. By way of numerical simulations, we study the effects of changes in the DI coverage horizon, the risk associated with the asset portfolio of the bank, and the bank’s initial leverage level (deposit-to-asset ratio on the DI premium while the optimal investment strategy is followed.
Financial derivative pricing under probability operator via Esscher transfomation
Energy Technology Data Exchange (ETDEWEB)
Achi, Godswill U., E-mail: achigods@yahoo.com [Department of Mathematics, Abia State Polytechnic Aba, P.M.B. 7166, Aba, Abia State (Nigeria)
2014-10-24
The problem of pricing contingent claims has been extensively studied for non-Gaussian models, and in particular, Black- Scholes formula has been derived for the NIG asset pricing model. This approach was first developed in insurance pricing{sup 9} where the original distortion function was defined in terms of the normal distribution. This approach was later studied6 where they compared the standard Black-Scholes contingent pricing and distortion based contingent pricing. So, in this paper, we aim at using distortion operators by Cauchy distribution under a simple transformation to price contingent claim. We also show that we can recuperate the Black-Sholes formula using the distribution. Similarly, in a financial market in which the asset price represented by a stochastic differential equation with respect to Brownian Motion, the price mechanism based on characteristic Esscher measure can generate approximate arbitrage free financial derivative prices. The price representation derived involves probability Esscher measure and Esscher Martingale measure and under a new complex valued measure φ (u) evaluated at the characteristic exponents φ{sub x}(u) of X{sub t} we recuperate the Black-Scholes formula for financial derivative prices.
Financial derivative pricing under probability operator via Esscher transfomation
International Nuclear Information System (INIS)
Achi, Godswill U.
2014-01-01
The problem of pricing contingent claims has been extensively studied for non-Gaussian models, and in particular, Black- Scholes formula has been derived for the NIG asset pricing model. This approach was first developed in insurance pricing 9 where the original distortion function was defined in terms of the normal distribution. This approach was later studied6 where they compared the standard Black-Scholes contingent pricing and distortion based contingent pricing. So, in this paper, we aim at using distortion operators by Cauchy distribution under a simple transformation to price contingent claim. We also show that we can recuperate the Black-Sholes formula using the distribution. Similarly, in a financial market in which the asset price represented by a stochastic differential equation with respect to Brownian Motion, the price mechanism based on characteristic Esscher measure can generate approximate arbitrage free financial derivative prices. The price representation derived involves probability Esscher measure and Esscher Martingale measure and under a new complex valued measure φ (u) evaluated at the characteristic exponents φ x (u) of X t we recuperate the Black-Scholes formula for financial derivative prices
Financial derivative pricing under probability operator via Esscher transfomation
Achi, Godswill U.
2014-10-01
The problem of pricing contingent claims has been extensively studied for non-Gaussian models, and in particular, Black- Scholes formula has been derived for the NIG asset pricing model. This approach was first developed in insurance pricing9 where the original distortion function was defined in terms of the normal distribution. This approach was later studied6 where they compared the standard Black-Scholes contingent pricing and distortion based contingent pricing. So, in this paper, we aim at using distortion operators by Cauchy distribution under a simple transformation to price contingent claim. We also show that we can recuperate the Black-Sholes formula using the distribution. Similarly, in a financial market in which the asset price represented by a stochastic differential equation with respect to Brownian Motion, the price mechanism based on characteristic Esscher measure can generate approximate arbitrage free financial derivative prices. The price representation derived involves probability Esscher measure and Esscher Martingale measure and under a new complex valued measure φ (u) evaluated at the characteristic exponents φx(u) of Xt we recuperate the Black-Scholes formula for financial derivative prices.
DEFF Research Database (Denmark)
Christensen, Bent Jesper; van der Wel, Michel
of the risk premium is associated with the slope factor, and individual risk prices depend on own past values, factor realizations, and past values of other risk prices, and are significantly related to the output gap, consumption, and the equity risk price. The absence of arbitrage opportunities is strongly...... is tested, but in addition to the standard bilinear term in factor loadings and market prices of risk, the relevant mean restriction in the term structure case involves an additional nonlinear (quadratic) term in factor loadings. We estimate our general model using likelihood-based dynamic factor model...... techniques for a variety of volatility factors, and implement the relevant likelihood ratio tests. Our factor model estimates are similar across a general state space implementation and an alternative robust two-step principal components approach. The evidence favors time-varying market prices of risk. Most...
Back to the Future Betas: Empirical Asset Pricing of US and Southeast Asian Markets
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Jordan French
2016-07-01
Full Text Available The study adds an empirical outlook on the predicting power of using data from the future to predict future returns. The crux of the traditional Capital Asset Pricing Model (CAPM methodology is using historical data in the calculation of the beta coefficient. This study instead uses a battery of Generalized Auto Regressive Conditional Heteroskedasticity (GARCH models, of differing lag and parameter terms, to forecast the variance of the market used in the denominator of the beta formula. The covariance of the portfolio and market returns are assumed to remain constant in the time-varying beta calculations. The data spans from 3 January 2005 to 29 December 2014. One ten-year, two five-year, and three three-year sample periods were used, for robustness, with ten different portfolios. Out of sample forecasts, mean absolute error (MAE and mean squared forecast error (MSE were used to compare the forecasting ability of the ex-ante GARCH models, Artificial Neural Network, and the standard market ex-post model. Find that the time-varying MGARCH and SGARCH beta performed better with out-of-sample testing than the other ex-ante models. Although the simplest approach, constant ex-post beta, performed as well or better within this empirical study.
Option Pricing with Stochastic Volatility and Jump Diffusion Processes
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Radu Lupu
2006-03-01
Full Text Available Option pricing by the use of Black Scholes Merton (BSM model is based on the assumption that asset prices have a lognormal distribution. In spite of the use of these models on a large scale, both by practioners and academics, the assumption of lognormality is rejected by the history of returns. The objective of this article is to present the methods that developed after the Black Scholes Merton environment and deals with the option pricing model adjustment to the empirical properties of asset returns. The main models that appeared after BSM allowed for special changes of the returns that materialized in jump-diffusion and stochastic volatility processes. The article presents the foundations of risk neutral options evaluation and the empirical evidence that fed the amendment of the lognormal assumption in the first part and shows the evaluation procedure under the assumption of stock prices following the jump-diffusion process and the stochastic volatility process.
A homotopy analysis method for the option pricing PDE in illiquid markets
E-Khatib, Youssef
2012-09-01
One of the shortcomings of the Black and Scholes model on option pricing is the assumption that trading the underlying asset does not affect the underlying asset price. This can happen in perfectly liquid markets and it is evidently not viable in markets with imperfect liquidity (illiquid markets). It is well-known that markets with imperfect liquidity are more realistic. Thus, the presence of price impact while studying options is very important. This paper investigates a solution for the option pricing PDE in illiquid markets using the homotopy analysis method.
Asset life and pricing the use of electricity transmission infrastructure in Chile
International Nuclear Information System (INIS)
Raineri, Ricardo
2010-01-01
Beyond the different approaches to set regulated prices for the use of infrastructure, a key parameter to determine regulated tariffs is the concept of asset life and how it changes with changes in the economic and regulatory context, which determines the optimal infrastructure investment and replacement policies. In this paper we look at the effects that changes in demand, the presence of substitutes and complements, the regulatory framework - both a pro or an anticompetitive framework -, scale economies, and the investment planning horizon, have on the economic service life of an asset and the tariffs for its use. We find that as the electric industry becomes more competitive, a negative effect on the economic service life of electric electricity transmission should be expected. Also, numerical experiments illustrate an inverse relation between scale economies on investment and the ESL of electricity transmission infrastructure. Further, we look at the biases on optimal investment that happen when optimal plans do not observe the life cycle of the investments and the ESL of the equipment, as well as the inconsistency and biases on optimal investment and replacement policies that might result when the Social Planner optimal investment plan lacks of a long-term commitment. (author)
Asset life and pricing the use of electricity transmission infrastructure in Chile
Energy Technology Data Exchange (ETDEWEB)
Raineri, Ricardo [Pontificia Universidad Catolica de Chile, Av. Vicuna Mackenna 4860, Santiago (Chile)
2010-01-15
Beyond the different approaches to set regulated prices for the use of infrastructure, a key parameter to determine regulated tariffs is the concept of asset life and how it changes with changes in the economic and regulatory context, which determines the optimal infrastructure investment and replacement policies. In this paper we look at the effects that changes in demand, the presence of substitutes and complements, the regulatory framework - both a pro or an anticompetitive framework -, scale economies, and the investment planning horizon, have on the economic service life of an asset and the tariffs for its use. We find that as the electric industry becomes more competitive, a negative effect on the economic service life of electric electricity transmission should be expected. Also, numerical experiments illustrate an inverse relation between scale economies on investment and the ESL of electricity transmission infrastructure. Further, we look at the biases on optimal investment that happen when optimal plans do not observe the life cycle of the investments and the ESL of the equipment, as well as the inconsistency and biases on optimal investment and replacement policies that might result when the Social Planner optimal investment plan lacks of a long-term commitment. (author)
Asset Condition, Information Systems and Decision Models
Willett, Roger; Brown, Kerry; Mathew, Joseph
2012-01-01
Asset Condition, Information Systems and Decision Models, is the second volume of the Engineering Asset Management Review Series. The manuscripts provide examples of implementations of asset information systems as well as some practical applications of condition data for diagnostics and prognostics. The increasing trend is towards prognostics rather than diagnostics, hence the need for assessment and decision models that promote the conversion of condition data into prognostic information to improve life-cycle planning for engineered assets. The research papers included here serve to support the on-going development of Condition Monitoring standards. This volume comprises selected papers from the 1st, 2nd, and 3rd World Congresses on Engineering Asset Management, which were convened under the auspices of ISEAM in collaboration with a number of organisations, including CIEAM Australia, Asset Management Council Australia, BINDT UK, and Chinese Academy of Sciences, Beijing University of Chemical Technology, Chin...
A boundary PDE feedback control approach for the stabilization of mortgage price dynamics
Rigatos, G.; Siano, P.; Sarno, D.
2017-11-01
Several transactions taking place in financial markets are dependent on the pricing of mortgages (loans for the purchase of residences, land or farms). In this article, a method for stabilization of mortgage price dynamics is developed. It is considered that mortgage prices follow a PDE model which is equivalent to a multi-asset Black-Scholes PDE. Actually it is a diffusion process evolving in a 2D assets space, where the first asset is the house price and the second asset is the interest rate. By applying semi-discretization and a finite differences scheme this multi-asset PDE is transformed into a state-space model consisting of ordinary nonlinear differential equations. For the local subsystems, into which the mortgage PDE is decomposed, it becomes possible to apply boundary-based feedback control. The controller design proceeds by showing that the state-space model of the mortgage price PDE stands for a differentially flat system. Next, for each subsystem which is related to a nonlinear ODE, a virtual control input is computed, that can invert the subsystem's dynamics and can eliminate the subsystem's tracking error. From the last row of the state-space description, the control input (boundary condition) that is actually applied to the multi-factor mortgage price PDE system is found. This control input contains recursively all virtual control inputs which were computed for the individual ODE subsystems associated with the previous rows of the state-space equation. Thus, by tracing the rows of the state-space model backwards, at each iteration of the control algorithm, one can finally obtain the control input that should be applied to the mortgage price PDE system so as to assure that all its state variables will converge to the desirable setpoints. By showing the feasibility of such a control method it is also proven that through selected modification of the PDE boundary conditions the price of the mortgage can be made to converge and stabilize at specific
Analysis of Options Contract, Option Pricing in Agricultural Products
Directory of Open Access Journals (Sweden)
H. Tamidy
2016-03-01
of standardizing the underlying asset 4- Impossibility of creating cross supply of the underlying asset In addition, after the introduction of the model parameters, we offers method calculating of the volatility (standard deviation price with using historical data (time series. Parameters of Blk- Scholes model are introduced and option contract of selected product will pricing. After effect of the rise and fall agreement prices (in the form of 9-defined scenario on the price of put option and sales option are studied. In this study, after forming the hypothetical option market for the Canola, option pricing is done. In this section, the criteria for selecting an appropriate asset base is expressed for option contract. The Black–Scholes model is introduced for the valuation of call option and European put option contract. After introducing the model parameters, the calculation of volatility (standard deviation of price using historical data (time series is presented .To achieve this aim, the Black – Scholes model was used under 9 strike price scenario of 5, 10, 15, 20 percent above; 5, 10, 15, and 20 percent lower and finally equal to current prices. This model was run in Excel 2010 and Derivea gem 1.5. Results and Discussion: The results showed 43% price volatility for canola that reflects uncertainty in its price. In the next stage of pricing, the purchase and sale of the selected product was done under the nine price scenarios. The results showed that the highest authority to purchase option was for scenario K1 and the highest buy option was for the K9 scenario. The least expensive buy option is K9 and the least expensive sell option is K1. Conclusion: The results show that the increase of strike price under these scenarios leads to a decrease of call option price and decrease of put option price. In addition, the farmers, businesspersons and agricultural products transforming factories with a different degree of risk disclosure can participate in these markets
A statistical analysis of product prices in online markets
Mizuno, T.; Watanabe, T.
2010-08-01
We empirically investigate fluctuations in product prices in online markets by using a tick-by-tick price data collected from a Japanese price comparison site, and find some similarities and differences between product and asset prices. The average price of a product across e-retailers behaves almost like a random walk, although the probability of price increase/decrease is higher conditional on the multiple events of price increase/decrease. This is quite similar to the property reported by previous studies about asset prices. However, we fail to find a long memory property in the volatility of product price changes. Also, we find that the price change distribution for product prices is close to an exponential distribution, rather than a power law distribution. These two findings are in a sharp contrast with the previous results regarding asset prices. We propose an interpretation that these differences may stem from the absence of speculative activities in product markets; namely, e-retailers seldom repeat buy and sell of a product, unlike traders in asset markets.
Aggregated Marcoeconomic News and Price Discovery
J. Brazys (Justinas)
2015-01-01
markdownabstract__Abstract__ Is there a link between asset prices and economic fundamentals? Many studies fail to find a convincing link and conclude that asset prices and economic fundamentals are disconnected. A famous example of the disconnect between exchange rates and macroeconomic
Energy Technology Data Exchange (ETDEWEB)
Schutz, S.R.
1978-12-01
An energy source ready for immediate use on a commercial scale is solar energy in the form of On Site Solar Heating (OSSH) systems. These systems collect solar energy with rooftop panels, store excess energy in water storage tanks and can, in certain circumstances, provide 100% of the space heating and hot water required by the occupants of the residential or commercial structure on which the system is located. Such systems would take advantage of a free and inexhaustible energy source--sunlight. The principal drawback of such systems is the high initial capital cost. The solution would normally be a carefully worked out corporate financing plan. However, at the moment it is individual homeowners and not corporations who are attempting to finance these systems. As a result, the terms of finance are excessively stringent and constitute the main obstacle to the large scale market penetration of OSSH. This study analyzes the feasibility of OSSH as a private utility investment. Such systems would be installed and owned by private utilities and would displace other investment projects, principally electric generating plants. The return on OSSH is calculated on the basis of the cost to the consumer of the equivalent amount of electrical energy that is displaced by the OSSH system. The hurdle rate for investment in OSSH is calculated using the Sharpe--Lintner Capital Asset Pricing Model. The results of this study indicate that OSSH is a low risk investment having an appropriate hurdle rate of 7.9%. At this rate, OSSH investment appears marginally acceptable in northern California and unambiguously acceptable in southern California. The results also suggest that utility investment in OSSH should lead to a higher degree of financial leverage for utility companies without a concurrent deterioration in the risk class of utility equity.
Ising model of financial markets with many assets
Eckrot, A.; Jurczyk, J.; Morgenstern, I.
2016-11-01
Many models of financial markets exist, but most of them simulate single asset markets. We study a multi asset Ising model of a financial market. Each agent has two possible actions (buy/sell) for every asset. The agents dynamically adjust their coupling coefficients according to past market returns and external news. This leads to fat tails and volatility clustering independent of the number of assets. We find that a separation of news into different channels leads to sector structures in the cross correlations, similar to those found in real markets.
Stock Market Integration: Are Risk Premiums of International Assets Equal?
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Kusdhianto Setiawan
2014-02-01
Full Text Available This paper studies previous research on capital market integration and applies a simple international capital asset pricing model by considering the incompleteness in market integration and heteroscedasticity of the market returns. When we disregarded those two factors, we found that stock markets were integrated and the law of one price on risk premiums prevails. However, when the factors were considered, the markets were just partially integrated.
Heterogeneity and option pricing
Benninga, Simon; Mayshar, Joram
2000-01-01
An economy with agents having constant yet heterogeneous degrees of relative risk aversion prices assets as though there were a single decreasing relative risk aversion pricing representative agent. The pricing kernel has fat tails and option prices do not conform to the Black-Scholes formula.
Rypdal, Martin; Sirnes, Espen; Løvsletten, Ola; Rypdal, Kristoffer
2013-08-01
Maximum likelihood estimation techniques for multifractal processes are applied to high-frequency data in order to quantify intermittency in the fluctuations of asset prices. From time records as short as one month these methods permit extraction of a meaningful intermittency parameter λ characterising the degree of volatility clustering. We can therefore study the time evolution of volatility clustering and test the statistical significance of this variability. By analysing data from the Oslo Stock Exchange, and comparing the results with the investment grade spread, we find that the estimates of λ are lower at times of high market uncertainty.
Crude oil prices: Speculation versus fundamentals
Kolodziej, Marek Krzysztof
Beginning in 2004, the price of crude oil fluctuates rapidly over a wide range. Large and rapid price increases have recessionary consequences and dampen long-term infrastructural investment. I investigate whether price changes are driven by market fundamentals or speculation. With regard to market fundamentals, I revisit econometric evidence for the importance of demand shocks, as proxied by dry maritime cargo rates, on oil prices. When I eliminate transportation costs from both sides of the equation, disaggregate OPEC and non-OPEC production, and allow for more than one cointegrating relation, I find that previous specifications are inconsistent with arguments that demand shocks play an important role. Instead, results confirm the importance of OPEC supply shocks. I investigate two channels by which speculation may affect oil prices; the direct effect of trader behavior and changes in oil from a commodity to a financial asset. With regard to trader behavior, I find evidence that trader positions are required to explain the spread between spot and futures prices of crude oil on the New York Mercantile Exchange. The inclusion of trader positions clarifies the process of equilibrium error correction, such that there is bidirectional causality between prices and trader positions. This creates the possibility of speculative bubbles. With regard to oil as a commodity and/or financial asset, I use a Kalman Filter model to estimate the time-varying partial correlation between returns to investments in equity and oil markets. This correlation changes from negative to positive at the onset of the 2008 financial crisis. The low interest rates used to rescue the economy depress convenience yields, which reduces the benefits of holding oil as a commodity. Instead, oil becomes a financial asset (on net) as the oil market changed from contango to backwardation. Contradicting simple political narratives, my research suggests that both market fundamentals and speculation drive
Pricing and Hedging of Derivatives in Contagious Markets
DEFF Research Database (Denmark)
Kokholm, Thomas
2016-01-01
It is well documented that stock markets are contagious. A negative shock to one market increases the probability of adverse shocks to other markets. We model this contagion effect by including mutually exciting jump processes in the dynamics of the indexes' log-returns. On top of this we add...... a stochastic volatility component to the dynamics. It is important to take the contagion effect into account if derivatives written on a basket of assets are to be priced or hedged. Due to the affine model specification the joint characteristic function of the log-returns is known analytically, and for two......-asset derivatives prices and show how for certain derivatives the impact is heavy. Moreover, we derive hedge ratios for European put and call options and perform a numerical experiment, which illustrates the impact of contagious jumps on option prices and hedge ratios. Mutually exciting processes have been analyzed...
What have we learned from asset sales?
International Nuclear Information System (INIS)
Falk, J.
1999-01-01
The author has created a database of 33 sales of generating assets and has the characteristics of those sales to estimate the value of generating assets. The authors conclusion so far is negative: the sales observed to date have varied so widely in characteristics and price that observed sales data cannot be usefully employed to forecast with any reliability the price at which some other asset is likely to sell in a subsequent auction. The author concludes this does not mean that the auction method is in any way inferior to an administrative method for determining stranded costs. It simply means that there are at present no reliable inferences which can be drawn from this process to inform the administrative process. While this situation might change as more and more assets are auctioned, there are reasons to think that this may not be the case
Credit Market Distortions, Asset Prices and Monetary Policy
Pfajfar, D.; Santoro, E.
2012-01-01
Abstract: We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of passthrough of the policy rate to bank-lending rates. Strong
Credit Market Distortions, Asset Prices and Monetary Policy
Pfajfar, D.; Santoro, E.
2012-01-01
Abstract: We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong
Robert Gallagher; Niall O’ Sullivan
2011-01-01
This paper contributes to the behavioural finance literature that examines the asset pricing impact of mood altering events such as sports results, sunshine levels, daylight hours, public holidays, temperature etc. Specifically, we investigate whether variations in investor mood arising from wins and losses in major sporting events have an impact on stock market returns. We examine the case of Ireland. Ireland is an interesting case because its people are passionate about sport, the domestic ...
Money illusion and nominal inertia in experimental asset markets
Noussair, C.N.; Richter, G.; Tyran, J.R.
2012-01-01
We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset while holding the real fundamental value constant. After an inflationary shock,
Money Illusion and Nominal Inertia in Experimental Asset Markets
DEFF Research Database (Denmark)
Noussair, Charles N.; Richter, Gregers; Tyran, Jean-Robert
We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset, while holding the real fundamental value constant. After an inflationary shock...
SPLINE LINEAR REGRESSION USED FOR EVALUATING FINANCIAL ASSETS 1
Directory of Open Access Journals (Sweden)
Liviu GEAMBAŞU
2010-12-01
Full Text Available One of the most important preoccupations of financial markets participants was and still is the problem of determining more precise the trend of financial assets prices. For solving this problem there were written many scientific papers and were developed many mathematical and statistical models in order to better determine the financial assets price trend. If until recently the simple linear models were largely used due to their facile utilization, the financial crises that affected the world economy starting with 2008 highlight the necessity of adapting the mathematical models to variation of economy. A simple to use model but adapted to economic life realities is the spline linear regression. This type of regression keeps the continuity of regression function, but split the studied data in intervals with homogenous characteristics. The characteristics of each interval are highlighted and also the evolution of market over all the intervals, resulting reduced standard errors. The first objective of the article is the theoretical presentation of the spline linear regression, also referring to scientific national and international papers related to this subject. The second objective is applying the theoretical model to data from the Bucharest Stock Exchange
Looking for Synergy with Momentum in Main Asset Classes
Lukas Macijauskas; Dimitrios I. Maditinos
2014-01-01
As during turbulent market conditions correlations between main asset-classes falter, classical asset management concepts seem unreliable. This problem stimulates search for non-discretionary asset allocation methods. The aim of the paper is to test weather the concept of Momentum phenomena could be used as a stand alone investment strategy using all main asset classes. The study is based on exploring historical prices of various asset classes; statistical data analysis method is used. Result...
Hozman, J.; Tichý, T.
2017-12-01
Stochastic volatility models enable to capture the real world features of the options better than the classical Black-Scholes treatment. Here we focus on pricing of European-style options under the Stein-Stein stochastic volatility model when the option value depends on the time, on the price of the underlying asset and on the volatility as a function of a mean reverting Orstein-Uhlenbeck process. A standard mathematical approach to this model leads to the non-stationary second-order degenerate partial differential equation of two spatial variables completed by the system of boundary and terminal conditions. In order to improve the numerical valuation process for a such pricing equation, we propose a numerical technique based on the discontinuous Galerkin method and the Crank-Nicolson scheme. Finally, reference numerical experiments on real market data illustrate comprehensive empirical findings on options with stochastic volatility.
Pricing Mining Concessions Based on Combined Multinomial Pricing Model
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Chang Xiao
2017-01-01
Full Text Available A combined multinomial pricing model is proposed for pricing mining concession in which the annualized volatility of the price of mineral products follows a multinomial distribution. First, a combined multinomial pricing model is proposed which consists of binomial pricing models calculated according to different volatility values. Second, a method is provided to calculate the annualized volatility and the distribution. Third, the value of convenience yields is calculated based on the relationship between the futures price and the spot price. The notion of convenience yields is used to adjust our model as well. Based on an empirical study of a Chinese copper mine concession, we verify that our model is easy to use and better than the model with constant volatility when considering the changing annualized volatility of the price of the mineral product.
Static and dynamic factors in an information-based multi-asset artificial stock market
Ponta, Linda; Pastore, Stefano; Cincotti, Silvano
2018-02-01
An information-based multi-asset artificial stock market characterized by different types of stocks and populated by heterogeneous agents is presented. In the market, agents trade risky assets in exchange for cash. Beside the amount of cash and of stocks owned, each agent is characterized by sentiments and agents share their sentiments by means of interactions that are determined by sparsely connected networks. A central market maker (clearing house mechanism) determines the price processes for each stock at the intersection of the demand and the supply curves. Single stock price processes exhibit volatility clustering and fat-tailed distribution of returns whereas multivariate price process exhibits both static and dynamic stylized facts, i.e., the presence of static factors and common trends. Static factors are studied making reference to the cross-correlation of returns of different stocks. The common trends are investigated considering the variance-covariance matrix of prices. Results point out that the probability distribution of eigenvalues of the cross-correlation matrix of returns shows the presence of sectors, similar to those observed on real empirical data. As regarding the dynamic factors, the variance-covariance matrix of prices point out a limited number of assets prices series that are independent integrated processes, in close agreement with the empirical evidence of asset price time series of real stock markets. These results remarks the crucial dependence of statistical properties of multi-assets stock market on the agents' interaction structure.
Directory of Open Access Journals (Sweden)
Leo Julianto
2015-09-01
Full Text Available For decades, there were many models explaining the returns earned emerged in order to fulfil the curiosity had by human. Since then, various studies and empirical findings in many countries’ stock market showedthat the empirical findings of market return explanation and the return of assets meet the different results in both clarify of model and identification of significant determinant variables.Therefore, many comparative studies between models were accomplished. In this study, the author attempts to do comparative study between two models, APT and CAPM, in Indonesian Capital Market during period 2008 until 2012. Besides, the author also attempts to find how much inflation, interest rate, and exchange rate describe the returns earned in each sector existed in Indonesia Capital Market. As the result, the author find out that CAPM has bigger explanation power than APT in Indonesian Capital Market during period 2008-2012. Besides, the author also found that among macroeconomic factors, there are only two macroeconomic factors that can affect certain samples significantly. They are change in BI rate, which affect AALI, ANTM, ASII, TLKM, UNTR, and change in exchange rate, which affect INDF and TLKM significantly.
Bayesian Option Pricing Framework with Stochastic Volatility for FX Data
Directory of Open Access Journals (Sweden)
Ying Wang
2016-12-01
Full Text Available The application of stochastic volatility (SV models in the option pricing literature usually assumes that the market has sufficient option data to calibrate the model’s risk-neutral parameters. When option data are insufficient or unavailable, market practitioners must estimate the model from the historical returns of the underlying asset and then transform the resulting model into its risk-neutral equivalent. However, the likelihood function of an SV model can only be expressed in a high-dimensional integration, which makes the estimation a highly challenging task. The Bayesian approach has been the classical way to estimate SV models under the data-generating (physical probability measure, but the transformation from the estimated physical dynamic into its risk-neutral counterpart has not been addressed. Inspired by the generalized autoregressive conditional heteroskedasticity (GARCH option pricing approach by Duan in 1995, we propose an SV model that enables us to simultaneously and conveniently perform Bayesian inference and transformation into risk-neutral dynamics. Our model relaxes the normality assumption on innovations of both return and volatility processes, and our empirical study shows that the estimated option prices generate realistic implied volatility smile shapes. In addition, the volatility premium is almost flat across strike prices, so adding a few option data to the historical time series of the underlying asset can greatly improve the estimation of option prices.
Numeraire Invariance and application to Option Pricing and Hedging
Jamshidian, F.; Vanmaele, Michèle; Deelstra, Griselda; De Schepper, Ann; Dhaene, Jan; Reynaerts, Huguette; Schoutens, Wim; Van Goethem, Paul
2008-01-01
Numeraire invariance is a well-known technique in option pricing and hedging theory. It takes a convenient asset as the numeraire, as if it were the medium of exchange, and expresses all other asset and option prices in units of this numeraire. Since the price of the numeraire relative to itself is
THE BUSINESS MODEL AND FINANCIAL ASSETS MEASUREMENT
NICULA Ileana
2012-01-01
The paper work analyses some aspects regarding the implementation of IFRS 9, the relationship between the business model approach and the assets classification and measurement. It does not discuss the cash flows characteristics, another important aspect of assets classification, or the reclassifications. The business model is related to some characteristics of the banks (opaqueness, leverage ratio, compliance to capital, sound liquidity requirements and risk management) and to Special Purpose...
Directory of Open Access Journals (Sweden)
Gulnara REJEPOVA
2007-01-01
Full Text Available This article attempts to test the validity of CAPM (Capital Asset Pricing Model in Turkey by regressing the weekly risk premiums (rj - rf against the beta coefficients of 20 portfolios, each including 10 stocks, over the period of 1995-2004.ISE 100 index and US T-Bill rate, adjusted for the difference between Turkish and US inflation rates were used as the proxies to the market portfolio, and the risk-free rate respectively. Following an in-depth literature survey, Fama and MacBeth (1973, and Pettengil et. al. (1995 approaches were selected as two alternative methods to be used in the research. Research findings based on Fama&MacBeth approach indicated no meaningful relationship between beta coefficients and ex-post risk premiums of the selected portfolios. With Pettengill et al. methodology, on the other hand, strong beta-risk premium relationships were discovered.
Bond and CDS Pricing via the Stochastic Recovery Black-Cox Model
Directory of Open Access Journals (Sweden)
Albert Cohen
2017-04-01
Full Text Available Building on recent work incorporating recovery risk into structural models by Cohen & Costanzino (2015, we consider the Black-Cox model with an added recovery risk driver. The recovery risk driver arises naturally in the context of imperfect information implicit in the structural framework. This leads to a two-factor structural model we call the Stochastic Recovery Black-Cox model, whereby the asset risk driver At defines the default trigger and the recovery risk driver Rt defines the amount recovered in the event of default. We then price zero-coupon bonds and credit default swaps under the Stochastic Recovery Black-Cox model. Finally, we compare our results with the classic Black-Cox model, give explicit expressions for the recovery risk premium in the Stochastic Recovery Black-Cox model, and detail how the introduction of separate but correlated risk drivers leads to a decoupling of the default and recovery risk premiums in the credit spread. We conclude this work by computing the effect of adding coupons that are paid continuously until default, and price perpetual (consol bonds in our two-factor firm value model, extending calculations in the seminal paper by Leland (1994.
An Ising spin state explanation for financial asset allocation
Horvath, Philip A.; Roos, Kelly R.; Sinha, Amit
2016-03-01
We build on the developments in the application of statistical mechanics, notably the identity of the spin degree of freedom in the Ising model, to explain asset price dynamics in financial markets with a representative agent. Specifically, we consider the value of an individual spin to represent the proportional holdings in various assets. We use partial moment arguments to identify asymmetric reactions to information and develop an extension of a plunging and dumping model. This unique identification of the spin is a relaxation of the conventional discrete state limitation on an Ising spin to accommodate a new archetype in Ising model-finance applications wherein spin states may take on continuous values, and may evolve in time continuously, or discretely, depending on the values of the partial moments.
Ontology modeling in physical asset integrity management
Yacout, Soumaya
2015-01-01
This book presents cutting-edge applications of, and up-to-date research on, ontology engineering techniques in the physical asset integrity domain. Though a survey of state-of-the-art theory and methods on ontology engineering, the authors emphasize essential topics including data integration modeling, knowledge representation, and semantic interpretation. The book also reflects novel topics dealing with the advanced problems of physical asset integrity applications such as heterogeneity, data inconsistency, and interoperability existing in design and utilization. With a distinctive focus on applications relevant in heavy industry, Ontology Modeling in Physical Asset Integrity Management is ideal for practicing industrial and mechanical engineers working in the field, as well as researchers and graduate concerned with ontology engineering in physical systems life cycles. This book also: Introduces practicing engineers, research scientists, and graduate students to ontology engineering as a modeling techniqu...
Nuclear industry strategic asset management: Managing nuclear assets in a competitive environment
International Nuclear Information System (INIS)
Mueller, H.; Hunt, E.W. Jr.; Oatman, E.N.
1999-01-01
The former Electric Power Research Institute took the lead in developing an approach now widely known as strategic asset management (SAM). The SAM methodology applies the tools of decision/risk analysis used in the financial community to clarify effective use of physical assets and resources to create value: to build a clear line of sight to value creation. SAM processes have been used in both the power and other industries. The rapid change taking place in the nuclear business creates the need for competitive decision making regarding the management of nuclear assets. The nuclear industry is moving into an era in which shareholder value is determined by the net revenues earned on power marketed in a highly competitive and frequently low-priced power market environment
Relative Pricing of Publicly Traded U.S. Electric Utility Companies
Jewczyn, Nicholas Stephen
In the financial turmoil of 2008, U.S. firms reported debt-ratios that differed from the debt-ratios calculated from balance sheets. The problem is that investors bought common stock expecting initial investment return and lost money when companies delisted. The purpose of this quantitative study was to determine sample securities pricing with the application of synthetic assets and debt accrued. Addressed in the research questions was whether those securities were (a) underpriced compared with return-on-assets (ROA), (b) overpriced compared with ROA, (c) a debt-ratio higher than 60% and also overpriced, (d) underpriced with a synthetic asset added, or (e) related by relative pricing to variant pricing and market capitalization. The study's base theory was Pan's efficient market hypothesis (EMH) of security price prediction of market prices versus model prices. The data from the financial statements of 16 publicly traded U.S. electric utility companies were analyzed via correlations and multiple regression analyses to determine securities pricing and suitability. The findings from the analyses of the sample's variables of market price, book value, market-to-book, and study constructed variables from those variable data were statistically significant. The alternate hypotheses were accepted for all 5 research questions since the analytical operationalization of the hypothetical constructs led to significant relationships. Results suggest that the use of more pricing determinants in securities evaluation may lead to investors losing less money and earning the expected returns for a more efficient capital market, leading to a stronger economy and macroeconomic stability.
Directory of Open Access Journals (Sweden)
Petra Posedel
2006-12-01
Full Text Available The interest of professional investors in financial derivatives on the Croatian market is steadily increasing and trading is expected to start after the establishment of the legal framework. The quantification of the fair price of such financial instruments is therefore becoming increasingly important. Once the derivatives market is formed, the use of the Black-Scholes option pricing model is also expected. However, contrary to the assumptions of the Black-Scholes model, research in the field of option markets worldwide suggests that the volatility of the time-series returns is not constant over time. The present study analyzes the implications of volatility that changes over time for option pricing. The nonlinear-in-mean asymmetric GARCH model that reflects asymmetry in the distribution of returns and the correlation between returns and variance is recommended. For the purpose of illustration, we use the NGARCH model for the pricing of foreign currency options. Possible prices for such options having different strikes and maturities are then determined using Monte Carlo simulations. The improvement provided by the NGARCH model is that the option price is a function of the risk premium embedded in the underlying asset. This contrasts with the standard preference-free option pricing result that is obtained in the Black-Scholes model.
"Asset Pricing With Multiplicative Habit and Power-Expo Preferences"
William T. Smith; Qiang Zhang
2006-01-01
Multiplicative habit introduces an additional consumption risk as a determinant of equity premium, and allows time preference and habit strength, in addition to risk aversion, to affect "price of risk". A model combining multiplicative habit and power-expo preferences cannot be rejected.
The Share Price and Investment: Current Footprints for Future Oil and Gas Industry Performance
Directory of Open Access Journals (Sweden)
Ionel Jianu
2018-02-01
Full Text Available The share price has become a very important indicator for shareholders, banks, and financial institutions evaluating the performance of companies. The oil and gas industry seems to be in a difficult era of development, due to the market prices for its products. Moreover, climate change and renewable energies are barriers for fossil energy. This state of affairs, and the fact that oil and gas shares are considered one of the most solid and reliable shares on the London Stock Exchange (LSE, have drawn our attention. International institutions encourage the investment in the oil and gas economic sector. This study investigates how investments of oil and gas companies in long-term assets influence the share price. Using the Ohlson share price model for a sample of 51 listed companies on the LSE proves that investments in long-term assets influence the share price in the case of companies which record losses. Investments in long-term assets are responsible for the attractiveness of the oil and gas company shares.
The impact of asset repurchases and issues in an experimental market
Haruvy, E.; Noussair, C.N.; Powell, O.R.
We create an experimental asset market in which the value of the shares is independent of the quantity outstanding, and find that (i) repurchases increase, whereas share issues decrease, the price of the asset. These effects are consistent with downward-sloping demand for the asset. (ii) This
Financier-led asset lease model
Zhao, X.; Angelov, S.A.; Grefen, P.W.P.J.; Meersman, R.A.; Dillon, T.S.
2010-01-01
Nowadays, the business globalisation trend drives organisations to spread their business worldwide, which in turn generates vast asset demands. In this context, broader asset channels and higher financial capacities are required to boost the asset lease sector to meet the increasing asset demands
The Influence of Fundamental and Macroeconomic Analysis on Stock Price
Directory of Open Access Journals (Sweden)
Hari Gursida
2017-12-01
Full Text Available The purpose of this research is to analyze the effect of fundamental and macroeconomic analysis on stock price. The research was conducted at a coal company listed on the Indonesia Stock Exchange. Fundamental analysis measured by current ratio, debt to equity ratio (DER, earning per share (EPS, return on assets (ROA, and total assets turnover (TATO, while macroeconomic analysis is measured by inflation and exchange rate. Current ratio (CR has a positive effect on Stock Price. Strengthening this level of liquidity can provide information to investors to decide to buy shares of companies that tend to be healthy and stable. Return on assets (ROA has a positive and significant influence on stock price. Efforts to maximize the level of profitability by increasing the value of return on assets can provide information to investors that investments invested in the company will provide good profit. The impact of stock prices will rise. While debt to equity ratio (DER, earning per share (EPS and total assets turnover (TATO have no effect on Stock Price. Macroeconomic analysis shows: (a Inflation rate has no effect on stock price of coal company. This can be because the inflation rate in Indonesia is at the level of 6% -7% per year and included in the category of mild inflation. Mild inflation resulted in very slow economic growth, not affecting stock prices. The exchange rate has a negative and significant effect on coal company stock price. If the Rupiah is depreciated then the stock price of the coal company will decrease.
A remark on the set of arbitrage-free prices in a multi-period model
DEFF Research Database (Denmark)
Ranjan, Abhishek
2013-01-01
We study the convexity property of the set QF of arbitrage ‐ free prices of a multi ‐period financial structure F. The set of arbitrage‐free prices is shown to be a convex cone under conditions on the financial structure F that hold in particular for short ‐ lived assets. Furthermore, we provide ...
A PERFORMANCE MANAGEMENT MODEL FOR PHYSICAL ASSET MANAGEMENT
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J.L. Jooste
2012-01-01
Full Text Available
ENGLISH ABSTRACT: There has been an emphasis shift from maintenance management towards asset management, where the focus is on reliable and operational equipment and on effective assets at optimum life-cycle costs. A challenge in the manufacturing industry is to develop an asset performance management model that is integrated with business processes and strategies. The authors developed the APM2 model to satisfy that requirement. The model has a generic reference structure and is supported by operational protocols to assist in operations management. It facilitates performance measurement, business integration and continuous improvement, whilst exposing industry to the latest developments in asset performance management.
AFRIKAANSE OPSOMMING: Daar is ‘n klemverskuiwing vanaf onderhoudsbestuur na batebestuur, waar daar gefokus word op betroubare en operasionele toerusting, asook effektiewe bates teen optimum lewensikluskoste. ‘n Uitdaging in die vervaardigingsindustrie is die ontwikkeling van ‘n prestasiemodel vir bates, wat geïntegreer is met besigheidsprosesse en –strategieë. Die outeurs het die APM2 model ontwikkel om in hierdie behoefte te voorsien. Die model het ‘n generiese verwysingsstruktuur, wat ondersteun word deur operasionele instruksies wat operasionele bestuur bevorder. Dit fasiliteer prestasiebestuur, besigheidsintegrasie en voortdurende verbetering, terwyl dit die industrie ook blootstel aan die nuutste ontwikkelinge in prestasiebestuur van bates.
Pricing of Contracts for Difference in the Nordic market
International Nuclear Information System (INIS)
Kristiansen, T.
2004-01-01
The purpose of this paper is to give an introduction to, and a pricing analysis of a new forward locational price differential product, Contracts for Difference (CfD), introduced the 17th of November 2000 at Nord Pool - the Nordic electricity exchange. To our knowledge there is no literature available of how the Nordic CfDs are priced. The CfD is a forward market product with reference to the difference between the future seasonal Area Price and System Price. By using available historical trading prices and spot prices for four seasonal contracts and one yearly contract, we analyze the relationships between the contract prices and the value of the underlying asset. For the first four seasonal contracts it appears that CfDs traded at Nord Pool are mostly over-priced relative to the underlying asset. Pricing theory for forward contracts explains this by the presence of a majority of risk-averse consumers who are willing to pay a risk premium for receiving the future price differential. We utilize statistical analysis with regard to the contract prices and the underlying asset, and find some interesting relationships. The analysis is preliminary due to the fact that the CfD market is relatively new. (Author)
An electricity price model with consideration to load and gas price effects.
Huang, Min-xiang; Tao, Xiao-hu; Han, Zhen-xiang
2003-01-01
Some characteristics of the electricity load and prices are studied, and the relationship between electricity prices and gas (fuel) prices is analyzed in this paper. Because electricity prices are strongly dependent on load and gas prices, the authors constructed a model for electricity prices based on the effects of these two factors; and used the Geometric Mean Reversion Brownian Motion (GMRBM) model to describe the electricity load process, and a Geometric Brownian Motion(GBM) model to describe the gas prices; deduced the price stochastic process model based on the above load model and gas price model. This paper also presents methods for parameters estimation, and proposes some methods to solve the model.
Accounting of Long-Term Biological Assets
Valeriy Mossakovskyy; Vasyl Korytnyy
2015-01-01
The article is devoted to generalization of experience in valuation of long-term biological assets of plant-growing and animal-breeding, and preparation of suggestions concerning improvement of accounting in this field. Recommendations concerning accounting of such assets are given based on the study of accounting practice at specific agricultural company during long period of time. Authors believe that fair value is applicable only if price level for agricultural products is fixed by the gov...
Directory of Open Access Journals (Sweden)
An Chen
2015-03-01
Full Text Available This paper compares two different types of private retirement plans from the perspective of a representative beneficiary: a defined benefit (DB and a defined contribution (DC plan. While salary risk is the main common risk factor in DB and DC pension plans, one of the key differences is that DB plans carry portability risks, whereas DC plans bear asset price risk. We model these tradeoffs explicitly in this paper and compare these two plans in a utility-based framework. Our numerical analysis focuses on answering the question of when the beneficiary is indifferent between the DB and DC plan. Most of our results confirm the findings in the existing literature, among which, e.g., portability losses considerably reduce the relative attractiveness of the DB plan. However, we also find that the attractiveness of the DB plan can decrease in the level of risk aversion, which is inconsistent with the existing literature.
A Model for Resource Allocation Using Operational Knowledge Assets
Andreou, Andreas N.; Bontis, Nick
2007-01-01
Purpose: The paper seeks to develop a business model that shows the impact of operational knowledge assets on intellectual capital (IC) components and business performance and use the model to show how knowledge assets can be prioritized in driving resource allocation decisions. Design/methodology/approach: Quantitative data were collected from 84…
Pricing perpetual American options under multiscale stochastic elasticity of variance
International Nuclear Information System (INIS)
Yoon, Ji-Hun
2015-01-01
Highlights: • We study the effects of the stochastic elasticity of variance on perpetual American option. • Our SEV model consists of a fast mean-reverting factor and a slow mean-revering factor. • A slow scale factor has a very significant impact on the option price. • We analyze option price structures through the market prices of elasticity risk. - Abstract: This paper studies pricing the perpetual American options under a constant elasticity of variance type of underlying asset price model where the constant elasticity is replaced by a fast mean-reverting Ornstein–Ulenbeck process and a slowly varying diffusion process. By using a multiscale asymptotic analysis, we find the impact of the stochastic elasticity of variance on the option prices and the optimal exercise prices with respect to model parameters. Our results enhance the existing option price structures in view of flexibility and applicability through the market prices of elasticity risk
Do crypto-currencies form a new asset class?
Mayr, Samuel
2015-01-01
This paper examines statistical properties of crypto-currencies' price variations in comparison with statistical properties of price variations in common financial markets. Price data of Bitcoin, ripple and Litecoin have been directly compared with price data of euro currency and stock index S&P500. Additionally, and compared with set of stylized facts of asset returns. The properties in scope of this work include an autocorrelation of day-to-day returns, a shape of return distributions, a vo...
Effects of Idiosyncratic Volatility in Asset Pricing
Directory of Open Access Journals (Sweden)
André Luís Leite
2016-04-01
Full Text Available This paper aims to evaluate the effects of the aggregate market volatility components - average volatility and average correlation - on the pricing of portfolios sorted by idiosyncratic volatility, using Brazilian data. The study investigates whether portfolios with high and low idiosyncratic volatility - in relation to the Fama and French model (1996 - have different exposures to innovations in average market volatility, and consequently, different expectations for return. The results are in line with those found for US data, although they portray the Brazilian reality. Decomposition of volatility allows the average volatility component, without the disturbance generated by the average correlation component, to better price the effects of a worsening or an improvement in the investment environment. This result is also identical to that found for US data. Average variance should thus command a risk premium. For US data, this premium is negative. According to Chen and Petkova (2012, the main reason for this negative sign is the high level of investment in research and development recorded by companies with high idiosyncratic volatility. As in Brazil this type of investment is significantly lower than in the US, it was expected that a result with the opposite sign would be found, which is in fact what occurred.
The valuation of health care intangible assets.
Reilly, R F; Rabe, J R
1997-01-01
Health care entities (and especially medical practices) are valued for a number of reasons: sale transaction pricing and structuring, merger formation and dissolution, taxation and regulatory compliance, and litigation support and dispute resolution. The identification and quantification of the entity's intangible assets are often the most important aspects of the valuation. This article illustrates the generally accepted methods for valuing health care-related intangible assets.
Using Partial Differential Equations for Pricing of Goods and Services
Directory of Open Access Journals (Sweden)
Traykov Metodi
2016-06-01
Full Text Available This article is based on the methodology of comparative analysis, using an innovative approach for pricing of various goods and services. Benchmarking is the continuous search to find and adapt better pricing methods that leading to increased profits. We will consider the numerical solution of partial differential equations, based on Black-Scholes model for pricing of goods and services within European option. Also, we will present formulation and numerical behavior of explicit and implicit methods that can be use in pricing for company assets within European option.
Reasons to value the health care intangible asset valuation.
Reilly, Robert F
2012-01-01
There are numerous individual reasons to conduct a health care intangible asset valuation. This discussion summarized many of these reasons and considered the common categories of these individual reasons. Understanding the reason for the intangible asset analysis is an important prerequisite to conducting the valuation, both for the analyst and the health care owner/operator. This is because an intangible asset valuation may not be the type of analysis that the owner/operator really needs. Rather, the owner/operator may really need an economic damages measurement, a license royalty rate analysis, an intercompany transfer price study, a commercialization potential evaluation, or some other type of intangible asset analysis. In addition, a clear definition of the reason for the valuation will allow the analyst to understand if (1) any specific analytical guidelines, procedures, or regulations apply and (2) any specific reporting requirement applies. For example, intangible asset valuations prepared for fair value accounting purposes should meet specific ASC 820 fair value accounting guidance. Intangible asset valuations performed for intercompany transfer price tax purposes should comply with the guidance provided in the Section 482 regulations. Likewise, intangible asset valuations prepared for Section 170 charitable contribution purposes should comply with specific reporting requirements. The individual reasons for the health care intangible asset valuation may influence the standard of value applied, the valuation date selected, the valuation approaches and methods applied, the form and format of valuation report prepared, and even the type of professional employed to perform the valuation.
Intangible liabilities: beyond models of intellectual assets
García Parra, Mercedes; Simó Guzmán, Pep; Sallán Leyes, José María; Mundet Hiern, Joan
2009-01-01
Purpose – Most models of intellectual capital measurment equal intellectual capital with intellectual assets. Nevertheless, companies sometimes must incur liabilities to make intellectual assets truly actionable. This fact suggests the existence of intangible liabilities. The aim of this paper is to refine the methods of assessment of intellectual capital by refining and extending the concept of intangible liabilities. Design/methodology/approach – The paper consists of a literature revi...
International Nuclear Information System (INIS)
Coudert, V.; Mignon, V.; Penot, A.
2007-01-01
Oil prices and the United States (US) dollar exchange rate are driving the evolution of the world economy. This paper investigated long-term relationships between oil prices and the US effective exchange rate. An empirical study was performed on oil prices and the dollar real effective exchange rate between 1974 to 2004. The impact of the dollar exchange rate was also explored, and the effects of oil prices on supply and demand were considered. A dynamic partial equilibrium framework study was evaluated in order to compare how other countries used revenues from oil exports in dollars. The study showed that both variables had similar evolutions when price fluctuations were low. Strong increases in the dollar were associated with lower oil prices. However, adjustment speeds of the dollar real effective exchange rate was slow. Co-integration and causality tests showed that oil prices influenced the exchange rate, and that the link between the 2 variables was transmitted through the country's net foreign asset position. It was concluded that higher oil prices improved US net foreign asset position in relation to other countries, and had a positive impact on dollar appreciation. 24 refs., 6 tabs., 1 fig
Market Makers' Supply and Pricing of Financial Market Liquidity
Shen, Pu; Starr, Ross M.
2000-01-01
This study models the bid-ask spread in financial markets as a function of asset price variability and order flow. The market-maker is characterized as passively accepting orders to buy and to sell a security at the market's prevailing price (plus or minus half the bid-ask spread). The bid-ask spread adjusts to cover market-makers' average costs. The bid-ask spread then varies positively with: the security's price volatility, the volatility of order flow, and the absolute value of the market-...
Option pricing and foreign investment under political risk
Cherian, J.A.; Perotti, E.C.
1999-01-01
The paper analyzes foreign investment and asset prices in a context of uncertainty over future government policy. The model endogenizes the process of learning by foreign investors facing a potentially opportunistic government, which chooses strategically the timing of a policy reversal in order to
Option pricing and foreign investment under political risk
Cherian, J.A.; Perotti, E.C.
1999-01-01
he paper analyses foreign investment and asset prices in a context of uncertainty over future government policy. The model endogenizes the process of learning by foreign investors facing a potentially opportunistic government, which chooses strategically the timing of a policy reversal in order to
Option pricing and foreign investment under political risk
Cherian, J. A.; Perotti, E.C.
1999-01-01
The paper analyses foreign investment and asset prices in a context of uncertainty over future government policy. The model endogenizes the process of learning by foreign investors facing a potentially opportunistic government, which chooses strategically the timing of a policy reversal in order to
Asset pricing under rational learning about rare disasters
Koulovatianos, Christos; Wieland, Volker
2011-01-01
This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors’ information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the likelihood of rare disasters drop to a much more pessimistic level once a disaster has occurred. Such a shift in beliefs can trigger massive declines in price-dividend ratios. Pessimistic beliefs persist for s...
Integrasi Manajemen Asset dan Liabilitas Perbankan Syari’ah
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Parmujianto Parmujianto
2017-04-01
Full Text Available Asset management focus and liability is to coordinate asset-liability portfolio of the bank in order to maximize profits for the banks and the results are distributed to the shareholders in the long term by taking into account liquidity needs and prudence. Prastimoyo (1997 says that the focus or objectives of management of assets and liabilities is to optimize revenue and keep the risk does not exceed the tolerable limit, while also maximizing the market price of the company's equity, while according to Bambang (2000, the management of assets and liabilities has a function and kenijakan in implementing a pricing strategy, both in the areas of lending and funding, in general, the responsibility of ALCO is to manage positions and allocation of funds that banks provided liquidity, maximize profit and minimize risk. On the other hand, Islamic banking has the characteristics berbada with conventional banks which do not recognize interest but for the results except that there are some business activities that exist only on Islamic banking such as trade and pawn so that it impacts extensive technical on banking activities one of which is the management asset-liabilit. So this paper will describe how the ALM policy applied to Islamic banking.
Sticky continuous processes have consistent price systems
DEFF Research Database (Denmark)
Bender, Christian; Pakkanen, Mikko; Sayit, Hasanjan
Under proportional transaction costs, a price process is said to have a consistent price system, if there is a semimartingale with an equivalent martingale measure that evolves within the bid-ask spread. We show that a continuous, multi-asset price process has a consistent price system, under...
Ready, Robert Clayton
I show that relative levels of aggregate consumption and personal oil consumption provide an excellent proxy for oil prices, and that high oil prices predict low future aggregate consumption growth. Motivated by these facts, I add an oil consumption good to the long-run risk model of Bansal and Yaron [2004] to study the asset pricing implications of observed changes in the dynamic interaction of consumption and oil prices. Empirically I observe that, compared to the first half of my 1987--2010 sample, oil consumption growth in the last 10 years is unresponsive to levels of oil prices, creating an decrease in the mean-reversion of oil prices, and an increase in the persistence of oil price shocks. The model implies that the change in the dynamics of oil consumption generates increased systematic risk from oil price shocks due to their increased persistence. However, persistent oil prices also act as a counterweight for shocks to expected consumption growth, with high expected growth creating high expectations of future oil prices which in turn slow down growth. The combined effect is to reduce overall consumption risk and lower the equity premium. The model also predicts that these changes affect the riskiness of of oil futures contracts, and combine to create a hump shaped term structure of oil futures, consistent with recent data.
Models of Investor Forecasting Behavior — Experimental Evidence
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Federico Bonetto
2017-12-01
Full Text Available Different forecasting behaviors affect investors’ trading decisions and lead to qualitatively different asset price trajectories. It has been shown in the literature that the weights that investors place on observed asset price changes when forecasting future price changes, and the nature of their confidence when price changes are forecast, determine whether price bubbles, price crashes, and unpredictable price cycles occur. In this paper, we report the results of behavioral experiments involving multiple investors who participated in a market for a virtual asset. Our goal is to study investors’ forecast formation. We conducted three experimental sessions with different participants in each session. We fit different models of forecast formation to the observed data. There is strong evidence that the investors forecast future prices by extrapolating past price changes, even when they know the fundamental value of the asset exactly and the extrapolated forecasts differ significantly from the fundamental value. The rational expectations hypothesis seems inconsistent with the observed forecasts. The forecasting models of all participants that best fit the observed forecasting data were of the type that cause price bubbles and cycles in dynamical systems models, and price bubbles and cycles ended up occurring in all three sessions.
The Diversification Benefits of Including Carbon Assets in Financial Portfolios
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Yinpeng Zhang
2017-03-01
Full Text Available Carbon allowances traded in the EU-Emission Trading Scheme (EU-ETS were initially designed as an economic motivation for efficiently curbing greenhouse as emissions, but now it mimics quite a few characteristics of financial assets, and have now been used as a candidate product in building financial portfolios. In this study, we examine the time-varying correlations between carbon allowance prices with other financial indices, during the third phase of EU-ETS. The results show that, at the beginning of this period, carbon price was still strongly corrected with other financial indices. However, this connection was weakened over time. Given the relative independence of carbon assets from other financial assets, we argue for the diversification benefits of including carbon assets in financial portfolios, and building such portfolios, respectively, with the traditional global minimum variance (GMV strategy, the mean-variance-OGARCH (MV-OGARCH strategy, and the dynamic conditional correlation (DCC strategy. It is shown that the portfolio built with the MV-OGARCH strategy far out-performs the others and that including carbon assets in financial portfolios does help reduce investment risks.
Conic coconuts : the pricing of contingent capital notes using conic finance
Madan, D.B.; Schoutens, W.
2010-01-01
In this paper we introduce a fundamental model under which we will price contingent capital notes using conic finance techniques. The model is based on more realistic balance-sheet models recognizing the fact that asset and liabilities are both risky and have been treated differently taking into
The impact of liquidity and size premium on equity price formation in Serbia
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Minović Jelena
2012-01-01
Full Text Available The goal of this paper is to examine the impact of an overall market factor, the factor related to the firm size, the factor related to the ratio of book to market value of companies, and the factor of liquidity risk on expected asset returns in the Serbian market. For this market we estimated different factor models: Capital Asset Pricing Model (CAPM by Sharpe, 1964, Fama-French (FF model (1992, 1993, Liquidity-augmented CAPM (LCAPM by Liu (2006, and combination LCAPM with FF factors. We used daily data for the period from 2005 to 2009. Using a demanding methodology and complex dataset, we found that liquidity and firm size had a significant impact on equity price formation in Serbia. On the other hand, our results suggest that the factor related to the ratio of book to market value of companies does not have an important role in asset pricing in Serbia. We found that Liu’s two factor LCAPM model performs better in explaining stock returns than the standard CAPM and the Fama-French three factor model. Additionally, Liu’s LCAPM may indeed be a good tool for realistic assessment of the expected asset returns. The combination of the Fama-French model and the LCAPM could improve the understanding of equilibrium in the Serbian equity market. Even though previous papers have mostly dealt with examining different factor models of developed or emerging markets worldwide, none of them has tested factor models on the countries of former Yugoslavia. This paper is the first to test the FF model and LCAPM with FF factors in the case of Serbia and the area of ex-Yugoslavia. [Projekat Ministarstva nauke Republike Srbije, br. 179015: Challenges and Prospects of Structural Changes in Serbia: Strategic Directions for Economic Development and Harmonization With EU Requirements
The Retail Price Model is a tool to estimate the average retail electricity prices - under both competitive and regulated market structures - using power sector projections and assumptions from the Energy Information Administration.
IMPACT OF LIQUIDITY AND SIZE PREMIUM ON EQUITY PRICE FORMATION IN SERBIA
Jelena Minović; Boško Živković
2012-01-01
The goal of this paper is to examine the impact of an overall market factor, the factor related to the firm size, the factor related to the ratio of book to market value of companies, and the factor of liquidity risk on expected asset returns in the Serbian market. For this market we estimated different factor models: Capital Asset Pricing Model (CAPM by Sharpe, 1964), Fama-French (FF) model (1992, 1993), Liquidity-augmented CAPM (LCAPM) by Liu (2006), and combination LCAPM with FF factors. W...
Transfer pricing file- a contextualized Approach. Case Study
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M. Boiţă
2013-12-01
Full Text Available The transfer price is basically the price used for transfer of tangible and intangible assets between related parties and it should be determined on the basis of market value without being influenced by the relationship of affiliation. However, if for services or tangible assets, the comparison of the transfer price to the market one is relatively easy to achieve, for the intangible ones, quantifying future benefits waived by the affiliated person compared to the situation in which it would be independent is harder to be established.
Financial news predicts stock market volatility better than close price
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Adam Atkins
2018-06-01
Full Text Available The behaviour of time series data from financial markets is influenced by a rich mixture of quantitative information from the dynamics of the system, captured in its past behaviour, and qualitative information about the underlying fundamentals arriving via various forms of news feeds. Pattern recognition of financial data using an effective combination of these two types of information is of much interest nowadays, and is addressed in several academic disciplines as well as by practitioners. Recent literature has focused much effort on the use of news-derived information to predict the direction of movement of a stock, i.e. posed as a classification problem, or the precise value of a future asset price, i.e. posed as a regression problem. Here, we show that information extracted from news sources is better at predicting the direction of underlying asset volatility movement, or its second order statistics, rather than its direction of price movement. We show empirical results by constructing machine learning models of Latent Dirichlet Allocation to represent information from news feeds, and simple naïve Bayes classifiers to predict the direction of movements. Empirical results show that the average directional prediction accuracy for volatility, on arrival of new information, is 56%, while that of the asset close price is no better than random at 49%. We evaluate these results using a range of stocks and stock indices in the US market, using a reliable news source as input. We conclude that volatility movements are more predictable than asset price movements when using financial news as machine learning input, and hence could potentially be exploited in pricing derivatives contracts via quantifying volatility. Keywords: Machine learning, Natural language processing, Volatility forecasting, Technical analysis, Computational finance
Cash dividends and futures prices on discontinuous filtrations
Vellekoop, M.H.; Nieuwenhuis, J.W.
We derive a general formula for the futures price process without the restriction that the assets used in the future margin account are continuous and of finite variation. To do so, we model tradeable securities with dividends which are not necessarily cash dividends at fixed times or continuously
Game Options approach in bankruptcy triggering asset value
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Abdelmajid El hajaji
2019-07-01
Full Text Available In this paper, we develop a new numerical method, game theory and option pricing to compute a bankruptcy triggering asset value. we will draw our attention to determining a the numerical asset value, or price of a share, at which a bankruptcy is triggered. This paper develops and analyze a cubic spline collocation method for approximating solutions of the problem. This method converges quadratically. In addition, this article also provides with a real-life case study of the investment bank, and the optimal bankruptcy strategy in this particular case. As we will observe, the bankruptcy trigger computed in this example could have served as a good guide for predicting fall of this investment bank.
Laplace transform analysis of a multiplicative asset transfer model
Sokolov, Andrey; Melatos, Andrew; Kieu, Tien
2010-07-01
We analyze a simple asset transfer model in which the transfer amount is a fixed fraction f of the giver’s wealth. The model is analyzed in a new way by Laplace transforming the master equation, solving it analytically and numerically for the steady-state distribution, and exploring the solutions for various values of f∈(0,1). The Laplace transform analysis is superior to agent-based simulations as it does not depend on the number of agents, enabling us to study entropy and inequality in regimes that are costly to address with simulations. We demonstrate that Boltzmann entropy is not a suitable (e.g. non-monotonic) measure of disorder in a multiplicative asset transfer system and suggest an asymmetric stochastic process that is equivalent to the asset transfer model.
Understanding international commodity price fluctuations
Arezki, Rabah; Loungani, Prakash; van der Ploeg, Rick; Venables, Anthony J.
An overview is provided of recent work on commodity prices, focusing on three themes: (i) "financialization" of commodity markets--commodities being considered by financial investors as a distinct asset class, (ii) trends and forecasts of commodity prices, and (iii) fracking-a shorthand for the
Stochastic volatility models and Kelvin waves
Lipton, Alex; Sepp, Artur
2008-08-01
We use stochastic volatility models to describe the evolution of an asset price, its instantaneous volatility and its realized volatility. In particular, we concentrate on the Stein and Stein model (SSM) (1991) for the stochastic asset volatility and the Heston model (HM) (1993) for the stochastic asset variance. By construction, the volatility is not sign definite in SSM and is non-negative in HM. It is well known that both models produce closed-form expressions for the prices of vanilla option via the Lewis-Lipton formula. However, the numerical pricing of exotic options by means of the finite difference and Monte Carlo methods is much more complex for HM than for SSM. Until now, this complexity was considered to be an acceptable price to pay for ensuring that the asset volatility is non-negative. We argue that having negative stochastic volatility is a psychological rather than financial or mathematical problem, and advocate using SSM rather than HM in most applications. We extend SSM by adding volatility jumps and obtain a closed-form expression for the density of the asset price and its realized volatility. We also show that the current method of choice for solving pricing problems with stochastic volatility (via the affine ansatz for the Fourier-transformed density function) can be traced back to the Kelvin method designed in the 19th century for studying wave motion problems arising in fluid dynamics.
Stochastic volatility models and Kelvin waves
International Nuclear Information System (INIS)
Lipton, Alex; Sepp, Artur
2008-01-01
We use stochastic volatility models to describe the evolution of an asset price, its instantaneous volatility and its realized volatility. In particular, we concentrate on the Stein and Stein model (SSM) (1991) for the stochastic asset volatility and the Heston model (HM) (1993) for the stochastic asset variance. By construction, the volatility is not sign definite in SSM and is non-negative in HM. It is well known that both models produce closed-form expressions for the prices of vanilla option via the Lewis-Lipton formula. However, the numerical pricing of exotic options by means of the finite difference and Monte Carlo methods is much more complex for HM than for SSM. Until now, this complexity was considered to be an acceptable price to pay for ensuring that the asset volatility is non-negative. We argue that having negative stochastic volatility is a psychological rather than financial or mathematical problem, and advocate using SSM rather than HM in most applications. We extend SSM by adding volatility jumps and obtain a closed-form expression for the density of the asset price and its realized volatility. We also show that the current method of choice for solving pricing problems with stochastic volatility (via the affine ansatz for the Fourier-transformed density function) can be traced back to the Kelvin method designed in the 19th century for studying wave motion problems arising in fluid dynamics
Stochastic volatility models and Kelvin waves
Energy Technology Data Exchange (ETDEWEB)
Lipton, Alex [Merrill Lynch, Mlfc Main, 2 King Edward Street, London EC1A 1HQ (United Kingdom); Sepp, Artur [Merrill Lynch, 4 World Financial Center, New York, NY 10080 (United States)], E-mail: Alex_Lipton@ml.com, E-mail: Artur_Sepp@ml.com
2008-08-29
We use stochastic volatility models to describe the evolution of an asset price, its instantaneous volatility and its realized volatility. In particular, we concentrate on the Stein and Stein model (SSM) (1991) for the stochastic asset volatility and the Heston model (HM) (1993) for the stochastic asset variance. By construction, the volatility is not sign definite in SSM and is non-negative in HM. It is well known that both models produce closed-form expressions for the prices of vanilla option via the Lewis-Lipton formula. However, the numerical pricing of exotic options by means of the finite difference and Monte Carlo methods is much more complex for HM than for SSM. Until now, this complexity was considered to be an acceptable price to pay for ensuring that the asset volatility is non-negative. We argue that having negative stochastic volatility is a psychological rather than financial or mathematical problem, and advocate using SSM rather than HM in most applications. We extend SSM by adding volatility jumps and obtain a closed-form expression for the density of the asset price and its realized volatility. We also show that the current method of choice for solving pricing problems with stochastic volatility (via the affine ansatz for the Fourier-transformed density function) can be traced back to the Kelvin method designed in the 19th century for studying wave motion problems arising in fluid dynamics.
Price returns efficiency of the Shanghai A-Shares
Long, Wang Jiang; Jaaman, Saiful Hafizah; Samsudin, Humaida Banu
2014-06-01
Beta measured from the capital asset pricing model (CAPM) is the most widely used risk to estimate expected return. In this paper factors that influence Shanghai A-share stock return based on CAPM are explored and investigated. Price data of 312 companies listed on Shanghai Stock Exchange (SSE) from the year 2000 to 2011 are investigated. This study employed the Fama-MacBeth cross-sectional method to avoid weakness of traditional CAPM. In addition, this study improves the model by adjusting missing data. Findings of this study justifies that systematic risk can explain the portfolios' returns of China SSE stock market.
Dynamic option pricing with endogenous stochastic arbitrage
Contreras, Mauricio; Montalva, Rodrigo; Pellicer, Rely; Villena, Marcelo
2010-09-01
Only few efforts have been made in order to relax one of the key assumptions of the Black-Scholes model: the no-arbitrage assumption. This is despite the fact that arbitrage processes usually exist in the real world, even though they tend to be short-lived. The purpose of this paper is to develop an option pricing model with endogenous stochastic arbitrage, capable of modelling in a general fashion any future and underlying asset that deviate itself from its market equilibrium. Thus, this investigation calibrates empirically the arbitrage on the futures on the S&P 500 index using transaction data from September 1997 to June 2009, from here a specific type of arbitrage called “arbitrage bubble”, based on a t-step function, is identified and hence used in our model. The theoretical results obtained for Binary and European call options, for this kind of arbitrage, show that an investment strategy that takes advantage of the identified arbitrage possibility can be defined, whenever it is possible to anticipate in relative terms the amplitude and timespan of the process. Finally, the new trajectory of the stock price is analytically estimated for a specific case of arbitrage and some numerical illustrations are developed. We find that the consequences of a finite and small endogenous arbitrage not only change the trajectory of the asset price during the period when it started, but also after the arbitrage bubble has already gone. In this context, our model will allow us to calibrate the B-S model to that new trajectory even when the arbitrage already started.
Pricing and Hedging Quanto Options in Energy Markets
DEFF Research Database (Denmark)
Benth, Fred Espen; Lange, Nina; Myklebust, Tor Åge
approach we derive a closed form option pricing formula for energy quanto options, under the assumption that the underlying assets are log-normally distributed. Our approach encompasses several interesting cases, such as geometric Brownian motions and multifactor spot models. We also derive delta and gamma......In energy markets, the use of quanto options have increased significantly in the recent years. The payoff from such options are typically written on an underlying energy index and a measure of temperature and are suited for managing the joint price and volume risk in energy markets. Using an HJM...... expressions for hedging. Furthermore, we illustrate the use of our model by an empirical pricing exercise using NYMEX traded natural gas futures and CME traded Heating Degree Days futures for New York....
The Impact of Asset Repurchases and Issues in an Experimental Market
Haruvy, E.; Noussair, C.N.; Powell, O.R.
2012-01-01
Abstract: We create an experimental asset market in which we conduct share repurchases and share issues. Although the intrinsic value of the shares is independent of the quantity outstanding, the interventions result in changes in asset price. Specifically, we find the following. (1) A repurchase of
Pricing of Asian temperature risk
Benth, Fred; Härdle, Wolfgang Karl; López Cabrera, Brenda
2009-01-01
Weather derivatives (WD) are different from most financial derivatives because the underlying weather cannot be traded and therefore cannot be replicated by other financial instruments. The market price of risk (MPR) is an important parameter of the associated equivalent martingale measures used to price and hedge weather futures/options in the market. The majority of papers so far have priced non-tradable assets assuming zero MPR, but this assumption underestimates WD prices. We study the MP...
Intangible asset tax depreciation in the Czech Republic
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Pavel Svirák
2011-01-01
Full Text Available This paper aims to familiarize readers with the legislative development of intangible asset tax depreciation in the Czech Republic since 1993. The paper is divided into several basic chapters, of which the main chapter describes and analyzes the development of legislation in three thus-existing legal modes regulating intangible asset tax depreciation (the periods 1993–2000; 2001–2004; 2004–2011. A separate sub-chapter deals with each of these three modes, which fundamentally differ in the concept of determining tax depreciations. For better clarity, changes in the legislation in question are described using tables. Over the first mentioned mode, i.e. the mode valid for assets acquired in the period 1993–2000, intangible asset tax depreciations were determined by the same manner as tangible asset tax depreciations. This period is characterized by gradual establishment (specification of legislation that may be partially attributed to the stormy development of social conditions and the need for them to be reflected in law. For the period 2001–2003, standard amendments were contained in accounting regulations. The Income Tax Act (hereinafter ITA did not contain an amendment of intangible assets and its depreciations. It merely determined that accounting depreciations of intangible assets were a tax expense. Nevertheless, changes also occurred in this short time period, which this paper will later address. Effective from 2004, legislation on intangible assets and their tax depreciations returned to the ITA. Changes came in this mode of determining depreciations as well; nevertheless, one may consider the current legislative regulation to be stabilized. Later in this paper for the selected category of intangible assets (software, the authors describe and assess the dependence of the portion of the entry price entering tax expenses in the form of tax depreciations on the year of acquiring intangible assets. To achieve the stated objectives
Asset transformation and the challenges to servitize a utility business model
International Nuclear Information System (INIS)
Helms, Thorsten
2016-01-01
The traditional energy utility business model is under pressure, and energy services are expected to play an important role for the energy transition. Experts and scholars argue that utilities need to innovate their business models, and transform from commodity suppliers to service providers. The transition from a product-oriented, capital-intensive business model based on tangible assets, towards a service-oriented, expense-intensive business model based on intangible assets may present great managerial and organizational challenges. Little research exists about such transitions for capital-intensive commodity providers, and particularly energy utilities, where the challenges to servitize are expected to be greatest. This qualitative paper explores the barriers to servitization within selected Swiss and German utility companies through a series of interviews with utility managers. One of them is ‘asset transformation’, the shift from tangible to intangible assets as major input factor for the value proposition, which is proposed as a driver for the complexity of business model transitions. Managers need to carefully manage those challenges, and find ways to operate both new service and established utility business models aside. Policy makers can support the transition of utilities through more favorable regulatory frameworks for energy services, and by supporting the exchange of knowledge in the industry. - Highlights: •The paper analyses the expected transformation of utilities into service-providers. •Service and utility business models possess very different attributes. •The former is based on intangible, the latter on tangible assets. •The transformation into a service-provider is related with great challenges. •Asset transformation is proposed as a barrier for business model innovation.
Modelling the Costs of Preserving Digital Assets
DEFF Research Database (Denmark)
Kejser, Ulla Bøgvad; Nielsen, Anders Bo; Thirifays, Alex
2012-01-01
Information is increasingly being produced in digital form, and some of it must be preserved for the longterm. Digital preservation includes a series of actively managed activities that require on-going funding. To obtain sufficient resources, there is a need for assessing the costs...... and the benefits accrued by preserving the assets. Cost data is also needed for optimizing activities and comparing the costs of different preservation alternatives. The purpose of this study is to analyse generic requirements for modelling the cost of preserving digital assets. The analysis was based...
Distributor pricing approaches enabled in Smart Grid to differentiate delivery service quality
Directory of Open Access Journals (Sweden)
Zhongwei Jake Zhang
2014-12-01
Full Text Available Industry practitioners who advocate retail competition and Demand-side Participation now look for approaches to link both initiatives through distributor pricing. As distributors incrementally convert more traditional assets into Smart Grid assets, they also need to consider different pricing approaches to recover the investment costs and meet the regulatory business requirements. Small electricity consumers need incentives to take part in these initiatives but their delivery service quality should also be closely guarded. Hence this paper addresses the above needs as a whole and investigates a set of distributor pricing approaches with Smart Grid technologies. Pricing of network and non-network based solutions should follow the incremental basis, such as the long run average incremental cost (LRAIC. The benefit of deferring network investment is calculated and should be passed to consumers as peak pricing rebate. A concept of reliability premium (RP based on load point reliability index is proposed, through which customers can express their preference of service quality and adjust their network tariff payment accordingly. A service delivery model is also proposed to utilize the savings from wholesale market trading to compensate for the downgraded service when loads are controlled. The IEEE 123-node distribution test feeder and the IEEE distribution system for RBTS Bus No. 2 are simulated, and solved using General Algebraic Modeling System (GAMS to demonstrate the proposed distributor pricing approaches in Smart Grid.
Testing option pricing with the Edgeworth expansion
Balieiro Filho, Ruy Gabriel; Rosenfeld, Rogerio
2004-12-01
There is a well-developed framework, the Black-Scholes theory, for the pricing of contracts based on the future prices of certain assets, called options. This theory assumes that the probability distribution of the returns of the underlying asset is a Gaussian distribution. However, it is observed in the market that this hypothesis is flawed, leading to the introduction of a fudge factor, the so-called volatility smile. Therefore, it would be interesting to explore extensions of the Black-Scholes theory to non-Gaussian distributions. In this paper, we provide an explicit formula for the price of an option when the distributions of the returns of the underlying asset is parametrized by an Edgeworth expansion, which allows for the introduction of higher independent moments of the probability distribution, namely skewness and kurtosis. We test our formula with options in the Brazilian and American markets, showing that the volatility smile can be reduced. We also check whether our approach leads to more efficient hedging strategies of these instruments.
Taxes, Regulations, and Asset Prices
Ellen R. McGrattan; Edward C. Prescott
2001-01-01
U.S. stock prices have increased much faster than gross domestic product (GDP) in the postwar period. Between 1962 and 2000, corporate equity value relative to GDP nearly doubled. In this paper, we determine what standard growth theory says the equity value should be in 1962 and 2000, the two years for which our steady-state assumption is a reasonable one. We find that the actual valuations were close to the theoretical predictions in both years. The reason for the large run-up in equity valu...
The Impact of Transfer Pricing on Tourism Entities
Directory of Open Access Journals (Sweden)
Păiuşan Luminiţa
2017-01-01
Full Text Available The purpose of this document is desired to brought a significant contribution of the controlactivity, and to discuss new methods to ensure transparency and to eliminate constant disputesbetween the public and private sector. Starting with these aspects, we are looking to highlightinternational fraud as accompanying phenomena of transnational structures and economicrelations, to explain its impact on the Romanian economy and to discus the key to finding themetholodgy to eradicate this phenomenon, and also to indicate our recommendations and opinionsto what we believe is necessary to eradicate this phenomenon. Transfer pricing is basically theprice used in the transfer of tangible and intangible assets and / or transfer of services betweenrelated parties, and this price should be based on market price without influence of the relationshipof affiliation. For services or tangible assets, the transfer price comparison with the market isrelatively easy to perform, but in the case of intangible assets, quantification of future benefits thatit gives to an affiliated person, in comparison to a situation where this would be to an independent,is difficult to determine.
Peaks and Valleys : Experimental Asset Markets With Non-Monotonic Fundamentals
Noussair, C.N.; Powell, O.R.
2008-01-01
We report the results of an experiment designed to measure how well asset market prices track fundamentals when the latter experience peaks and troughs. We observe greater price efficiency in markets in which fundamentals rise to a peak and then decline, than in markets in which fundamentals decline
Internet resource pricing models
Xu, Ke; He, Huan
2013-01-01
This brief guides the reader through three basic Internet resource pricing models using an Internet cost analysis. Addressing the evolution of service types, it presents several corresponding mechanisms which can ensure pricing implementation and resource allocation. The authors discuss utility optimization of network pricing methods in economics and underline two classes of pricing methods including system optimization and entities' strategic optimization. The brief closes with two examples of the newly proposed pricing strategy helping to solve the profit distribution problem brought by P2P
Quantifying price risk of electricity retailer based on CAPM and RAROC methodology
International Nuclear Information System (INIS)
Karandikar, R.G.; Khaparde, S.A.; Kulkarni, S.V.
2007-01-01
In restructured electricity markets, electricity retailers set up contracts with generation companies (GENCOs) and with end users to meet their load requirements at agreed upon tariff. The retailers invest consumer payments as capital in the volatile competitive market. In this paper, a model for quantifying price risk of electricity retailer is proposed. An IEEE 30 Bus test system is used to demonstrate the model. The Capital Asset Pricing Model (CAPM) is demonstrated to determine the retail electricity price for the end users. The factor Risk Adjusted Recovery on Capital (RAROC) is used to quantify the price risk involved. The methodology proposed in this paper can be used by retailer while submitting proposal for electricity tariff to the regulatory authority. (author)
Quantifying price risk of electricity retailer based on CAPM and RAROC methodology
Energy Technology Data Exchange (ETDEWEB)
Karandikar, R.G.; Khaparde, S.A.; Kulkarni, S.V. [Electrical Engineering Department, Indian Institute of Technology Bombay, Mumbai 400 076 (India)
2007-12-15
In restructured electricity markets, electricity retailers set up contracts with generation companies (GENCOs) and with end users to meet their load requirements at agreed upon tariff. The retailers invest consumer payments as capital in the volatile competitive market. In this paper, a model for quantifying price risk of electricity retailer is proposed. An IEEE 30 Bus test system is used to demonstrate the model. The Capital Asset Pricing Model (CAPM) is demonstrated to determine the retail electricity price for the end users. The factor Risk Adjusted Recovery on Capital (RAROC) is used to quantify the price risk involved. The methodology proposed in this paper can be used by retailer while submitting proposal for electricity tariff to the regulatory authority. (author)
Sylvain M. Prado
2009-01-01
In the leasing industry, the risk of loss on sales at the end of the contract term, as well as pricing are critically impacted by the forecasted resale price of the asset (residual value). We apply the Hedonic methodology to European auto lease portfolios, in order to estimate the resale price distribution. The Hedonic approach estimates the price of a good through the valuation of its attributes. Following a discussion on Hedonic prices, we propose an operational model for the automobile res...
Fourier and wavelet option pricing methods
S.C. Maree (Stef); L. Ortiz Gracia (Luis); C.W. Oosterlee (Cornelis); M.A.H. Dempster; J. Kanniainen (Juho); J. Keane (John); E. Vynckier (Erik)
2018-01-01
textabstractIn this overview chapter, we will discuss the use of exponentially converging option pricing techniques for option valuation. We will focus on the pricing of European options, and they are the basic instruments within a calibration procedure when fitting the parameters in asset dynamics.
The pricing of bank debt guarantees
Arping, S.
2009-01-01
We analyze the optimal pricing of government-sponsored bank debt guarantees within the context of an asset substitution framework. We show that the desirability of fair pricing of guarantees depends on the degree of transparency of the banking sector: in relatively opaque banking systems, fair
Consistent Valuation across Curves Using Pricing Kernels
Directory of Open Access Journals (Sweden)
Andrea Macrina
2018-03-01
Full Text Available The general problem of asset pricing when the discount rate differs from the rate at which an asset’s cash flows accrue is considered. A pricing kernel framework is used to model an economy that is segmented into distinct markets, each identified by a yield curve having its own market, credit and liquidity risk characteristics. The proposed framework precludes arbitrage within each market, while the definition of a curve-conversion factor process links all markets in a consistent arbitrage-free manner. A pricing formula is then derived, referred to as the across-curve pricing formula, which enables consistent valuation and hedging of financial instruments across curves (and markets. As a natural application, a consistent multi-curve framework is formulated for emerging and developed inter-bank swap markets, which highlights an important dual feature of the curve-conversion factor process. Given this multi-curve framework, existing multi-curve approaches based on HJM and rational pricing kernel models are recovered, reviewed and generalised and single-curve models extended. In another application, inflation-linked, currency-based and fixed-income hybrid securities are shown to be consistently valued using the across-curve valuation method.
Pricing and Hedging Quanto Options in Energy Markets
DEFF Research Database (Denmark)
Benth, Fred Espen; Lange, Nina; Myklebust, Tor Åge
2015-01-01
–Jarrow–Morton approach, we derive a closed-form option pricing formula for energy quanto options under the assumption that the underlying assets are lognormally distributed. Our approach encompasses several interesting cases, such as geometric Brownian motions and multifactor spot models. We also derive Delta and Gamma......In energy markets, the use of quanto options has increased significantly in recent years. The payoff from such options are typically written on an underlying energy index and a measure of temperature. They are suited to managing the joint price and volume risk in energy markets. Using a Heath...... expressions for hedging. Further, we illustrate the use of our model by an empirical pricing exercise using NewYork Mercantile Exchange-traded natural gas futures and Chicago Mercantile Exchange-traded heating degree days futures for NewYork....
Derivative pricing with liquidity risk: Theory and evidence from the credit default swap market
Bongaerts, D.; de Jong, F.; Driessen, J.
2008-01-01
We derive a theoretical asset-pricing model for derivative contracts that allows for expected liquidity and liquidity risk, and estimate this model for the market of credit default swaps (CDS). Our model extends the LCAPM of Acharya and Pedersen (2005) to a setting with derivative instruments and
A model for the effects of psychological pricing in Gabor-Granger price studies
Wedel, M; Leeflang, PSH
We present a model of consumers' price sensitivity that explicitly deals with the existence of so-called psychological price levels or odd prices, i.e. prices ending in an odd number. The model is formulated in a latent class framework, in which splines are used to model utility as a function of
Directory of Open Access Journals (Sweden)
Oosthuizen, A.V.
2013-10-01
Full Text Available Determining the price of a financial instrument is something that happens every day in the financial markets. Every price starts off with a spot price adjusted for interest until maturity of the particular instrument. The interest is usually described as risk-free interest. The price so determined is the most basic price that an investor is willing to pay if not risk is involved. Risk-free assets, then, are securities of which the future rates of return are known with certainty. An exceptional degree of confidence in the issuer of the security brings about this certainty. Risk-free assets are normally in the fixed income securities (capital markets investment category or in the liquid money market instruments such as treasury bills, category. This study attempts to determine whether the risk-free rates used by treasury managers and traders in South Africa to formulate their bond yield curves and which are used in valuation models, may be deemed risk-free. The study specifies certain criteria that an asset must satisfy in order to be used as a risk-free asset. Short term and long term South African instruments are compared to the US counterpart instruments, to gain an understanding of the South African instruments relative to the US ones. The behaviour of the risk-free instruments used in South Africa is also compared to the FTSE/JSE All Share Index and gold spot prices, which are perceived to be a risky asset classes. To gain some understanding of the behaviour of these instruments, analyses were done from different angles. The standard deviations of the daily percentage changes of the R157 were significantly lower than that of the ALSI and the gold spot price change. Compared to the ALSI and gold spot price, therefore, the R157 may be deemed a “low risk” instrument. The JIBAR was even less volatile that the R157. Interestingly, the US instruments were substantially more risky than the SA instruments over the analysis period. Also the JIBAR
On pricing futures options on random binomial tree
International Nuclear Information System (INIS)
Bayram, Kamola; Ganikhodjaev, Nasir
2013-01-01
The discrete-time approach to real option valuation has typically been implemented in the finance literature using a binomial tree framework. Instead we develop a new model by randomizing the environment and call such model a random binomial tree. Whereas the usual model has only one environment (u, d) where the price of underlying asset can move by u times up and d times down, and pair (u, d) is constant over the life of the underlying asset, in our new model the underlying security is moving in two environments namely (u 1 , d 1 ) and (u 2 , d 2 ). Thus we obtain two volatilities σ 1 and σ 2 . This new approach enables calculations reflecting the real market since it consider the two states of market normal and extra ordinal. In this paper we define and study Futures options for such models.
Directory of Open Access Journals (Sweden)
Rani Ramdhani
2013-03-01
Full Text Available This study aims to determine the effect of Return on Assets and Debt to Equity Ratio of Stock Price on Financial Institutions in Indonesia Stock Exchange. This study used secondary data, with samples 2 financial companies in Indonesia Stock Exchange during the study period 2004-2010. Independent variables in this study are Return on Assets and Debt to Equity Ratio. This study used purposive sampling technique. The method of data analysis used classical assumption test, hypothesis test, multiple regression analysis, the F test and t test. Based on results of the study, Return on Assets and Debt to Equity Ratio have no significant effect on stock price. Meanwhile, the F test result shows that Return on Assets and Debt to Equity Ratio jointly have no effect on stock price.
Oil transformation sector modelling: price interactions
International Nuclear Information System (INIS)
Maurer, A.
1992-01-01
A global oil and oil product prices evolution model is proposed that covers the transformation sector incidence and the final user price establishment together with price interactions between gaseous and liquid hydrocarbons. High disparities among oil product prices in the various consumer zones (North America, Western Europe, Japan) are well described and compared with the low differences between oil supply prices in these zones. Final user price fluctuations are shown to be induced by transformation differences and competition; natural gas market is also modelled
Historical development of derivatives’ underlying assets
Directory of Open Access Journals (Sweden)
Sylvie Riederová
2011-01-01
Full Text Available The derivative transactions are able to eliminate the unexpected risk arising from the price volatility of the asset. The need for risk elimination relates to the application of derivatives.This paper is focused on derivatives’ underlying assets themselves. With the plain description, supported by progressive summarization, the authors analysed the relevant theoretical sources, dealt with derivatives, their underlying assets and their development in centuries. Starting in the ancient history, 2000 BC, the first non-standard transaction, very close to today’s understanding of derivatives, becomes to be closed between counterparties. During the time, in different kingdoms and emporiums, derivatives started to play a significant role in daily life, helping to reduce the uncertainty of the future. But the real golden era for derivatives started with the so called ‘New derivative markets’ and computer supported trading. They have extended their form from simple tools to most complex structures, without changing their main purpose hedging and risk – reduction.For the main purpose of this paper it is impossible to split the development of derivatives from the very wide extension of underlying assets. The change of these assets was one of the main drivers in derivatives development. Understanding of the dynamic character of these assets helps to understand the world of derivatives.
Transfer Pricing and Intangible Assets in Cross-Border Business Restructurings
Pätäri, Heidi Maria
2012-01-01
Transfer pricing can be described as the internal price setting between multinational group companies. In recent years the issue of jurisdiction’s tax revenue flowing out of the jurisdiction has been closely related with transfer pricing and the tax authorities all over the world have increasingly began to question the arm’s length nature of the intra-group transactions of multinational enterprises. In this thesis the focus is on the transfer pricing issues arising in situations w...
Electricity price modeling with stochastic time change
International Nuclear Information System (INIS)
Borovkova, Svetlana; Schmeck, Maren Diane
2017-01-01
In this paper, we develop a novel approach to electricity price modeling, based on the powerful technique of stochastic time change. This technique allows us to incorporate the characteristic features of electricity prices (such as seasonal volatility, time varying mean reversion and seasonally occurring price spikes) into the model in an elegant and economically justifiable way. The stochastic time change introduces stochastic as well as deterministic (e.g., seasonal) features in the price process' volatility and in the jump component. We specify the base process as a mean reverting jump diffusion and the time change as an absolutely continuous stochastic process with seasonal component. The activity rate of the stochastic time change can be related to the factors that influence supply and demand. Here we use the temperature as a proxy for the demand and hence, as the driving factor of the stochastic time change, and show that this choice leads to realistic price paths. We derive properties of the resulting price process and develop the model calibration procedure. We calibrate the model to the historical EEX power prices and apply it to generating realistic price paths by Monte Carlo simulations. We show that the simulated price process matches the distributional characteristics of the observed electricity prices in periods of both high and low demand. - Highlights: • We develop a novel approach to electricity price modeling, based on the powerful technique of stochastic time change. • We incorporate the characteristic features of electricity prices, such as seasonal volatility and spikes into the model. • We use the temperature as a proxy for the demand and hence, as the driving factor of the stochastic time change • We derive properties of the resulting price process and develop the model calibration procedure. • We calibrate the model to the historical EEX power prices and apply it to generating realistic price paths.
Directory of Open Access Journals (Sweden)
Muhammad Iqbal
2017-06-01
Full Text Available Assorted types of market anomalies occur when stock prices deviate from the prediction of classical asset pricing theories. This study aims to examine asset growth anomaly where stocks with high asset growth will be followed by low returns in the subsequent periods. This study, using Indonesia Stock Exchanges data, finds that an equally-weighted low-growth portfolio outperforms high-growth portfolio by average 0.75% per month (9% per annum, confirming existence of asset growth anomaly. The analysis is extended at individual stock-level using fixed-effect panel regression in which asset growth effect remains significant even with controlling other variables of stock return determinants. This study also explores further whether asset growth can be included as risk factor. Employing two-stage cross-section regression in Fama and Macbeth (1973, the result aligns with some prior studies that asset growth is not a new risk factor; instead the anomaly is driven by mispricing due to investors’ overreaction and psychological bias. This result imply that asset growth anomaly is general phenomenon that can be found at mostly all stock market but in Indonesia market asset growth anomaly rise from investors’ overreaction, instead of playing as a factor of risk.
Directory of Open Access Journals (Sweden)
Muhammad Iqbal
2017-03-01
Full Text Available Assorted types of market anomalies occur when stock prices deviate from the prediction of classical asset pricing theories. This study aims to examine asset growth anomaly where stocks with high asset growth will be followed by low returns in the subsequent periods. This study, using Indonesia Stock Exchanges data, finds that an equally-weighted low-growth portfolio outperforms high-growth portfolio by average 0.75% per month (9% per annum, confirming existence of asset growth anomaly. The analysis is extended at individual stock-level using fixed-effect panel regression in which asset growth effect remains significant even with controlling other variables of stock return determinants. This study also explores further whether asset growth can be included as risk factor. Employing two-stage cross-section regression in Fama and Macbeth (1973, the result aligns with some prior studies that asset growth is not a new risk factor; instead the anomaly is driven by mispricing due to investors’ overreaction and psychological bias. This result imply that asset growth anomaly is general phenomenon that can be found at mostly all stock market but in Indonesia market asset growth anomaly rise from investors’ overreaction, instead of playing as a factor of risk.
Impacts of Variable Renewable Energy on Bulk Power System Assets, Pricing, and Costs
Energy Technology Data Exchange (ETDEWEB)
Wiser, Ryan H. [Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States); Mills, Andrew [Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States); Seel, Joachim [Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States); Levin, Todd [Argonne National Lab. (ANL), Argonne, IL (United States); Botterud, Audun [Argonne National Lab. (ANL), Argonne, IL (United States)
2017-11-29
We synthesize available literature, data, and analysis on the degree to which growth in variable renewable energy (VRE) has impacted to date or might in the future impact bulk power system assets, pricing, and costs. We do not analyze impacts on specific power plants, instead focusing on national and regional system-level trends. The issues addressed are highly context dependent—affected by the underlying generation mix of the system, the amount of wind and solar penetration, and the design and structure of the bulk power system in each region. Moreover, analyzing the impacts of VRE on the bulk power system is a complex area of research and there is much more to be done to increase understanding of how VRE impacts the dynamics of current and future electricity markets. While more analysis is warranted, including additional location-specific assessments, several high-level findings emerge from this synthesis: -VRE Is Already Impacting the Bulk Power Market -VRE Impacts on Average Wholesale Prices Have Been Modest -VRE Impacts on Power Plant Retirements Have So Far Been Limited -VRE Impacts on the Bulk Power Market will Grow with Penetration -The ’System Value’ of VRE will Decline with Penetration -Power System Flexibility Can Reduce the Rate of VRE Value Decline All generation types are unique in some respect—bringing benefits and challenges to the power system—and wholesale markets, industry investments, and operational procedures have evolved over time to manage the characteristics of a changing generation fleet. With increased VRE penetrations, power system planners, operators, regulators, and policymakers will continue to be challenged to develop methods to smoothly and cost-effectively manage the reliable integration of these new and growing sources of electricity supply.
Empirical Study on the Financial Reporting of Intangible Assets by Romanian Companies
Cristina-Ionela FĂDUR; Daniela CIOTINĂ; Marilena MIRONIUC
2011-01-01
The purpose of this paper is to identify to what extent Romanian companies quoted in the Bucharest Stock Exchange present information concerning intangible assets (IA), what the structure of the assets of the analyzed companies is, and what the difference between the accounting value of companies, computed through the net accounting asset, and their market value is, determined as the product between the number of shares and the average quotation price. We have analyzed th...
Estimating Phenomenological Parameters in Multi-Assets Markets
Raffaelli, Giacomo; Marsili, Matteo
Financial correlations exhibit a non-trivial dynamic behavior. This is reproduced by a simple phenomenological model of a multi-asset financial market, which takes into account the impact of portfolio investment on price dynamics. This captures the fact that correlations determine the optimal portfolio but are affected by investment based on it. Such a feedback on correlations gives rise to an instability when the volume of investment exceeds a critical value. Close to the critical point the model exhibits dynamical correlations very similar to those observed in real markets. We discuss how the model's parameter can be estimated in real market data with a maximum likelihood principle. This confirms the main conclusion that real markets operate close to a dynamically unstable point.
Managing Assets in The Infrastructure Sector
Directory of Open Access Journals (Sweden)
T.P. van Houten
2010-09-01
Full Text Available In view of the importance of managing assets and the lack of research in managing assets in the infrastructure sector, we develop an asset management model in this study. This model is developed in line with the unique characteristics of the infrastructure assets and asset management principles and criteria. In the proposed model, we consider activities at three levels, namely the strategical, tactical and operational levels. The interviews with experts in asset management and officials in several Dutch organizations have proven the potential of our asset management model.
Modeling the Effect of Oil Price on Global Fertilizer Prices
P-Y. Chen (Ping-Yu); C-L. Chang (Chia-Lin); C-C. Chen (Chi-Chung); M.J. McAleer (Michael)
2010-01-01
textabstractThe main purpose of this paper is to evaluate the effect of crude oil price on global fertilizer prices in both the mean and volatility. The endogenous structural breakpoint unit root test, the autoregressive distributed lag (ARDL) model, and alternative volatility models, including the
Space-time modeling of electricity spot prices
DEFF Research Database (Denmark)
Abate, Girum Dagnachew; Haldrup, Niels
In this paper we derive a space-time model for electricity spot prices. A general spatial Durbin model that incorporates the temporal as well as spatial lags of spot prices is presented. Joint modeling of space-time effects is necessarily important when prices and loads are determined in a network...... in the spot price dynamics. Estimation of the spatial Durbin model show that the spatial lag variable is as important as the temporal lag variable in describing the spot price dynamics. We use the partial derivatives impact approach to decompose the price impacts into direct and indirect effects and we show...... that price effects transmit to neighboring markets and decline with distance. In order to examine the evolution of the spatial correlation over time, a time varying parameters spot price spatial Durbin model is estimated using recursive estimation. It is found that the spatial correlation within the Nord...
The estimation of risk-premium implicit in oil prices
International Nuclear Information System (INIS)
Luis, J.B.
2001-01-01
The futures price can be seen as the sum of the expected value of the underlying asset price and a risk-premium. In order to disentangle these two components of the futures price, one can try to model the relationship between spot and futures prices, in order to obtain a closed expression for the risk-premium, or to use information from spot and option prices to estimate risk-aversion functions. Given the high volatility of the ratios between futures and spot prices, we opted for the latter, estimating risk-neutral and subjective probability density functions, respectively, from observed option and spot prices. looking at the prices of Brent and West Texas Intermediate light/sweet crude oil options, the obtained evidence suggests that risk-aversion is typically very low for levels near the futures prices. However, due to price volatility and, consequently, to the tails of distribution, the risk-aversion functions are badly behaved in extreme prices and futures prices do not anticipate sharp movements in oil spot prices. Therefore, futures oil prices seem to be useful in forecasting spot prices only when moderate price changes occur. (author)
A hybrid model for electricity spot prices
International Nuclear Information System (INIS)
Anderson, C.L.D.
2004-01-01
Electricity prices were highly regulated prior to the deregulation of the electric power industry. Prices were predictable, allowing generators and wholesalers to calculate their production costs and revenues. With deregulation, electricity has become the most volatile of all commodities. Electricity must be consumed as soon as it is generated due to the inability to store it in any sufficient quantity. Economic uncertainty exists because the supply of electricity cannot shift as quickly as the demand, which is highly variable. When demand increases quickly, the price must respond. Therefore, price spikes occur that are orders of magnitude higher than the base electricity price. This paper presents a robust and realistic model for spot market electricity prices used to manage risk in volatile markets. The model is a hybrid of a top down data driven method commonly used for financial applications, and a bottom up system driven method commonly used in regulated electricity markets. The advantage of the model is that it incorporates primary system drivers and demonstrates their effects on final prices. The 4 primary modules of the model are: (1) a model for forced outages, (2) a model for maintenance outages, (3) an electrical load model, and (4) a price model which combines the results of the previous 3 models. The performance of each model was tested. The forced outage model is the first of its kind to simulate the system on an aggregate basis using Weibull distributions. The overall spot price model was calibrated to, and tested with, data from the electricity market in Pennsylvania, New Jersey and Maryland. The model performed well in simulated market prices and adapted readily to changing system conditions and new electricity markets. This study examined the pricing of derivative contracts on electrical power. It also compared a range of portfolio scenarios using a Cash Flow at Risk approach
A hybrid model for electricity spot prices
Energy Technology Data Exchange (ETDEWEB)
Anderson, C.L.D.
2004-07-01
Electricity prices were highly regulated prior to the deregulation of the electric power industry. Prices were predictable, allowing generators and wholesalers to calculate their production costs and revenues. With deregulation, electricity has become the most volatile of all commodities. Electricity must be consumed as soon as it is generated due to the inability to store it in any sufficient quantity. Economic uncertainty exists because the supply of electricity cannot shift as quickly as the demand, which is highly variable. When demand increases quickly, the price must respond. Therefore, price spikes occur that are orders of magnitude higher than the base electricity price. This paper presents a robust and realistic model for spot market electricity prices used to manage risk in volatile markets. The model is a hybrid of a top down data driven method commonly used for financial applications, and a bottom up system driven method commonly used in regulated electricity markets. The advantage of the model is that it incorporates primary system drivers and demonstrates their effects on final prices. The 4 primary modules of the model are: (1) a model for forced outages, (2) a model for maintenance outages, (3) an electrical load model, and (4) a price model which combines the results of the previous 3 models. The performance of each model was tested. The forced outage model is the first of its kind to simulate the system on an aggregate basis using Weibull distributions. The overall spot price model was calibrated to, and tested with, data from the electricity market in Pennsylvania, New Jersey and Maryland. The model performed well in simulated market prices and adapted readily to changing system conditions and new electricity markets. This study examined the pricing of derivative contracts on electrical power. It also compared a range of portfolio scenarios using a Cash Flow at Risk approach.
Valuing natural gas power generation assets in the new competitive marketplace
Hsu, Michael Chun-Wei
1999-10-01
The profitability of natural gas fired power plants depends critically on the spread between electricity and natural gas prices. The price levels of these two energy commodities are the key uncertain variables in determining the operating margin and therefore the value of a power plant. The owner of a generation unit has the decision of dispatching the plant only when profit margins are positive. This operating flexibility is a real option with real value. In this dissertation I introduce the spark spread call options and illustrate how such paper contracts replicate the uncertain payoff space facing power asset owners and, therefore, how the financial options framework can be applied in estimating the value of natural gas generation plants. The intrinsic value of gas power plants is approximated as the sum of a series of spark spread call options with succeeding maturity dates. The Black-Scholes spread option pricing model, with volatility and correlation term structure adjustments, is utilized to price the spark spread options. Sensitivity analysis is also performed on the BS spread option formulation to compare different asset types. In addition I explore the potential of using compound and compound-exchange option concepts to evaluate, respectively, the benefits of delaying investment in new generation and in repowering existing antiquated units. The compound option designates an option on top of another option. In this case the series of spark spread call options is the 'underlying' option while the option to delay new investments is the 'overlying.' The compound-exchange option characterizes the opportunity to 'exchange' the old power plant, with its series of spark spread call options, for a set of new spark spread call options that comes with the new generation unit. The strike price of the compound-exchange option is the repowering capital investment and typically includes the purchase of new steam generators and combustion turbines, as well as other
Analysis of commodity prices with the particle filter
International Nuclear Information System (INIS)
Aiube, Fernando Antonio Lucena; Baidya, Tara Keshar Nanda; Tito, Edison Americo Huarsaya
2008-01-01
The behavior of commodities prices is fundamental to real-asset investment decisions, hedging, and pricing financial derivatives. Schwartz and Smith [Schwartz, E.S., Smith, J.E. (2000). Short term-variations and long-term dynamics in commodity prices. Management Science, 46, 893-911.] proposed a two-factor model for describing the stochastic processes of commodity prices, in which the two factors are short-term variations and equilibrium prices. These are both unobserved state variables that are estimated using the Kalman filter. The estimation is based on the observation of future prices for different maturities. The authors have carried out this process without incorporating jumps in the short-term variation of prices. Here we aim to demonstrate that the inclusion of jumps better explains the behavior of oil prices, and in fact creates difficulties in the estimation of state variables. This is because the variables become non-Gaussian so the Kalman filter is not recommended. Another methodology, called the particle filter, is more suitable in this case, and we describe its application in this article
The Pricing of European Options Under the Constant Elasticity of Variance with Stochastic Volatility
Bock, Bounghun; Choi, Sun-Yong; Kim, Jeong-Hoon
This paper considers a hybrid risky asset price model given by a constant elasticity of variance multiplied by a stochastic volatility factor. A multiscale analysis leads to an asymptotic pricing formula for both European vanilla option and a Barrier option near the zero elasticity of variance. The accuracy of the approximation is provided in a rigorous manner. A numerical experiment for implied volatilities shows that the hybrid model improves some of the well-known models in view of fitting the data for different maturities.
The quotient of normal random variables and application to asset price fat tails
Caginalp, Carey; Caginalp, Gunduz
2018-06-01
The quotient of random variables with normal distributions is examined and proven to have power law decay, with density f(x) ≃f0x-2, with the coefficient depending on the means and variances of the numerator and denominator and their correlation. We also obtain the conditional probability densities for each of the four quadrants given by the signs of the numerator and denominator for arbitrary correlation ρ ∈ [ - 1 , 1) . For ρ = - 1 we obtain a particularly simple closed form solution for all x ∈ R. The results are applied to a basic issue in economics and finance, namely the density of relative price changes. Classical finance stipulates a normal distribution of relative price changes, though empirical studies suggest a power law at the tail end. By considering the supply and demand in a basic price change model, we prove that the relative price change has density that decays with an x-2 power law. Various parameter limits are established.
Fast Fourier Transform Pricing Method for Exponential Lévy Processes
Crocce, Fabian; Happola, Juho; Kiessling, Jonas; Tempone, Raul
2014-01-01
We describe a set of partial-integro-differential equations (PIDE) whose solutions represent the prices of european options when the underlying asset is driven by an exponential L´evy process. Exploiting the L´evy -Khintchine formula, we give a Fourier based method for solving this class of PIDEs. We present a novel L1 error bound for solving a range of PIDEs in asset pricing and use this bound to set parameters for numerical methods.
Fast Fourier Transform Pricing Method for Exponential Lévy Processes
Crocce, Fabian
2014-05-04
We describe a set of partial-integro-differential equations (PIDE) whose solutions represent the prices of european options when the underlying asset is driven by an exponential L´evy process. Exploiting the L´evy -Khintchine formula, we give a Fourier based method for solving this class of PIDEs. We present a novel L1 error bound for solving a range of PIDEs in asset pricing and use this bound to set parameters for numerical methods.
Directory of Open Access Journals (Sweden)
Man Fu
2011-12-01
Full Text Available We study fluctuations in stock prices using a framework derived from the present value model augmented with a macroeconomic factor. The fundamental value is derived as the expected present discounted value of broad dividends that include, in addition to traditional cash dividends, other payouts to shareholders. A stochastic discount factor motivated by the consumption-based asset pricing model is utilized. A single macroeconomic factor, namely the output gap determines the non-fundamental component of stock prices. A resulting trivariate Vector Autoregression (TVAR model of stock prices, broad dividends, and the output gap shows evidence of cointegration in the DJIA and S&P 500 index data. Nonetheless, a sup augmented Dickey-Fuller test reveals existence of periodically collapsing bubbles in S&P 500 data during the late 1990s.
Arbitrage free pricing of forward and futures in the energy market
International Nuclear Information System (INIS)
Kloster, Kristian
2003-01-01
This thesis will describe a method for an arbitrage-free evaluation of forward and futures contracts in the Nordic electricity market. This is a market where it is not possible to hedge using the underlying asset which one normally would do. The electricity market is a relatively new market, and is less developed than the financial markets. The pricing of energy and energy derivatives are depending on factors like production, transport, storage etc. There are different approaches when pricing a forward contract in an energy market. With motivation from interest rate theory, one could model the forward prices directly in the risk neutral world. Another approach is to start out with a model for the spot prices in the physical world, and then derive theoretical forward prices, which then are fitted to observed forward prices. These and other approaches are described by Clewlow and Strickland in their book, Energy derivatives. This thesis uses the approach where I start out with a model for the spot price, and then derive theoretical forward prices. I use a generalization of the multifactor Schwartz model with seasonal trends and Ornstein Uhlenbeck processes to model the spot prices for electricity. This continuous-time model also incorporates mean-reversion, which is an important aspect of energy prices. Historical data for the spot prices is used to estimate my variables in the multi-factor Schwartz model. Then one can specify arbitrage-free prices for forward and futures based on the Schwartz model. The result from this procedure is a joint spot and forward price model in both the risk neutral and physical market, together with knowledge of the equivalent martingale measure chosen by the market. This measure can be interpreted as the market price of risk, which is of interest for risk management. In this setup both futures and forward contracts will have the same pricing dynamics, as the only difference between the two types of contracts is how the payment for the
Hozman, J.; Tichý, T.
2016-12-01
The paper is based on the results from our recent research on multidimensional option pricing problems. We focus on European option valuation when the price movement of the underlying asset is driven by a stochastic volatility following a square root process proposed by Heston. The stochastic approach incorporates a new additional spatial variable into this model and makes it very robust, i.e. it provides a framework to price a variety of options that is closer to reality. The main topic is to present the numerical scheme arising from the concept of discontinuous Galerkin methods and applicable to the Heston option pricing model. The numerical results are presented on artificial benchmarks as well as on reference market data.
The 5C model: A new approach to asset integrity management
International Nuclear Information System (INIS)
Rahim, Yousif; Refsdal, Ingbjorn; Kenett, Ron S.
2010-01-01
As organizations grow more complex in operation and more global in scope, assets and technical integrity become key success factors. A company's asset integrity business process needs to be mapped in order to 1) provide a proper overview of operation and business processes, 2) identify all critical interfaces and 3) ensure that all gaps and overlaps in processes are eliminated. Achieving asset integrity requires companies to sustain their activities and identify the hazards, weaknesses and objectives of their strategic assets. Technical integrity emphasizes a complete overview of technical conditions and related information, and the ability of the companies to document the technical state of its assets. It is based on an integrated view of the current state of operations, and the identification of all critical interfaces, in order to ensure that all gaps and unnecessary overlaps in processes are eliminated. Companies look increasingly at their asset integrity management system as a means to extend the life of their assets, beyond the original design conditions and production capacity. Establishing an asset integrity management system requires the documentation of the company's technical integrity management, a strategy and the processes for carrying it out, identifying gaps; selecting corrective interventions and conducting follow up actions. The paper discusses various aspects of asset integrity management, including its planning and implementation. We begin with an introduction to asset technical integrity, provide some theoretical backgrounds, present a model we call 5C and conclude with a summary and discussion.
Hedging electricity price volatility using nuclear power
International Nuclear Information System (INIS)
Mari, Carlo
2014-01-01
Highlights: • Nuclear power is an important asset to reduce the volatility of electricity prices. • Unpredictability of fossil fuels and carbon prices makes power prices very volatile. • The dynamics of fossil fuels and carbon prices is described by Brownian motions. • LCOE values, volatilities and correlations are obtained via Monte Carlo simulations. • Optimal portfolios of generating technologies are get using a mean–variance approach. - Abstract: The analysis presented in this paper aims to put in some evidence the role of nuclear power as hedging asset against the volatility of electricity prices. The unpredictability of natural gas and coal market prices as well as the uncertainty in environmental policies may affect power generating costs, thus enhancing volatility in electricity market prices. The nuclear option, allowing to generate electricity without carbon emissions, offers the possibility to reduce the volatility of electricity prices through optimal diversification of power generating technologies. This paper provides a methodological scheme to plan well diversified “portfolios” of generating capacity that minimize the electricity price risk induced by random movements of fossil fuels market prices and by unpredictable fluctuations of carbon credits prices. The analysis is developed within a stochastic environment in which the dynamics of fuel prices as well as the dynamics of carbon credits prices is assumed to evolve in time according to well defined Brownian processes. Starting from market data and using Monte Carlo techniques to simulate generating cost values, the hedging argument is developed by selecting optimal portfolio of power generating technologies using a mean–variance approach
Olan T. Henry; Nilss Olekalns; Kalvinder Shields
2004-01-01
The International Capital Asset Pricing Model measures country risk in terms of the conditional covariance of national returns with the world return. Using impulse responses from a multivariate nonlinear model we provide evidence of time variation and asymmetry in the measure of country risk. and the implied benefit to international diversification. The evidence implies that the price of risk and the benefits from diversification may differ in a statistically and economically meaningful fashi...
Essays on pricing dynamics, price dispersion, and nested logit modelling
Verlinda, Jeremy Alan
The body of this dissertation comprises three standalone essays, presented in three respective chapters. Chapter One explores the possibility that local market power contributes to the asymmetric relationship observed between wholesale costs and retail prices in gasoline markets. I exploit an original data set of weekly gas station prices in Southern California from September 2002 to May 2003, and take advantage of highly detailed station and local market-level characteristics to determine the extent to which spatial differentiation influences price-response asymmetry. I find that brand identity, proximity to rival stations, bundling and advertising, operation type, and local market features and demographics each influence a station's predicted asymmetric relationship between prices and wholesale costs. Chapter Two extends the existing literature on the effect of market structure on price dispersion in airline fares by modeling the effect at the disaggregate ticket level. Whereas past studies rely on aggregate measures of price dispersion such as the Gini coefficient or the standard deviation of fares, this paper estimates the entire empirical distribution of airline fares and documents how the shape of the distribution is determined by market structure. Specifically, I find that monopoly markets favor a wider distribution of fares with more mass in the tails while duopoly and competitive markets exhibit a tighter fare distribution. These findings indicate that the dispersion of airline fares may result from the efforts of airlines to practice second-degree price discrimination. Chapter Three adopts a Bayesian approach to the problem of tree structure specification in nested logit modelling, which requires a heavy computational burden in calculating marginal likelihoods. I compare two different techniques for estimating marginal likelihoods: (1) the Laplace approximation, and (2) reversible jump MCMC. I apply the techniques to both a simulated and a travel mode
BUSINESS MODELS FOR TAX AND TRANSFER PRICING PURPOSES
Directory of Open Access Journals (Sweden)
Corlaciu Alexandra
2013-07-01
Full Text Available In order to remain competitive, the multinational enterprises (MNEs are forced by the globalization phenomenon (which manifestation has became more and more stringent to analyze continuously its effectiveness. In this respect, the structure of the business represents an element which might have an important impact for the enterprise’s overall results. This is why, in the last decades, the MNEs granted special attention to business structures and put significant efforts in business restructurings, where the case, with the scope to keep the efficiency and to remain on the market. Generally, the operational business restructuring process follows one of the business model globally developed, namely manufacturer or sales business models. Thus, according to the functions performed, assets used and risks assumed, the entities within the group are labeled into limited risk units (such as toll manufacturer or commission agent, medium risk (contract manufacturer, commissionaire, stripped distributor or high risk units (fully fledged manufacturer, fully fledged distributor. Notwithstanding the above, there should be emphasized that the operational business restructuring has to be undertaken with maximal care, as it might have important fiscal impact. Having this regard, the purpose of the present investigation is to provide, from a tax and transfer pricing point of view, a systematic and structured analysis of the generally characteristics of business models (manufacturer and sales business models used by multinational enterprises in the process of business reorganization, with the scope to increase their performance and the sustainable competitive advantages. Thus, by using the fundamental (theoretical and qualitative research type, this paper is aiming to present the most important characteristics of each business model (general overview of each model, the principal risk assumed, the usual transfer pricing method used for the remuneration of intra
International Nuclear Information System (INIS)
Fotouhi Ghazvini, Mohammad Ali; Faria, Pedro; Ramos, Sergio; Morais, Hugo; Vale, Zita
2015-01-01
Following the deregulation experience of retail electricity markets in most countries, the majority of the new entrants of the liberalized retail market were pure REP (retail electricity providers). These entities were subject to financial risks because of the unexpected price variations, price spikes, volatile loads and the potential for market power exertion by GENCO (generation companies). A REP can manage the market risks by employing the DR (demand response) programs and using its' generation and storage assets at the distribution network to serve the customers. The proposed model suggests how a REP with light physical assets, such as DG (distributed generation) units and ESS (energy storage systems), can survive in a competitive retail market. The paper discusses the effective risk management strategies for the REPs to deal with the uncertainties of the DAM (day-ahead market) and how to hedge the financial losses in the market. A two-stage stochastic programming problem is formulated. It aims to establish the financial incentive-based DR programs and the optimal dispatch of the DG units and ESSs. The uncertainty of the forecasted day-ahead load demand and electricity price is also taken into account with a scenario-based approach. The principal advantage of this model for REPs is reducing the risk of financial losses in DAMs, and the main benefit for the whole system is market power mitigation by virtually increasing the price elasticity of demand and reducing the peak demand. - Highlights: • Asset-light electricity retail providers subject to financial risks. • Incentive-based demand response program to manage the financial risks. • Maximizing the payoff of electricity retail providers in day-ahead market. • Mixed integer nonlinear programming to manage the risks
International Nuclear Information System (INIS)
Tjin, T.; Buitelaar, T.
2000-02-01
July 1999 The Netherlands Electricity Regulatory Service (DtE) published an Information and Consultation Document on the subject of 'Price Cap Regulation in the Dutch Electricity Sector'. By means of price cap regulation tariffs are determined such that businesses are stimulated continuously to organize their total processes and operation as efficient as possible. In the consultation document a large number of questions with respect to the future organization and planning of the system of economic regulation of the electricity sector in the Netherlands can be found. Many reactions and answers were received, compiled and analyzed. The results are presented in the main report, which forms the framework for the DtE to shape the economic regulation of the Dutch electricity sector. In this background document attention is paid to a method to determine the Regulatory Asset Base (RAB)
Pricing real estate index options under stochastic interest rates
Gong, Pu; Dai, Jun
2017-08-01
Real estate derivatives as new financial instruments are not merely risk management tools but also provide a novel way to gain exposure to real estate assets without buying or selling the physical assets. Although real estate derivatives market has exhibited a rapid development in recent years, the valuation challenge of real estate derivatives remains a great obstacle for further development in this market. In this paper, we derive a partial differential equation contingent on a real estate index in a stochastic interest rate environment and propose a modified finite difference method that adopts the non-uniform grids to solve this problem. Numerical results confirm the efficiency of the method and indicate that constant interest rate models lead to the mispricing of options and the effects of stochastic interest rates on option prices depend on whether the term structure of interest rates is rising or falling. Finally, we have investigated and compared the different effects of stochastic interest rates on European and American option prices.
Organizational information assets classification model and security architecture methodology
Directory of Open Access Journals (Sweden)
Mostafa Tamtaji
2015-12-01
Full Text Available Today's, Organizations are exposed with huge and diversity of information and information assets that are produced in different systems shuch as KMS, financial and accounting systems, official and industrial automation sysytems and so on and protection of these information is necessary. Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released.several benefits of this model cuses that organization has a great trend to implementing Cloud computing. Maintaining and management of information security is the main challenges in developing and accepting of this model. In this paper, at first, according to "design science research methodology" and compatible with "design process at information systems research", a complete categorization of organizational assets, including 355 different types of information assets in 7 groups and 3 level, is presented to managers be able to plan corresponding security controls according to importance of each groups. Then, for directing of organization to architect it’s information security in cloud computing environment, appropriate methodology is presented. Presented cloud computing security architecture , resulted proposed methodology, and presented classification model according to Delphi method and expers comments discussed and verified.
Directory of Open Access Journals (Sweden)
Carl-Johan Petri
2014-08-01
Full Text Available Purpose: The purpose of the paper is to describe how the biggest Swedish taxi company (Taxi Kurir developed an innovative price model to leverage the business model. Design/methodology/approach : The empirical data in the article describe Taxi Kurir’s development of a new price model. Data about the Swedish taxi market and about Taxi Kurir has been compiled though interviews and document studies. Detailed information about the background, development and implementation of Taxi Kurir’s new price model has been captured through interviews with representatives from Taxi Kurir. Findings : Based on both the empirical example, and other investigations, we have found that a company can create substantial changes in their price model, by just changing some of its basic characteristics. A well designed price model can contribute to leveraging the intentions of the business model. Practical implications : Most academic and practical texts about business models consider pricing to be an important component. However, they typically do not refer to the specifics of the price- or revenue models. According to the literature review in this paper, and the empirical findings, the configuration of a company’s price model should be aligned with its business model. This will contribute to leveraging the business model. Originality/value: The Swedish taxi market is one of the most deregulated in the world. Differently from most other countries, any individual or company can start and operate a taxi business. This case offers a unique description on how the biggest company in the market responded to the competition by introducing a fundamentally new price model, by making a small change in one of the dimensions in their existing price model.
Managing assets in the infrastructure sector
van Houten, T.P.; Zhang, L.
2010-01-01
In view of the importance of managing assets and the lack of research in managing assets in the infrastructure sector, we develop an asset management model in this study. This model is developed in line with the unique characteristics of the infrastructure assets and asset management principles and
Expected commodity returns and pricing models
International Nuclear Information System (INIS)
Cortazar, Gonzalo; Kovacevic, Ivo; Schwartz, Eduardo S.
2015-01-01
Stochastic models of commodity prices have evolved considerably in terms of their structure and the number and interpretation of the state variables that model the underlying risk. Using multiple factors, different specifications and modern estimation techniques, these models have gained wide acceptance because of their success in accurately fitting the observed commodity futures' term structures and their dynamics. It is not well emphasized however that these models, in addition to providing the risk neutral distribution of future spot prices, also provide their true distribution. While the parameters of the risk neutral distribution are estimated more precisely and are usually statistically significant, some of the parameters of the true distribution are typically measured with large errors and are statistically insignificant. In this paper we argue that to increase the reliability of commodity pricing models, and therefore their use by practitioners, some of their parameters — in particular the risk premium parameters — should be obtained from other sources and we show that this can be done without losing any precision in the pricing of futures contracts. We show how the risk premium parameters can be obtained from estimations of expected futures returns and provide alternative procedures for estimating these expected futures returns. - Highlights: • Simple methodology to improve the performance of commodity pricing models • New information about commodity futures expected return is added to the estimation. • No significant effect in pricing futures contracts is observed. • More reliable commodity pricing model's expected returns are obtained. • Methodology is open to any expected futures return model preferred by practitioner
The Shuttle Cost and Price model
Leary, Katherine; Stone, Barbara
1983-01-01
The Shuttle Cost and Price (SCP) model was developed as a tool to assist in evaluating major aspects of Shuttle operations that have direct and indirect economic consequences. It incorporates the major aspects of NASA Pricing Policy and corresponds to the NASA definition of STS operating costs. An overview of the SCP model is presented and the cost model portion of SCP is described in detail. Selected recent applications of the SCP model to NASA Pricing Policy issues are presented.
The risk of stranded assets for utilities in Canada
International Nuclear Information System (INIS)
Schroeder, W.
1998-01-01
The problems of dealing with stranded assets in Canada and the United States were discussed. Compared to the United States, the risk associated with stranded assets for utilities in Canada was considered to be relatively low because of the following factors: (1) low variable cost, (2) isolation, (3) lack of transmission interconnection capacity, (4) lack of tight synchronization in North America, (5) the likelihood of an increase in natural gas prices, (6) the absence of jurisdictional disputes such as FERC versus the states, (7) social considerations, (8) the learning curve, (9) politics, (10) weak balance sheets, (11) relatively low electricity prices, (12) the weak Canadian dollar, and (13) the possibility of refinancing at lower interest rates. Ontario Hydro, New Brunswick and Nova Scotia Power are the three Canadian utilities that may have stranded costs. For Ontario Hydro and New Brunswick Power the stranded costs would be related to nuclear generator problems, whereas for Nova Scotia Power, the stranded costs would be related to the thermal generating base, the threat from Sable Island Gas and the changing tax structure of the utility. Some other reasons why stranded assets could be created in Canada would include low variable costs and high fixed costs, over capacity of at least 30 per cent in generation, limited domestic energy growth, competitive threat from gas, reliability and safety of nuclear plants, and technology change. Five factors in terms of which stranded assets can be expressed are: (1) variable cost definition, (2) total cost definition, (3) operating profit definition, (4) wide geographic definition, and (5) free market definition. In calculating stranded assets, the number of years over which the assets are recovered and the discount rate are considered to be key factors. 26 tabs
Monetary Policy, Incomplete Asset Markets, and Welfare in a Small Open Economy
Shigeto Kitano; Kenya Takaku
2014-01-01
We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions.
The price level and monetary policy
Directory of Open Access Journals (Sweden)
Charles P. Kindleberger
2002-03-01
Full Text Available Most central banks are required to or choose to stabilize a price index, largely by manipulating short term interest rates. A serious problem is which index to choose among the national income deflator, wholesale prices, the cost of living, with or eliminating highly volatile commodities such as food and energy, to produce a core index, plus others such as housing, including or without imputed rent of owner-occupied houses, or assets, whether equities or houses. No obvious and widely agreed index exists. Even if there were a clear choice, there remains a question whether a central bank should carefully consider action in order to achieve other goals: full employment, adjustment of the balance of payments, of the exchange rate, prevention of bubbles in asset prices, or recovery from financial crises. If so, the question of central bank weapons remains: monetary expansion or contraction, credit controls, for overall or for particular purposes, and moral suasion.
Eicher, Bernhard
2016-10-01
Hospitals are responsible for a remarkable part of the annual increase in healthcare expenditure. This article examines one of the major cost drivers, the expenditure for investment in hospital assets. The study, conducted in Switzerland, identifies factors that influence hospitals' investment decisions. A suggestion on how to categorize asset investment models is presented based on the life cycle of an asset, and its influencing factors defined based on transaction cost economics. The influence of five factors (human asset specificity, physical asset specificity, uncertainty, bargaining power, and privacy of ownership) on the selection of an asset investment model is examined using a two-step fuzzy-set Qualitative Comparative Analysis. The research shows that outsourcing-oriented asset investment models are particularly favored in the presence of two combinations of influencing factors: First, if technological uncertainty is high and both human asset specificity and bargaining power of a hospital are low. Second, if assets are very specific, technological uncertainty is high and there is a private hospital with low bargaining power, outsourcing-oriented asset investment models are favored too. Using Qualitative Comparative Analysis, it can be demonstrated that investment decisions of hospitals do not depend on isolated influencing factors but on a combination of factors. Copyright © 2016 John Wiley & Sons, Ltd. Copyright © 2016 John Wiley & Sons, Ltd.
Modelling the rand and commodity prices: A Granger causality and cointegration analysis
Directory of Open Access Journals (Sweden)
Xolani Ndlovu
2014-11-01
Full Text Available This paper examines the ‘commodity currency’ hypothesis of the Rand, that is, the postulate that the currency moves in line with commodity prices, and analyses the associated causality using nominal data between 1996 and 2010. We address both the short run and long run relationship between commodity prices and exchange rates. We find that while the levels of the series of both assets are difference stationary, they are not cointegrated. Further, we find the two variables are negatively related, with strong and significant causality running from commodity prices to the exchange rate and not vice versa, implying exogeneity in the determination of commodity prices with respect to the nominal exchange rate. The strength of the relationship is significantly weaker than other OECD commodity currencies. We surmise that the relationship is dynamic over time owing to the portfolio-rebalance argument and the Commodity Terms of Trade (CTT effect and, in the absence of an error correction mechanism, this disconnect may be prolonged. For commodity and currency market participants, this implies that while futures and forward commodity prices may be useful leading indicators of future currency movements, the price risk management strategies may need to be recalibrated over time.
Imperfect Knowledge, Asset Price Swings, and Structural Slumps
DEFF Research Database (Denmark)
Juselius, Katarina
2013-01-01
emphasizes real interest rates and real exchange rates as potentially important determinants underlying the persistent fluctuations in aggregate activities, and the latter provides the conditions under which speculative behavior in currency markets generates such persistence. The paper argues that by combing...... the two theories we can shed new light on the two-way interdependence between persistent swings in asset markets and persistent fluctuations in the real economy. In particular, we may improve our understanding of the mechanisms behind the long recurrent spells of high unemployment that continue to mar our...
The RAGE Software Asset Model and Metadata Model
Georgiev, Atanas; Grigorov, Alexander; Bontchev, Boyan; Boytchev, Pavel; Stefanov, Krassen; Bahreini, Kiavash; Nyamsuren, Enkhbold; Van der Vegt, Wim; Westera, Wim; Prada, Rui; Hollins, Paul; Moreno, Pablo
2016-01-01
Software assets are key output of the RAGE project and they can be used by applied game developers to enhance the pedagogical and educational value of their games. These software assets cover a broad spectrum of functionalities – from player analytics including emotion detection to intelligent
Levy Random Bridges and the Modelling of Financial Information
Hoyle, Edward; Hughston, Lane P.; Macrina, Andrea
2009-01-01
The information-based asset-pricing framework of Brody, Hughston and Macrina (BHM) is extended to include a wider class of models for market information. In the BHM framework, each asset is associated with a collection of random cash flows. The price of the asset is the sum of the discounted conditional expectations of the cash flows. The conditional expectations are taken with respect to a filtration generated by a set of "information processes". The information processes carry imperfect inf...
Bank Lending and Property Prices in Hong Kong
Gerlach, Stefan; Peng, Wensheng
2004-01-01
This paper studies the relationship between residential property prices and lending in Hong Kong. This is an interesting topic for three reasons. First, swings in property prices have been extremely large and frequent in Hong Kong. Second, under the currency board regime, monetary policy can not be used to guard against asset price swings. Third, despite the collapse in property prices since 1998, the banking sector remains sound. While the contemporaneous correlation between lending and prop...
Modelling the impact of oil prices on Vietnam's stock prices
International Nuclear Information System (INIS)
Narayan, Paresh Kumar; Narayan, Seema
2010-01-01
The goal of this paper is to model the impact of oil prices on Vietnam's stock prices. We use daily data for the period 2000-2008 and include the nominal exchange rate as an additional determinant of stock prices. We find that stock prices, oil prices and nominal exchange rates are cointegrated, and oil prices have a positive and statistically significant impact on stock prices. This result is inconsistent with theoretical expectations. The growth of the Vietnamese stock market was accompanied by rising oil prices. However, the boom of the stock market was marked by increasing foreign portfolio investment inflows which are estimated to have doubled from US$0.9 billion in 2005 to US$1.9 billion in 2006. There was also a change in preferences from holding foreign currencies and domestic bank deposits to stocks local market participants, and there was a rise in leveraged investment in stock as well as investments on behalf of relatives living abroad. It seems that the impact of these internal and domestic factors were more dominant than the oil price rise on the Vietnamese stock market. (author)
DEFF Research Database (Denmark)
Pedersen, Thomas Quistgaard
In this paper we derive an approximate analytical solution to the optimal con- sumption and portfolio choice problem of an infinitely-lived investor with power utility defined over the difference between consumption and an external habit. The investor is assumed to have access to two tradable......-linearized surplus consumption ratio. The "difference habit model" implies that the relative risk aversion is time-varying which is in line with recent ev- idence from the asset pricing literature. We show that accounting for habit a¤ects both the myopic and intertemporal hedge component of optimal asset demand......, and introduces an additional component that works as a hedge against changes in the investor's habit level. In an empirical application, we calibrate the model to U.S. data and show that habit formation has significant effects on both the optimal consumption and portfolio choice compared to a standard CRRA...
Modeling spot markets for electricity and pricing electricity derivatives
Ning, Yumei
Spot prices for electricity have been very volatile with dramatic price spikes occurring in restructured market. The task of forecasting electricity prices and managing price risk presents a new challenge for market players. The objectives of this dissertation are: (1) to develop a stochastic model of price behavior and predict price spikes; (2) to examine the effect of weather forecasts on forecasted prices; (3) to price electricity options and value generation capacity. The volatile behavior of prices can be represented by a stochastic regime-switching model. In the model, the means of the high-price and low-price regimes and the probabilities of switching from one regime to the other are specified as functions of daily peak load. The probability of switching to the high-price regime is positively related to load, but is still not high enough at the highest loads to predict price spikes accurately. An application of this model shows how the structure of the Pennsylvania-New Jersey-Maryland market changed when market-based offers were allowed, resulting in higher price spikes. An ARIMA model including temperature, seasonal, and weekly effects is estimated to forecast daily peak load. Forecasts of load under different assumptions about weather patterns are used to predict changes of price behavior given the regime-switching model of prices. Results show that the range of temperature forecasts from a normal summer to an extremely warm summer cause relatively small increases in temperature (+1.5%) and load (+3.0%). In contrast, the increases in prices are large (+20%). The conclusion is that the seasonal outlook forecasts provided by NOAA are potentially valuable for predicting prices in electricity markets. The traditional option models, based on Geometric Brownian Motion are not appropriate for electricity prices. An option model using the regime-switching framework is developed to value a European call option. The model includes volatility risk and allows changes
Regularity of the exercise boundary for American put options on assets with discrete dividends
Jourdain, B.; Vellekoop, M.
2009-01-01
We analyze the regularity of the optimal exercise boundary for the American Put option when the underlying asset pays a discrete dividend at a known time td during the lifetime of the option. The ex-dividend asset price process is assumed to follow Black-Scholes dynamics and the dividend amount is a
Relationship between Gold and Oil Prices and Stock Market Returns
Directory of Open Access Journals (Sweden)
Muhammad Mansoor Baig
2013-10-01
Full Text Available This study objective to examine the relationship between gold prices, oil prices and KSE100 return. This study important for the investor whose want to invest in real assets and financial assets. This study helps investor to achieve the portfolio diversification. This study uses the monthly data of gold prices, KSE100, and oil prices for the period of 2000 to 2010 (monthly. This study applied Descriptive statistics, Augmented Dickey Fuller test Phillip Perron test, Johansen and Jelseluis Co-integration test, Variance Decomposition test to find relationship. This study concludes that Gold prices growth, Oil prices growth and KSE100 return have no significant relationship in the long run. This study provides information to the investors who want to get the benefit of diversification by investing in Gold, Oil and stock market. In the current era Gold prices and oil prices are fluctuating day by day and investors think that stock returns may or may not affected by these fluctuations. This study is unique because it focuses on current issues and takes the current data in this research to help the investment institutions or portfolio managers.
The impact of house price index specification levels on the risk profile of housing corporations
Kramer, B.; Kuijl, T.; Francke, M.
2009-01-01
Asset Liability Management (ALM) for housing corporations is based on stochastic scenario models for important risk and return drivers such as interest and inflation rates, construction costs and sales prices of houses. Given the situation of the housing corporation (current real estate portfolio,
Implied liquidity : towards stochastic liquidity modeling and liquidity trading
Corcuera, J.M.; Guillaume, F.M.Y.; Madan, D.B.; Schoutens, W.
2010-01-01
In this paper we introduce the concept of implied (il)liquidity of vanilla options. Implied liquidity is based on the fundamental theory of conic finance, in which the one-price model is abandoned and replaced by a two-price model giving bid and ask prices for traded assets. The pricing is done by
Cost modelling in maintenance strategy optimisation for infrastructure assets with limited data
International Nuclear Information System (INIS)
Zhang, Wenjuan; Wang, Wenbin
2014-01-01
Our paper reports on the use of cost modelling in maintenance strategy optimisation for infrastructure assets. We present an original approach: the possibility of modelling even when the data and information usually required are not sufficient in quantity and quality. Our method makes use of subjective expert knowledge, and requires information gathered for only a small sample of assets to start with. Bayes linear methods are adopted to combine the subjective expert knowledge with the sample data to estimate the unknown model parameters of the cost model. When new information becomes available, Bayes linear methods also prove useful in updating these estimates. We use a case study from the rail industry to demonstrate our methods. The optimal maintenance strategy is obtained via simulation based on the estimated model parameters and the strategy with the least unit time cost is identified. When the optimal strategy is not followed due to insufficient funding, the future costs of recovering the degraded asset condition are estimated
Introduction to the mathematics of finance from risk management to options pricing
Roman, Steven
2004-01-01
The Mathematics of Finance has become a hot topic in applied mathematics ever since the discovery of the Black-Scholes option pricing formulas in 1973. Unfortunately, there are very few undergraduate textbooks in this area. This book is specifically written for upper division undergraduate or beginning graduate students in mathematics, finance or economics. With the exception of an optional chapter on the Capital Asset Pricing Model, the book concentrates on discrete derivative pricing models, culminating in a careful and complete derivation of the Black-Scholes option pricing formulas as a limiting case of the Cox-Ross-Rubinstein discrete model. The final chapter is devoted to American options. The mathematics is not watered down but is appropriate for the intended audience. No measure theory is used and only a small amount of linear algebra is required. All necessary probability theory is developed in several chapters throughout the book, on a "need-to-know" basis. No background in finance is required, sinc...
The Cross-Section of Crypto-Currencies as Financial Assets: An Overview
Elendner, Hermann; Trimborn, Simon; Ong, Bobby; Lee, Teik Ming
2016-01-01
Crypto-currencies have developed a vibrant market since bitcoin, the first crypto-currency, was created in 2009. We look at the properties of cryptocurrencies as financial assets in a broad cross-section. We discuss approaches of altcoins to generate value and their trading and information platforms. Then we investigate crypto-currencies as alternative investment assets, studying their returns and the co-movements of altcoin prices with bitcoin and against each other. We evaluate their additi...
Pricing Volatility of Stock Returns with Volatile and Persistent Components
DEFF Research Database (Denmark)
Zhu, Jie
In this paper a two-component volatility model based on the component's first moment is introduced to describe the dynamic of speculative return volatility. The two components capture the volatile and persistent part of volatility respectively. Then the model is applied to 10 Asia-Pacific stock m......, a positive or risk-premium effect exists between return and the volatile component, yet the persistent component is not significantly priced for return dynamic process....... markets. Their in-mean effects on return are also tested. The empirical results show that the persistent component accounts much more for volatility dynamic process than the volatile component. However the volatile component is found to be a significant pricing factor of asset returns for most markets...
A model for efficient management of electrical assets
International Nuclear Information System (INIS)
Alonso Guerreiro, A.
2008-01-01
At the same time that energy demand grows faster than the investments in electrical installations, the older capacity is reaching the end of its useful life. The need of running all those capacity without interruptions and an efficient maintenance of its assets, are the two current key points for power generation, transmission and distribution systems. This paper tries to show the reader a model of management which makes possible an effective management of assets with a strict control cost, and which includes those key points, centred at predictive techniques, involving all the departments of the organization and which goes further on considering the maintenance like a simple reparation or substitution of broken down units. Therefore, it becomes precise a model with three basic lines: supply guarantee, quality service and competitively, in order to allow the companies to reach the current demands which characterize the power supply. (Author) 5 refs
Higher-moment stochastic discount factor specifications and the cross-section of asset returns
Wang, Dengli
2013-01-01
The stochastic discount factor model provides a general framework for pricing assets. A suitably specified discount factor encompasses most of the theories currently in use, including the CAPM, consumption CAPM, higher-moment CAPM and their conditional versions. In this thesis, we focus on the empirical admissibility of alternative SDFs under restrictions that ensure that investors’ risk-preferences are well behaved. More innovatively, we explore whether the SDF implied by the 3 and 4-mome...
Interrelated factors influence of current stock market on pricing
Directory of Open Access Journals (Sweden)
Наталія Петрівна Мацелюх
2015-03-01
Full Text Available Impacts on market prices of securities are generalized. It is found that in the process of price determination and its implementation exist a system of interrelated factors of influence, which are divided into objective and subjective; internal and external; traditional and specific. It is proved that the impact of factors associated with risk pricing in financial assets
Documentation of the Retail Price Model
The Retail Price Model (RPM) provides a first‐order estimate of average retail electricity prices using information from the EPA Base Case v.5.13 Base Case or other scenarios for each of the 64 Integrated Planing Model (IPM) regions.
Endogenous time-varying risk aversion and asset returns.
Berardi, Michele
2016-01-01
Stylized facts about statistical properties for short horizon returns in financial markets have been identified in the literature, but a satisfactory understanding for their manifestation is yet to be achieved. In this work, we show that a simple asset pricing model with representative agent is able to generate time series of returns that replicate such stylized facts if the risk aversion coefficient is allowed to change endogenously over time in response to unexpected excess returns under evolutionary forces. The same model, under constant risk aversion, would instead generate returns that are essentially Gaussian. We conclude that an endogenous time-varying risk aversion represents a very parsimonious way to make the model match real data on key statistical properties, and therefore deserves careful consideration from economists and practitioners alike.
THE MAIN QUESTION OF FIXED ASSETS
Directory of Open Access Journals (Sweden)
Kogan A. B.
2015-03-01
Full Text Available The article deals with the methods of selecting the best type of fixed assets (real investment. Explore the current situation where the investor has to compare the different-parametrical alternatives (DPA. The DPA are the fixed assets which have similar functions, but different in price, durability and periodic effects. In the general case the DPA are the investment projects which have different amounts of investment, accounting periods and net cash flow. Net present value (NPV and internal rate of return (IRR are criticized. The author describes his indicator «speed index of unit value increase» (IS. The author proves on numerical examples that the economy, the subjects of which use IS instead of NPV and IRR, has accelerated the pace of development.
Population age structure and asset returns: an empirical investigation.
Poterba, J M
1998-10-01
"This paper investigates the association between population age structure, particularly the share of the population in the 'prime saving years' 45-60, and the returns on stocks and bonds. The paper is motivated by the claim that the aging of the 'Baby Boom' cohort in the United States is a key factor in explaining the recent rise in asset values. It also addresses the associated claim that asset prices will decline when this large cohort reaches retirement age and begins to reduce its asset holdings. This paper begins by considering household age-asset accumulation profiles. Data from the Survey of Consumer Finances suggest that while cross-sectional age-wealth profiles peak for households in their early 60s, cohort data on the asset ownership of the same households show a much less pronounced peak.... The paper then considers the historical relationship between demographic structure and real returns on Treasury bills, long-term government bonds, and corporate stock. The results do not suggest any robust relationship between demographic structure and asset returns.... The paper concludes by discussing factors such as international capital flows and forward-looking behavior on the part of market participants that could weaken the relationship between age structure and asset returns in a single nation." excerpt
Stenzel, A.; Wagner, W.B.
2013-01-01
Abstract: We consider a model of private information acquisition in which the cost of information depends on an asset's opacity. The model generates a hump-shaped relationship between opacity and the equilibrium amount of private information. In particular, the incentives to acquire information are largest for assets of intermediate opacity; such assets hence display low liquidity in the secondary market due to adverse selection. We also show that costly information acquisition generates ince...
Price models for oil derivates in Slovenia
International Nuclear Information System (INIS)
Nemac, F.; Saver, A.
1995-01-01
In Slovenia, a law is currently applied according to which any change in the price of oil derivatives is subject to the Governmental approval. Following the target of getting closer to the European Union, the necessity has arisen of finding ways for the introduction of liberalization or automated approach to price modifications depending on oscillations of oil derivative prices on the world market and the rate of exchange of the American dollar. It is for this reason that at the Agency for Energy Restructuring we made a study for the Ministry of Economic Affairs and Development regarding this issue. We analysed the possible models for the formation of oil derivative prices for Slovenia. Based on the assessment of experiences of primarily the west European countries, we proposed three models for the price formation for Slovenia. In future, it is expected that the Government of the Republic of Slovenia will make a selection of one of the proposed models to be followed by enforcement of price liberalization. The paper presents two representative models for price formation as used in Austria and Portugal. In the continuation the authors analyse the application of three models that they find suitable for the use in Slovenia. (author)
Research on nonlinear stochastic dynamical price model
International Nuclear Information System (INIS)
Li Jiaorui; Xu Wei; Xie Wenxian; Ren Zhengzheng
2008-01-01
In consideration of many uncertain factors existing in economic system, nonlinear stochastic dynamical price model which is subjected to Gaussian white noise excitation is proposed based on deterministic model. One-dimensional averaged Ito stochastic differential equation for the model is derived by using the stochastic averaging method, and applied to investigate the stability of the trivial solution and the first-passage failure of the stochastic price model. The stochastic price model and the methods presented in this paper are verified by numerical studies
International Nuclear Information System (INIS)
Keles, Dogan; Genoese, Massimo; Möst, Dominik; Fichtner, Wolf
2012-01-01
This paper evaluates different financial price and time series models, such as mean reversion, autoregressive moving average (ARMA), integrated ARMA (ARIMA) and general autoregressive conditional heteroscedasticity (GARCH) process, usually applied for electricity price simulations. However, as these models are developed to describe the stochastic behaviour of electricity prices, they are extended by a separate data treatment for the deterministic components (trend, daily, weekly and annual cycles) of electricity spot prices. Furthermore price jumps are considered and implemented within a regime-switching model. Since 2008 market design allows for negative prices at the European Energy Exchange, which also occurred for several hours in the last years. Up to now, only a few financial and time series approaches exist, which are able to capture negative prices. This paper presents a new approach incorporating negative prices. The evaluation of the different approaches presented points out that the mean reversion and the ARMA models deliver the lowest mean root square error between simulated and historical electricity spot prices gained from the European Energy Exchange. These models posses also lower mean average errors than GARCH models. Hence, they are more suitable to simulate well-fitting price paths. Furthermore it is shown that the daily structure of historical price curves is better captured applying ARMA or ARIMA processes instead of mean-reversion or GARCH models. Another important outcome of the paper is that the regime-switching approach and the consideration of negative prices via the new proposed approach lead to a significant improvement of the electricity price simulation. - Highlights: ► Considering negative prices improves the results of time-series and financial models for electricity prices. ► Regime-switching approach captures the jumps and base prices quite well. ► Removing and separate modelling of deterministic annual, weekly and daily
American option pricing with stochastic volatility processes
Directory of Open Access Journals (Sweden)
Ping LI
2017-12-01
Full Text Available In order to solve the problem of option pricing more perfectly, the option pricing problem with Heston stochastic volatility model is considered. The optimal implementation boundary of American option and the conditions for its early execution are analyzed and discussed. In view of the fact that there is no analytical American option pricing formula, through the space discretization parameters, the stochastic partial differential equation satisfied by American options with Heston stochastic volatility is transformed into the corresponding differential equations, and then using high order compact finite difference method, numerical solutions are obtained for the option price. The numerical experiments are carried out to verify the theoretical results and simulation. The two kinds of optimal exercise boundaries under the conditions of the constant volatility and the stochastic volatility are compared, and the results show that the optimal exercise boundary also has stochastic volatility. Under the setting of parameters, the behavior and the nature of volatility are analyzed, the volatility curve is simulated, the calculation results of high order compact difference method are compared, and the numerical option solution is obtained, so that the method is verified. The research result provides reference for solving the problems of option pricing under stochastic volatility such as multiple underlying asset option pricing and barrier option pricing.
Directory of Open Access Journals (Sweden)
Burtnyak Ivan V.
2017-06-01
Full Text Available In the paper we apply the spectral theory to find the price for derivatives of financial assets assuming that the processes described are Markov processes and such that can be considered in the Hilbert space L^2 using the Sturm-Liouville theory. Bessel diffusion processes are used in studying Asian options. We consider the financial flows generated by the Bessel diffusions by expressing them in terms of the system of Bessel functions of the first kind, provided that they take into account the linear combination of the flow and its spatial derivative. Such expression enables calculating the size of the market portfolio and provides a measure of the amount of internal volatility in the market at any given moment, allows investigating the dynamics of the equity market. The expansion of the Green function in terms of the system of Bessel functions is expressed by an analytic formula that is convenient in calculating the volume of financial flows. All assumptions are natural, result in analytic formulas that are consistent with the empirical data and, when applied in practice, adequately reflect the processes in equity markets.
SaaS architecture and pricing models
Laatikainen, Gabriella; Ojala, Arto
2014-01-01
In the new era of computing, SaaS software with different architectural characteristics might be priced in different ways. Even though both pricing and architectural characteristics are responsible for the success of the offering; the relationship between architectural and pricing characteristics has not been studied before. The present study fills this gap by employing a multi-case research. The findings accentuate that flexible and well-designed architecture enables different pricing models...
Error analysis in Fourier methods for option pricing for exponential Lévy processes
Crocce, Fabian
2015-01-07
We derive an error bound for utilising the discrete Fourier transform method for solving Partial Integro-Differential Equations (PIDE) that describe european option prices for exponential Lévy driven asset prices. We give sufficient conditions for the existence of a L? bound that separates the dynamical contribution from that arising from the type of the option n in question. The bound achieved does not rely on information of the asymptotic behaviour of option prices at extreme asset values. In addition, we demonstrate improved numerical performance for select examples of practical relevance when compared to established bounding methods.
Do Exchange Rates Really Help Forecasting Commodity Prices?
DEFF Research Database (Denmark)
Bork, Lasse; Kaltwasser, Pablo Rovira; Sercu, Piet
Chen et al. (2010) report that for ‘commodity currencies’, the exchange rate predicts the country’s commodity index but not vice versa. The commodity currency hypothesis is consistent with the Engle and West (2005) exchange rate model if the fundamental is chosen to be the country’s key export...... expectations, one should mostly observe contemporaneous correlations, not one-directional cross-predictability from one variable toward the other. Using three different data sets and various econometric techniques, we do find the contemporaneous correlations as predicted by the financial asset view......-averaged prices in the commodity index data that they use (price averaging induces spurious autocorrelation and predictability) and to features in their test procedures....
Food Prices and Climate Extremes: A Model of Global Grain Price Variability with Storage
Otto, C.; Schewe, J.; Frieler, K.
2015-12-01
Extreme climate events such as droughts, floods, or heat waves affect agricultural production in major cropping regions and therefore impact the world market prices of staple crops. In the last decade, crop prices exhibited two very prominent price peaks in 2007-2008 and 2010-2011, threatening food security especially for poorer countries that are net importers of grain. There is evidence that these spikes in grain prices were at least partly triggered by actual supply shortages and the expectation of bad harvests. However, the response of the market to supply shocks is nonlinear and depends on complex and interlinked processes such as warehousing, speculation, and trade policies. Quantifying the contributions of such different factors to short-term price variability remains difficult, not least because many existing models ignore the role of storage which becomes important on short timescales. This in turn impedes the assessment of future climate change impacts on food prices. Here, we present a simple model of annual world grain prices that integrates grain stocks into the supply and demand functions. This firstly allows us to model explicitly the effect of storage strategies on world market price, and thus, for the first time, to quantify the potential contribution of trade policies to price variability in a simple global framework. Driven only by reported production and by long--term demand trends of the past ca. 40 years, the model reproduces observed variations in both the global storage volume and price of wheat. We demonstrate how recent price peaks can be reproduced by accounting for documented changes in storage strategies and trade policies, contrasting and complementing previous explanations based on different mechanisms such as speculation. Secondly, we show how the integration of storage allows long-term projections of grain price variability under climate change, based on existing crop yield scenarios.
Henkel, Christof
2017-03-01
We present an agent behavior based microscopic model that induces jumps, spikes and high volatility phases in the price process of a traded asset. We transfer dynamics of thermally activated jumps of an unexcited/excited two state system discussed in the context of quantum mechanics to agent socio-economic behavior and provide microfoundations. After we link the endogenous agent behavior to price dynamics we establish the circumstances under which the dynamics converge to an Itô-diffusion price processes in the large market limit.
Lévy Random Bridges and the Modelling of Financial Information
Edward Hoyle; Lane P. Hughston; Andrea Macrina
2010-01-01
The information-based asset-pricing framework of Brody, Hughston and Mac- rina (BHM) is extended to include a wider class of models for market information. In the BHM framework, each asset is associated with a collection of random cash flows. The price of the asset is the sum of the discounted conditional expecta- tions of the cash flows. The conditional expectations are taken with respect to a ¯ltration generated by a set of 'information processes'. The information pro- cesses carry imperfec...
Multivariate Option Pricing with Time Varying Volatility and Correlations
DEFF Research Database (Denmark)
Rombouts, Jeroen V.K.; Stentoft, Lars Peter
In recent years multivariate models for asset returns have received much attention, in particular this is the case for models with time varying volatility. In this paper we consider models of this class and examine their potential when it comes to option pricing. Specifically, we derive the risk...... neutral dynamics for a general class of multivariate heteroskedastic models, and we provide a feasible way to price options in this framework. Our framework can be used irrespective of the assumed underlying distribution and dynamics, and it nests several important special cases. We provide an application...... to options on the minimum of two indices. Our results show that not only is correlation important for these options but so is allowing this correlation to be dynamic. Moreover, we show that for the general model exposure to correlation risk carries an important premium, and when this is neglected option...
Pricing Models of e-Books When Competing with p-Books
Directory of Open Access Journals (Sweden)
Yan Li
2013-01-01
Full Text Available With the rise in popularity of e-books, there is a growing need to reexamine the pricing strategy in the e-book supply chain. In this paper, we study two forms of pricing models widely used in the book industry: wholesale and agency pricing models. We first assume a stylized deterministic demand model in which the demand depends on the price, the degree of substitution, and the overall market potential. Subsequently, we employ the game theory to determine the price equilibriums and profit distribution under different pricing models. Finally, we explore the behavior of the publisher and the retailer under different preferences and degrees of substitution through a computational study. Our findings indicate that the e-book price will be lower under the agency pricing model than under the wholesale pricing model, which is counterintuitive. The publishers have higher incentives to adopt the agency pricing model than the wholesale pricing model. The agency pricing model benefits the whole system and can provide readers with books at lower prices. The degree of substitution between the two forms of books and the readers’ preference toward e-book will affect the books’ price and the profit distribution between the publisher and the retailers.
Investment-based Capital Asset Pricing Model からみた投資と資産収益率
宮川, 努; 滝澤, 美帆
2017-01-01
本稿は，資産収益率の要因を，投資変動を使って説明するInvestment-based Capital Asset Pricing Model（I-CAPM）を使って，日米の投資規模と資産収益率の関係及び無形資産規模の影響を考察した。I-CAPM によれば，投資規模が大きくなると投資に付帯する費用によって資産収益率が低下するが，単純に投資規模別に分けた資産収益率を調べると，日米ともにI-CAPM の妥当性が検証される。しかしFama and French（1995）によるThree Factor Model など他の要因も加えると，日本では投資規模が明示的に資産収益率に影響を与える効果は検出できなかった。しかし米国では無形資産規模が大きい場合，I-CAPM の妥当性が成立することがわかる。また有形資産投資に無形資産投資を加えると収益率格差が縮小する現象も見られた。このことは，有形資産投資に伴う費用を無形資産投資が一部代替している可能性を示している，日本が今後IT 化を進める際にはハード面の投資だけでなく，無形資産投資も合わせて実施することで，付帯費用に伴う収益率低下を防ぐ必要がある...
Space-time modeling of timber prices
Mo Zhou; Joseph Buongriorno
2006-01-01
A space-time econometric model was developed for pine sawtimber timber prices of 21 geographically contiguous regions in the southern United States. The correlations between prices in neighboring regions helped predict future prices. The impulse response analysis showed that although southern pine sawtimber markets were not globally integrated, local supply and demand...
A Unified Pricing of Variable Annuity Guarantees under the Optimal Stochastic Control Framework
Directory of Open Access Journals (Sweden)
Pavel V. Shevchenko
2016-07-01
Full Text Available In this paper, we review pricing of the variable annuity living and death guarantees offered to retail investors in many countries. Investors purchase these products to take advantage of market growth and protect savings. We present pricing of these products via an optimal stochastic control framework and review the existing numerical methods. We also discuss pricing under the complete/incomplete financial market models, stochastic mortality and optimal/sub-optimal policyholder behavior, and in the presence of taxes. For numerical valuation of these contracts in the case of simple risky asset process, we develop a direct integration method based on the Gauss-Hermite quadratures with a one-dimensional cubic spline for calculation of the expected contract value, and a bi-cubic spline interpolation for applying the jump conditions across the contract cashflow event times. This method is easier to implement and faster when compared to the partial differential equation methods if the transition density (or its moments of the risky asset underlying the contract is known in closed form between the event times. We present accurate numerical results for pricing of a Guaranteed Minimum Accumulation Benefit (GMAB guarantee available on the market that can serve as a numerical benchmark for practitioners and researchers developing pricing of variable annuity guarantees to assess the accuracy of their numerical implementation.
Asset backed securities : risks, ratings and quantitative modelling
Jönsson, B.H.B.; Schoutens, W.
2009-01-01
Asset backed securities (ABSs) are structured finance products backed by pools of assets and are created through a securitisation process. The risks in asset backed securities, such as, credit risk, prepayment risk, market risks, operational risk, and legal risks, are directly connected with the
Directory of Open Access Journals (Sweden)
H Du Toit
2004-04-01
Full Text Available This paper provides a concise overview of the development of an integrated property and asset market model (IPAMM for South African property markets, utilising the Pretoria office market as case study. The IPAMM simulates the interrelationships between property and asset markets in a diagrammatic quadrant model configuration. The Fischer-DiPasquale-Wheaton (FDW real estate model, arguably the most advanced diagrammatic quadrant real estate model available at present, served as basis for the development of IPAMM. IPAMM is essentially a regression model based on a system of stochastic equations that captures the interrelationships between property and asset markets. The model advances beyond mere conceptualisation of these relationships to a quantified interpretation and application of the theoretical premises that represent the micro-foundations of economic behaviour in property and asset markets.
Favato, Giampiero; Mariani, Paolo; Mills, Roger W; Capone, Alessandro; Pelagatti, Matteo; Pieri, Vasco; Marcobelli, Alberico; Trotta, Maria G; Zucchi, Alberto; Catapano, Alberico L
2007-07-04
The primary objective of this study was to make the first step in the modelling of pharmaceutical demand in Italy, by deriving a weighted capitation model to account for demographic differences among general practices. The experimental model was called ASSET (Age/Sex Standardised Estimates of Treatment). Individual prescription costs and demographic data referred to 3,175,691 Italian subjects and were collected directly from three Regional Health Authorities over the 12-month period between October 2004 and September 2005. The mean annual prescription cost per individual was similar for males (196.13 euro) and females (195.12 euro). After 65 years of age, the mean prescribing costs for males were significantly higher than females. On average, costs for a 75-year-old subject would be 12 times the costs for a 25-34 year-old subject if male, 8 times if female. Subjects over 65 years of age (22% of total population) accounted for 56% of total prescribing costs. The weightings explained approximately 90% of the evolution of total prescribing costs, in spite of the pricing and reimbursement turbulences affecting Italy in the 2000-2005 period. The ASSET weightings were able to explain only about 25% of the variation in prescribing costs among individuals. If mainly idiosyncratic prescribing by general practitioners causes the unexplained variations, the introduction of capitation-based budgets would gradually move practices with high prescribing costs towards the national average. It is also possible, though, that the unexplained individual variation in prescribing costs is the result of differences in the clinical characteristics or socio-economic conditions of practice populations. If this is the case, capitation-based budgets may lead to unfair distribution of resources. The ASSET age/sex weightings should be used as a guide, not as the ultimate determinant, for an equitable allocation of prescribing resources to regional authorities and general practices.
A quantum model of option pricing: When Black-Scholes meets Schrödinger and its semi-classical limit
Contreras, Mauricio; Pellicer, Rely; Villena, Marcelo; Ruiz, Aaron
2010-12-01
The Black-Scholes equation can be interpreted from the point of view of quantum mechanics, as the imaginary time Schrödinger equation of a free particle. When deviations of this state of equilibrium are considered, as a product of some market imperfection, such as: Transaction cost, asymmetric information issues, short-term volatility, extreme discontinuities, or serial correlations; the classical non-arbitrage assumption of the Black-Scholes model is violated, implying a non-risk-free portfolio. From Haven (2002) [1] we know that an arbitrage environment is a necessary condition to embedding the Black-Scholes option pricing model in a more general quantum physics setting. The aim of this paper is to propose a new Black-Scholes-Schrödinger model based on the endogenous arbitrage option pricing formulation introduced by Contreras et al. (2010) [2]. Hence, we derive a more general quantum model of option pricing, that incorporates arbitrage as an external time dependent force, which has an associated potential related to the random dynamic of the underlying asset price. This new resultant model can be interpreted as a Schrödinger equation in imaginary time for a particle of mass 1/σ2 with a wave function in an external field force generated by the arbitrage potential. As pointed out above, this new model can be seen as a more general formulation, where the perfect market equilibrium state postulated by the Black-Scholes model represent a particular case. Finally, since the Schrödinger equation is in place, we can apply semiclassical methods, of common use in theoretical physics, to find an approximate analytical solution of the Black-Scholes equation in the presence of market imperfections, as it is the case of an arbitrage bubble. Here, as a numerical illustration of the potential of this Schrödinger equation analogy, the semiclassical approximation is performed for different arbitrage bubble forms (step, linear and parabolic) and compare with the exact
Paul D. McNelis
1993-01-01
This paper is a data-analytic study of the relationships among international asset price volatilities and the time-varying correlations of asset returns in a small open economy (Australia) with international asset returns. Making use of recent developments in time-series approaches to volatility estimation, impulse response functions, variance decomposition, and Kalman filtering, I show that the Australian stock market volatility is most closely linked with volatility in the UK stock market, ...
A hybrid modeling approach for option pricing
Hajizadeh, Ehsan; Seifi, Abbas
2011-11-01
The complexity of option pricing has led many researchers to develop sophisticated models for such purposes. The commonly used Black-Scholes model suffers from a number of limitations. One of these limitations is the assumption that the underlying probability distribution is lognormal and this is so controversial. We propose a couple of hybrid models to reduce these limitations and enhance the ability of option pricing. The key input to option pricing model is volatility. In this paper, we use three popular GARCH type model for estimating volatility. Then, we develop two non-parametric models based on neural networks and neuro-fuzzy networks to price call options for S&P 500 index. We compare the results with those of Black-Scholes model and show that both neural network and neuro-fuzzy network models outperform Black-Scholes model. Furthermore, comparing the neural network and neuro-fuzzy approaches, we observe that for at-the-money options, neural network model performs better and for both in-the-money and an out-of-the money option, neuro-fuzzy model provides better results.
Pricing Volatility of Stock Returns with Volatile and Persistent Components
DEFF Research Database (Denmark)
Zhu, Jie
2009-01-01
This paper introduces a two-component volatility model based on first moments of both components to describe the dynamics of speculative return volatility. The two components capture the volatile and the persistent part of volatility, respectively. The model is applied to 10 Asia-Pacific stock ma...... markets. A positive or risk-premium effect exists between the return and the volatile component, yet the persistent component is not significantly priced for the return dynamic process....... markets. Their in-mean effects on returns are tested. The empirical results show that the persistent component is much more important for the volatility dynamic process than is the volatile component. However, the volatile component is found to be a significant pricing factor of asset returns for most...
Information-based models for finance and insurance
Hoyle, Edward
2010-10-01
In financial markets, the information that traders have about an asset is reflected in its price. The arrival of new information then leads to price changes. The `information-based framework' of Brody, Hughston and Macrina (BHM) isolates the emergence of information, and examines its role as a driver of price dynamics. This approach has led to the development of new models that capture a broad range of price behaviour. This thesis extends the work of BHM by introducing a wider class of processes for the generation of the market filtration. In the BHM framework, each asset is associated with a collection of random cash flows. The asset price is the sum of the discounted expectations of the cash flows. Expectations are taken with respect (i) an appropriate measure, and (ii) the filtration generated by a set of so-called information processes that carry noisy or imperfect market information about the cash flows. To model the flow of information, we introduce a class of processes termed Lévy random bridges (LRBs), generalising the Brownian and gamma information processes of BHM. Conditioned on its terminal value, an LRB is identical in law to a Lévy bridge. We consider in detail the case where the asset generates a single cash flow X_T at a fixed date T. The flow of information about X_T is modelled by an LRB with random terminal value X_T. An explicit expression for the price process is found by working out the discounted conditional expectation of X_T with respect to the natural filtration of the LRB. New models are constructed using information processes related to the Poisson process, the Cauchy process, the stable-1/2 subordinator, the variance-gamma process, and the normal inverse-Gaussian process. These are applied to the valuation of credit-risky bonds, vanilla and exotic options, and non-life insurance liabilities.
Variable capacity utilization, ambient temperature shocks and generation asset valuation
Energy Technology Data Exchange (ETDEWEB)
Tseng, Chung-Li; Dmitriev, Alexandre [Australian School of Business, University of New South Wales, Sydney NSW 2052 (Australia); Zhu, Wei [Optim Energy, 225 E. John Carpenter Freeway, Irving, TX 75062 (United States)
2009-11-15
This paper discusses generation asset valuation in a framework where capital utilization decisions are endogenous. We use real options approach for valuation of natural gas fueled turbines. Capital utilization choices that we explore include turning on/off the unit, operating the unit at increased firing temperatures (overfiring), and conducting preventive maintenance. Overfiring provides capacity enhancement which comes at the expense of reduced maintenance interval and increased costs of part replacement. We consider the costs and benefits of overfiring in attempt to maximize the asset value by optimally exercising the overfire option. In addition to stochastic processes governing prices, we incorporate an exogenous productivity shock: ambient temperature. We consider how variation in ambient temperature affects the asset value through its effect on gas turbine's productivity. (author)
EOQ model for perishable products with price-dependent demand, pre and post discounted selling price
Santhi, G.; Karthikeyan, K.
2017-11-01
In this article we introduce an economic order quantity model for perishable products like vegetables, fruits, milk, flowers, meat, etc.,with price-dependent demand, pre and post discounted selling price. Here we consider the demand is depending on selling price and deterioration rate is constant. Here we developed mathematical model to determine optimal discounton the unit selling price to maximize total profit. Numerical examples are given for illustrated.
Intellectual Capital and Intangible Assets Analysis and Valuation
Directory of Open Access Journals (Sweden)
Ion Anghel
2008-03-01
Full Text Available Today the intellectual capital is a key factor in company’s profitability. Two major forces have driven the high performance workplace over the past two decades: globalization and increasing in technological changes. In this environment, the intellectual capital and intangible assets is fundamental to success. In the new economic competition, knowledge assets provide a sustainable competitive advantage. The measurement is fundamental to support management decision in allocation investment and investor’s decision regarding the value versus price. In our research we consider a group of Romanian listed companies on Bucharest Stock Exchange and analyze the importance of intangible value into the total market value of the equity. From accounting point of view the importance of intangible assets is very low but from the market evidence was indicated 47% importance of intangible value in total market value for the Romanian listed companies.
Currency Inconvertibility, Portfolio Balance and Relative Prices
Jorge Braga de Macedo
1983-01-01
This paper analyzes regimes of currency inconvertibility in the frame-work of a simple general equilibrium model where an officially-traded good,a smuggled good and a non-traded good are produced and consumed by residents,who hold domestic and foreign currency in their portfolios. It is shown that stability requires the effect of relative prices on demand for traded and non-traded goods to dominate their effect on asset demands and that a once-and-for-all devaluation does not change the curre...
Price Uncertainty in Linear Production Situations
Suijs, J.P.M.
1999-01-01
This paper analyzes linear production situations with price uncertainty, and shows that the corrresponding stochastic linear production games are totally balanced. It also shows that investment funds, where investors pool their individual capital for joint investments in financial assets, fit into
Importance of Electricity Transport Pricing in Liberalised Energy Markets
International Nuclear Information System (INIS)
Wohlgemuth, N.
2001-01-01
Electricity has traditionally been supplied by vertically integrated companies providing generation, transmission and distribution services. Consumers have purchased a bundled commodity - delivered electricity - and there has been no need to price the components individually. This is no longer the case in competitive and unbundled electricity markets. One of the outstanding issues in the restructuring of the electricity markets is the way in which transmission costs are translated into tariffs. The efforts to create a single European electricity market are difficult to reconcile due to different national network pricing approaches. The European Commission's draft regulation on conditions for access to the network for cross-border exchanges of electricity sets general principles for the pricing of international electricity exchanges. Nodal pricing provides incentives for an efficient use of generation and transmission assets. Experience shows that nodal pricing is workable, and its use may be expected to increase progressively. Postage stamp pricing does not generally provide adequate incentives for efficiency. However, inefficiencies may be small under certain conditions, and postage stamp pricing has the advantage of being relatively transparent and easy to implement. This paper presents an overview of objectives related to an effective design of transmission pricing approaches, of transmission pricing models and presents recent developments in Europe in this respect. Due to the great number of institutional designs of electricity market organisations, it will be difficult to design and implement a model of cross-border transmission pricing that results in a high degree of non-discriminatory international competition in electricity markets, a key objective of the Electricity Directive.(author)
On a Boltzmann-type price formation model
Burger, Martin; Caffarelli, Luis A.; Markowich, Peter A.; Wolfram, Marie Therese
2013-01-01
In this paper, we present a Boltzmann-type price formation model, which is motivated by a parabolic free boundary model for the evolution of price presented by Lasry and Lions in 2007. We discuss the mathematical analysis of the Boltzmann-type model and show that its solutions converge to solutions of the model by Lasry and Lions as the transaction rate tends to infinity. Furthermore, we analyse the behaviour of the initial layer on the fast time scale and illustrate the price dynamics with various numerical experiments. © 2013 The Author(s) Published by the Royal Society. All rights reserved.
On a Boltzmann-type price formation model
Burger, Martin
2013-06-26
In this paper, we present a Boltzmann-type price formation model, which is motivated by a parabolic free boundary model for the evolution of price presented by Lasry and Lions in 2007. We discuss the mathematical analysis of the Boltzmann-type model and show that its solutions converge to solutions of the model by Lasry and Lions as the transaction rate tends to infinity. Furthermore, we analyse the behaviour of the initial layer on the fast time scale and illustrate the price dynamics with various numerical experiments. © 2013 The Author(s) Published by the Royal Society. All rights reserved.
An Overview of Intellectual Property and Intangible Asset Valuation Models
Matsuura, Jeffrey H.
2004-01-01
This paper reviews the economic models most commonly applied to estimate the value of intellectual property and other forms of intangible assets. It highlights the key strengths and weaknesses of these models. One of the apparent weaknesses of the most commonly used valuation models is the failure to incorporate legal rights into their…
Scaling symmetry, renormalization, and time series modeling: the case of financial assets dynamics.
Zamparo, Marco; Baldovin, Fulvio; Caraglio, Michele; Stella, Attilio L
2013-12-01
We present and discuss a stochastic model of financial assets dynamics based on the idea of an inverse renormalization group strategy. With this strategy we construct the multivariate distributions of elementary returns based on the scaling with time of the probability density of their aggregates. In its simplest version the model is the product of an endogenous autoregressive component and a random rescaling factor designed to embody also exogenous influences. Mathematical properties like increments' stationarity and ergodicity can be proven. Thanks to the relatively low number of parameters, model calibration can be conveniently based on a method of moments, as exemplified in the case of historical data of the S&P500 index. The calibrated model accounts very well for many stylized facts, like volatility clustering, power-law decay of the volatility autocorrelation function, and multiscaling with time of the aggregated return distribution. In agreement with empirical evidence in finance, the dynamics is not invariant under time reversal, and, with suitable generalizations, skewness of the return distribution and leverage effects can be included. The analytical tractability of the model opens interesting perspectives for applications, for instance, in terms of obtaining closed formulas for derivative pricing. Further important features are the possibility of making contact, in certain limits, with autoregressive models widely used in finance and the possibility of partially resolving the long- and short-memory components of the volatility, with consistent results when applied to historical series.
Scaling symmetry, renormalization, and time series modeling: The case of financial assets dynamics
Zamparo, Marco; Baldovin, Fulvio; Caraglio, Michele; Stella, Attilio L.
2013-12-01
We present and discuss a stochastic model of financial assets dynamics based on the idea of an inverse renormalization group strategy. With this strategy we construct the multivariate distributions of elementary returns based on the scaling with time of the probability density of their aggregates. In its simplest version the model is the product of an endogenous autoregressive component and a random rescaling factor designed to embody also exogenous influences. Mathematical properties like increments’ stationarity and ergodicity can be proven. Thanks to the relatively low number of parameters, model calibration can be conveniently based on a method of moments, as exemplified in the case of historical data of the S&P500 index. The calibrated model accounts very well for many stylized facts, like volatility clustering, power-law decay of the volatility autocorrelation function, and multiscaling with time of the aggregated return distribution. In agreement with empirical evidence in finance, the dynamics is not invariant under time reversal, and, with suitable generalizations, skewness of the return distribution and leverage effects can be included. The analytical tractability of the model opens interesting perspectives for applications, for instance, in terms of obtaining closed formulas for derivative pricing. Further important features are the possibility of making contact, in certain limits, with autoregressive models widely used in finance and the possibility of partially resolving the long- and short-memory components of the volatility, with consistent results when applied to historical series.
Ma, Lin; Tan, Andy; Weijnen, Margot; Lee, Jay
2012-01-01
Engineering Asset Management 2010 represents state-of-the art trends and developments in the emerging field of engineering asset management as presented at the Fifth World Congress on Engineering Asset Management (WCEAM). The proceedings of the WCEAM 2010 is an excellent reference for practitioners, researchers and students in the multidisciplinary field of asset management, covering topics such as: Asset condition monitoring and intelligent maintenance Asset data warehousing, data mining and fusion Asset performance and level-of-service models Design and life-cycle integrity of physical assets Education and training in asset management Engineering standards in asset management Fault diagnosis and prognostics Financial analysis methods for physical assets Human dimensions in integrated asset management Information quality management Information systems and knowledge management Intelligent sensors and devices Maintenance strategies in asset management Optimisation decisions in asset management Risk management ...
International Nuclear Information System (INIS)
Akkemik, K. Ali
2011-01-01
Recent reforms in the Turkish electricity sector since 2001 aim to introduce a tariff system that reflects costs. This is expected to affect the production and consumer prices of electricity. The changes in electricity prices are then reflected in production costs in other segments of the economy. Subsequently, producer and consumer prices will be affected. The potential impact of the changes in electricity prices that the ongoing electricity reforms in Turkey will bring about may have important implications on the price formation in economic activities and the cost of living for households. This paper evaluates the potential impacts of changes in electricity prices from a social accounting matrix (SAM) price modeling perspective. It is found that based on the estimated price multipliers that prices in the energy-producing sectors, mining, and iron and steel manufacturing sectors would be affected more severely than the remaining sectors of the economy. Consumer prices are affected slightly less than producer prices. - Research Highlights: → The impact of electricity generation costs on prices in other sectors is modeled. → A micro-SAM emphasizing electricity supply is constructed using 2002 I-O tables. → Energy, mining, and steel sectors are more responsive to electricity costs. → Living costs are less responsive to electricity cost changes than producer prices.
Empirical analysis of uranium spot prices
International Nuclear Information System (INIS)
Morman, M.R.
1988-01-01
The objective is to empirically test a market model of the uranium industry that incorporates the notion that, if the resource is viewed as an asset by economic agents, then its own rate of return along with the own rate of return of a competing asset would be a major factor in formulating the price of the resource. The model tested is based on a market model of supply and demand. The supply model incorporates the notion that the decision criteria used by uranium mine owners is to select that extraction rate that maximizes the net present value of their extraction receipts. The demand model uses a concept that allows for explicit recognition of the prospect of arbitrage between a natural-resource market and the market for other capital goods. The empirical approach used for estimation was a recursive or causal model. The empirical results were consistent with the theoretical models. The coefficients of the demand and supply equations had the appropriate signs. Tests for causality were conducted to validate the use of the causal model. The results obtained were favorable. The implication of the findings as related to future studies of exhaustible resources are: (1) in some cases causal models are the appropriate specification for empirical analysis; (2) supply models should incorporate a measure to capture depletion effects
Modelling oil price volatility with structural breaks
International Nuclear Information System (INIS)
Salisu, Afees A.; Fasanya, Ismail O.
2013-01-01
In this paper, we provide two main innovations: (i) we analyze oil prices of two prominent markets namely West Texas Intermediate (WTI) and Brent using the two recently developed tests by Narayan and Popp (2010) and Liu and Narayan, 2010 both of which allow for two structural breaks in the data series; and (ii) the latter method is modified to include both symmetric and asymmetric volatility models. We identify two structural breaks that occur in 1990 and 2008 which coincidentally correspond to the Iraqi/Kuwait conflict and the global financial crisis, respectively. We find evidence of persistence and leverage effects in the oil price volatility. While further extensions can be pursued, the consideration of asymmetric effects as well as structural breaks should not be jettisoned when modelling oil price volatility. - Highlights: ► We analyze oil price volatility using NP (2010) and LN (2010) tests. ► We modify the LN (2010) to account for leverage effects in oil price. ► We find two structural breaks that reflect major global crisis in the oil market. ► We find evidence of persistence and leverage effects in oil price volatility. ► Leverage effects and structural breaks are fundamental in oil price modelling.
Directory of Open Access Journals (Sweden)
Shuang Li
2014-01-01
Full Text Available We study the pricing of American options in an incomplete market in which the dynamics of the underlying risky asset is driven by a jump diffusion process with stochastic volatility. By employing a risk-minimization criterion, we obtain the Radon-Nikodym derivative for the minimal martingale measure and consequently a linear complementarity problem (LCP for American option price. An iterative method is then established to solve the LCP problem for American put option price. Our numerical results show that the model and numerical scheme are robust in capturing the feature of incomplete finance market, particularly the influence of market volatility on the price of American options.
Directory of Open Access Journals (Sweden)
Milošević-Avdalović Snežana
2017-01-01
Full Text Available The global financial crisis of the late 2007 has provoked unprecedented shocks to the world markets and weaken investors' confidence due to the turbulent movements and frequent changes of stock prices. Emerging capital markets suffer from unsatisfactory corporate governance, market manipulation and insider trade problems. In such circumstances, institutional investors, managers, analysts and other market participants are in constant search of the trading strategy that will outperform the market. This research is an instrument for the identification of the main determinants of stock prices on the Belgrade Stock Exchange. The panel data regression analysis includes 42 companies that represent the composition of the BelexLine index for the period from 2010 to 2014. The paper looks at the impact of specific (internal variables of companies, such as company size, return on assets, return on equity, earnings per stock, book value, price-earning ratio, price-to-book ratio and leverage and the stock price of companies that compose the BelexLine index. The results indicate that variables such as the size of the company measured by assets, return on assets, leverage, earnings per stock, book value and price-to-book ratio provide a unique contribution to a statistically significant predictor of stock prices.
The model of asset management of commercial banks
Shaymardanov, Shakhzod; Nuriddinov, Sadriddin; Mamadaliev, Donierbek; Murodkhonov, Mukhammad
2018-01-01
The main objective of the commercial bank's policy in the sphere of asset and liability management is to maintain the optimal structure of assets and liabilities, ensure the compliance of amounts, terms and currency of attracting and allocating resources. The objectives and principles of asset and liability management are based on the bank's strategy and the fundamental principles of the risk management policy.
Steam generator asset management: integrating technology and asset management
International Nuclear Information System (INIS)
Shoemaker, P.; Cislo, D.
2006-01-01
Asset Management is an established but often misunderstood discipline that is gaining momentum within the nuclear generation industry. The global impetus behind the movement toward asset management is sustainability. The discipline of asset management is based upon three fundamental aspects; key performance indicators (KPI), activity-based cost accounting, and cost benefits/risk analysis. The technology associated with these three aspects is fairly well-developed, in all but the most critical area; cost benefits/risk analysis. There are software programs that calculate, trend, and display key-performance indicators to ensure high-level visibility. Activity-based costing is a little more difficult; requiring a consensus on the definition of what comprises an activity and then adjusting cost accounting systems to track. In the United States, the Nuclear Energy Institute's Standard Nuclear Process Model (SNPM) serves as the basis for activity-based costing. As a result, the software industry has quickly adapted to develop tracking systems that include the SNPM structure. Both the KPI's and the activity-based cost accounting feed the cost benefits/risk analysis to allow for continuous improvement and task optimization; the goal of asset management. In the case where the benefits and risks are clearly understood and defined, there has been much progress in applying technology for continuous improvement. Within the nuclear generation industry, more specialized and unique software systems have been developed for active components, such as pumps and motors. Active components lend themselves well to the application of asset management techniques because failure rates can be established, which serves as the basis to quantify risk in the cost-benefits/risk analysis. A key issue with respect to asset management technologies is only now being understood and addressed, that is how to manage passive components. Passive components, such as nuclear steam generators, reactor vessels
Comparative analysis of used car price evaluation models
Chen, Chuancan; Hao, Lulu; Xu, Cong
2017-05-01
An accurate used car price evaluation is a catalyst for the healthy development of used car market. Data mining has been applied to predict used car price in several articles. However, little is studied on the comparison of using different algorithms in used car price estimation. This paper collects more than 100,000 used car dealing records throughout China to do empirical analysis on a thorough comparison of two algorithms: linear regression and random forest. These two algorithms are used to predict used car price in three different models: model for a certain car make, model for a certain car series and universal model. Results show that random forest has a stable but not ideal effect in price evaluation model for a certain car make, but it shows great advantage in the universal model compared with linear regression. This indicates that random forest is an optimal algorithm when handling complex models with a large number of variables and samples, yet it shows no obvious advantage when coping with simple models with less variables.
The Financial Indicators’ and Listed Company‘s Stock Price Link Determining the Value
Directory of Open Access Journals (Sweden)
Rima Tamošiūnienė
2016-06-01
Full Text Available The demand for value determination increased after rising of the Lithuanian economics. The joint-stock company value depends on the stock price and the company’s profit according to the “stock pricing for profit” method. The purpose of this scientific paper is the financial indicators’ and listed company’s stock price link determining the value. The analysis methods are: the research of scientific literature, data analysis, summarizing and graphic visualization. The link between financial indicators and the stock price is determined on the basis of correlation regression analysis. The analysis showed that listed on the stock exchange company’s stocks already have some value as they raise the capital. The research results revealed the stock price’s direct dependence on the fixed asset turnover and the debt-to-asset ratios.
Econophysics: Master curve for price-impact function
Lillo, Fabrizio; Farmer, J. Doyne; Mantegna, Rosario N.
2003-01-01
The price reaction to a single transaction depends on transaction volume, the identity of the stock, and possibly many other factors. Here we show that, by taking into account the differences in liquidity for stocks of different size classes of market capitalization, we can rescale both the average price shift and the transaction volume to obtain a uniform price-impact curve for all size classes of firm for four different years (1995-98). This single-curve collapse of the price-impact function suggests that fluctuations from the supply-and-demand equilibrium for many financial assets, differing in economic sectors of activity and market capitalization, are governed by the same statistical rule.
Robust pricing of european options with wavelets and the characteristic function
Ortiz-Gracia, L.; Oosterlee, C.W.
2013-01-01
We present a novel method for pricing European options based on the wavelet approximation method and the characteristic function. We focus on the discounted expected payoff pricing formula and compute it by means of wavelets. We approximate the density function associated to the underlying asset
Error analysis in Fourier methods for option pricing for exponential Lévy processes
Crocce, Fabian; Hä ppö lä , Juho; Keissling, Jonas; Tempone, Raul
2015-01-01
We derive an error bound for utilising the discrete Fourier transform method for solving Partial Integro-Differential Equations (PIDE) that describe european option prices for exponential Lévy driven asset prices. We give sufficient conditions
Electricity pricing model in thermal generating stations under deregulation
International Nuclear Information System (INIS)
Reji, P.; Ashok, S.; Moideenkutty, K.M.
2007-01-01
In regulated public utilities with competitive power markets, deregulation has replaced the monopoly. Under the deregulated power market, the electricity price primarily depends on market mechanism and power demand. In this market, generators generally follow marginal pricing. Each generator fixes the electricity price based on their pricing strategy and it leads to more price volatility. This paper proposed a model to determine the electricity price considering all operational constraints of the plant and economic variables that influenced the price, for a thermal generating station under deregulation. The purpose of the model was to assist existing stations, investors in the power sector, regulatory authorities, transmission utilities, and new power generators in decision-making. The model could accommodate price volatility in the market and was based on performance incentive/penalty considering plant load factor, availability of the plant and peak/ off peak demand. The model was applied as a case study to a typical thermal utility in India to determine the electricity price. It was concluded that the case study of a thermal generating station in a deregulated environment showed that the electricity price mainly depended on the gross calorific value (GCV) of fuel, mode of operation, price of the fuel, and operating charges. 11 refs., 2 tabs., 1 fig
Modeling the stock price returns volatility using GARCH(1,1) in some Indonesia stock prices
Awalludin, S. A.; Ulfah, S.; Soro, S.
2018-01-01
In the financial field, volatility is one of the key variables to make an appropriate decision. Moreover, modeling volatility is needed in derivative pricing, risk management, and portfolio management. For this reason, this study presented a widely used volatility model so-called GARCH(1,1) for estimating the volatility of daily returns of stock prices of Indonesia from July 2007 to September 2015. The returns can be obtained from stock price by differencing log of the price from one day to the next. Parameters of the model were estimated by Maximum Likelihood Estimation. After obtaining the volatility, natural cubic spline was employed to study the behaviour of the volatility over the period. The result shows that GARCH(1,1) indicate evidence of volatility clustering in the returns of some Indonesia stock prices.
Flint, Emlyn; Maré, Eben
2017-01-01
Background: Contingent claims on underlying assets are typically priced under a framework that assumes, inter alia, that the log returns of the underlying asset are normally distributed. However, many researchers have shown that this assumption is violated in practice. Such violations include the statistical properties of heavy tails, volatility clustering, leptokurtosis and long memory. This paper considers the pricing of contingent claims when the underlying is assumed to display long memor...
Modelling the impact of oil prices on Vietnam's stock prices
Energy Technology Data Exchange (ETDEWEB)
Narayan, Paresh Kumar [School of Accounting, Economics and Finance, Deakin University, Victoria 3125 (Australia); Narayan, Seema [School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology University, Melbourne (Australia)
2010-01-15
The goal of this paper is to model the impact of oil prices on Vietnam's stock prices. We use daily data for the period 2000-2008 and include the nominal exchange rate as an additional determinant of stock prices. We find that stock prices, oil prices and nominal exchange rates are cointegrated, and oil prices have a positive and statistically significant impact on stock prices. This result is inconsistent with theoretical expectations. The growth of the Vietnamese stock market was accompanied by rising oil prices. However, the boom of the stock market was marked by increasing foreign portfolio investment inflows which are estimated to have doubled from US$0.9 billion in 2005 to US$1.9 billion in 2006. There was also a change in preferences from holding foreign currencies and domestic bank deposits to stocks local market participants, and there was a rise in leveraged investment in stock as well as investments on behalf of relatives living abroad. It seems that the impact of these internal and domestic factors were more dominant than the oil price rise on the Vietnamese stock market. (author)
Johnstone, D J
2002-06-01
Investors have a proven general reluctance to realize losses. The theory of "mental accounting" suggests that losses are easier to accept when mentally integrated with either preceding losses or with compensatory gains. Mental integration is made easier when a failed asset is exchanged against a new, apparently profitable, acquisition. The alternative is to sell the existing asset on the open market before re-investing the proceeds as desired. This is emotionally less appealing than "rolling over" a losing investment into a new venture by way of an asset trade. The psychological benefits of exchanging rather than selling a failed asset come at a cost. It is typical of trade-in arrangements, e.g., where one trades an old car against a new one, that the effective sale price of the existing asset is less than current market value. Acceptance of this low price adds to the investor's total monetary loss on the existing asset but is essential to an overall package deal apart from which that asset would often remain belatedly unsold.
Directory of Open Access Journals (Sweden)
Ming Dong
2010-01-01
Full Text Available The primary objective of engineering asset management is to optimize assets service delivery potential and to minimize the related risks and costs over their entire life through the development and application of asset health and usage management in which the health and reliability prediction plays an important role. In real-life situations where an engineering asset operates under dynamic operational and environmental conditions, the lifetime of an engineering asset is generally described as monitored nonlinear time-series data and subject to high levels of uncertainty and unpredictability. It has been proved that application of data mining techniques is very useful for extracting relevant features which can be used as parameters for assets diagnosis and prognosis. In this paper, a tutorial on nonlinear time-series data mining in engineering asset health and reliability prediction is given. Besides that an overview on health and reliability prediction techniques for engineering assets is covered, this tutorial will focus on concepts, models, algorithms, and applications of hidden Markov models (HMMs and hidden semi-Markov models (HSMMs in engineering asset health prognosis, which are representatives of recent engineering asset health prediction techniques.
Improved structural pricing model for the fair market price of Sukuk Ijarah in Indonesia
Rosadi, D.; Muslim
2017-12-01
Shariah financial products are currently developing in Indonesia financial market. One of the most important products is called as Sukuk which is commonly referred to as "sharia compliant" bonds. The type of Sukuk that have been widely traded in Indonesia until now are Sukuk Ijarah and Sukuk Mudharabah. In [1], we discuss various models for the price of the fixed-non-callable Sukuk Ijarah and provide the empirical studies using data from Indonesia Bonds market. We found that the structural model considered in [1] cannot model the market price empirically well. In this paper, we consider the improved model and show that it performs well for modelling the fair market price of Sukuk Ijarah.
Financial Integration and Asset Returns
P Martin; H Rey
2000-01-01
The paper investigates the impact of financial integration on asset return, risk diversification and breadth of financial markets. We analyse a three-country macroeconomic model in which (i) the number of financial assets is endogenous; (ii) assets are imperfect substitutes; (iii) cross-border asset trade entails some transaction costs; (iv) the investment technology is indivisible. In such an environment, lower transaction costs between two financial markets translate to higher demand for as...
Spectral decomposition of optimal asset-liability management
Decamps, M.; de Schepper, A.; Goovaerts, M.
2009-01-01
This paper concerns optimal asset-liability management when the assets and the liabilities are modeled by means of correlated geometric Brownian motions as suggested in Gerber and Shiu [2003. Geometric Brownian motion models for assets and liabilities: from pension funding to optimal dividends.
Pricing and Application of Electric Storage
Zhao, Jialin
Electric storage provides a vehicle to store power for future use. It contributes to the grids in multiple aspects. For instance, electric storage is a more effective approach to provide electricity ancillary services than conventional methods. Additionally, electric storage, especially fast-responding units, allows owners to implement high-frequency power transactions in settings such as the 5-min real-time trading market. Such high-frequency power trades were limited in the past. However, as technology advances, the power markets have evolved. For instance, the California Independent System Operator now supports the 5-min real-time trading and the hourly day-ahead ancillary services bidding. Existing valuation models of electric storage were not designed to accommodate these recent market developments. To fill this gap, I focus on the fast-responding grid-level electric storage that provides both the real-time trading and the day-ahead ancillary services bidding. To evaluate such an asset, I propose a Monte Carlo Simulation-based valuation model. The foundation of my model is simulations of power prices. This study develops a new simulation model of electric prices. It is worth noting that, unlike existing models, my proposed simulation model captures the dependency of the real-time markets on the day-ahead markets. Upon such simulations, this study investigates the pricing and the application of electric storage at a 5-min granularity. Essentially, my model is a Dynamic Programming system with both endogenous variables (i.e., the State-of-Charge of electric storage) and exogenous variables (i.e., power prices). My first numerical example is the valuation of a fictitious 4MWh battery. Similarly, my second example evaluates the application of two units of 2MWh batteries. By comparing these two experiments, I investigate the issues related to battery configurations, such as the impacts of splitting storage capability on the valuation of electric storage.
Modelling world gold prices and USD foreign exchange relationship using multivariate GARCH model
Ping, Pung Yean; Ahmad, Maizah Hura Binti
2014-12-01
World gold price is a popular investment commodity. The series have often been modeled using univariate models. The objective of this paper is to show that there is a co-movement between gold price and USD foreign exchange rate. Using the effect of the USD foreign exchange rate on the gold price, a model that can be used to forecast future gold prices is developed. For this purpose, the current paper proposes a multivariate GARCH (Bivariate GARCH) model. Using daily prices of both series from 01.01.2000 to 05.05.2014, a causal relation between the two series understudied are found and a bivariate GARCH model is produced.
Investor Expectations, Business Conditions, and the Pricing of Beta-Instability Risk
William Goetzmann; Akiko Watanabe; Masahiro Watanabe
2008-01-01
This paper examines the pricing implications of time-variation in assets' market betas over the business cycle in a conditional CAPM framework. We use a half century of real GDP growth expectations from economists' surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The expectation measure forecasts the market return controlling for existing predictive variables. The loadings on the expectation measure e...
Parameter estimation of electricity spot models from futures prices
Aihara, ShinIchi; Bagchi, Arunabha; Imreizeeq, E.S.N.; Walter, E.
We consider a slight perturbation of the Schwartz-Smith model for the electricity futures prices and the resulting modified spot model. Using the martingale property of the modified price under the risk neutral measure, we derive the arbitrage free model for the spot and futures prices. We estimate
6th World Congress on Engineering Asset Management
Ni, Jun; Sarangapani, Jagnathan; Mathew, Joseph
2014-01-01
This text represents state-of-the-art trends and developments in the emerging field of engineering asset management as presented at the Sixth World Congress on Engineering Asset Management (WCEAM) held in Cincinnati, OH, USA from October 3-5, 2011 The Proceedings of the WCEAM 2011 is an excellent reference for practitioners, researchers and students in the multidisciplinary field of asset management, covering topics such as: • Asset condition monitoring and intelligent maintenance • Asset data warehousing, data mining and fusion • Asset performance and level-of-service models • Design and lifecycle integrity of physical assets • Deterioration and preservation models for assets • Education and training in asset management • Engineering standards in asset management • Fault diagnosis and prognostics • Financial analysis methods for physical assets • Human dimensions in integrated asset management • Information quality management • Information systems and knowledge management • Intellig...
To consume or not. How oil prices affect the comovement of consumption and aggregate wealth
International Nuclear Information System (INIS)
Odusami, Babatunde Olatunji
2010-01-01
This paper provides insight into how oil price movements affect the consumption choices of U.S. households through the wealth channel. Lettau and Ludvigson (2001) show that while consumption, asset wealth, and labor income share a common long-term trend; they substantially deviate from one another in the short run. In this paper, I show that these transitory deviations can be explained by fluctuations in the price of crude oil. Linear and threshold multivariate autoregressive models are used to measure the oil price effect. Oil price effect on the consumption to aggregate wealth ratio is robust to monetary policy effect, sub-period effect, and econometric specifications of oil price effect. Generally speaking, higher (lower) oil price will lead to a decrease (increase) in the proportion of aggregate wealth consumed. In addition, the magnitude of the oil price effect is asymmetric and sub-period dependent. Oil price effect was higher before the 1980's than in succeeding periods. (author)
The Early Exercise Premium Representation for American Options on Multiply Assets
International Nuclear Information System (INIS)
Klimsiak, Tomasz; Rozkosz, Andrzej
2016-01-01
In the paper we consider the problem of valuation of American options written on dividend-paying assets whose price dynamics follow the classical multidimensional Black and Scholes model. We provide a general early exercise premium representation formula for options with payoff functions which are convex or satisfy mild regularity assumptions. Examples include index options, spread options, call on max options, put on min options, multiply strike options and power-product options. In the proof of the formula we exploit close connections between the optimal stopping problems associated with valuation of American options, obstacle problems and reflected backward stochastic differential equations
Bigger is Better, but at What Cost? Estimating the Economic Value of Incremental Data Assets.
Dalessandro, Brian; Perlich, Claudia; Raeder, Troy
2014-06-01
Many firms depend on third-party vendors to supply data for commercial predictive modeling applications. An issue that has received very little attention in the prior research literature is the estimation of a fair price for purchased data. In this work we present a methodology for estimating the economic value of adding incremental data to predictive modeling applications and present two cases studies. The methodology starts with estimating the effect that incremental data has on model performance in terms of common classification evaluation metrics. This effect is then translated into economic units, which gives an expected economic value that the firm might realize with the acquisition of a particular data asset. With this estimate a firm can then set a data acquisition price that targets a particular return on investment. This article presents the methodology in full detail and illustrates it in the context of two marketing case studies.
Option price calibration from Renyi entropy
International Nuclear Information System (INIS)
Brody, Dorje C.; Buckley, Ian R.C.; Constantinou, Irene C.
2007-01-01
The calibration of the risk-neutral density function for the future asset price, based on the maximisation of the entropy measure of Renyi, is proposed. Whilst the conventional approach based on the use of logarithmic entropy measure fails to produce the observed power-law distribution when calibrated against option prices, the approach outlined here is shown to produce the desired form of the distribution. Procedures for the maximisation of the Renyi entropy under constraints are outlined in detail, and a number of interesting properties of the resulting power-law distributions are also derived. The result is applied to efficiently evaluate prices of path-independent derivatives
The Long-Run Effects of the Fed’s Monetary Policy on the Dynamics among Major Asset Classes
Directory of Open Access Journals (Sweden)
Miao Jia
2016-09-01
Full Text Available It is well known that government monetary policies significantly impact financial markets. There have been numerous studies examining the relationship between monetary policy and the prices of financial assets, including equities and bonds. Little, however, has been done to explore the impact of major financial assets on changes in monetary policies.
Steam generator asset management model application
International Nuclear Information System (INIS)
Pop, M. G.; Shoemaker, P.; Colgan, K.; Griffith, J.
2008-01-01
An advanced economic model in SG Asset Management, called B-Factor Methodology Tool, was developed by AREVA NP (Patent Pending), and used during the summer of 2006. The Tool allowed prediction of the future cost for a selected combination of mitigation techniques at a utility, while considering the tube deposit evolution and its effects on their particular SGs. The Tool, which was presented in its basic theoretical form at the ICAPP Meeting in Nice in 2007, has been greatly improved and was applied again at the end of 2007 at another utility. The elements of the B-Factor Methodology are the annual and cumulative net present value, and the annual escalated direct and indirect costs/benefits. All these are relative to a base case for a selected combination of mitigation techniques, considering the tube deposit evolution and its effects on the SG tubing area and SG pressure losses and ultimately on the plant power production. This paper will present the actual progress made in improving the Tool during 2007 so that it successfully predicts the optimum combination of various SG maintenance activities for any given utility. Simulated results of the operation of the B-Factor Methodology Tool for a complex scenario of Asset Management reasoning are also presented. (authors)
Behavior and asset markets : Individual decisions, emotions and fundamental value trajectories
Breaban, A.G.
2014-01-01
This thesis consists of four chapters related to individual- and market- level behavior in experimental financial markets. The first three chapters analyze asset pricing and, in particular, stylized facts such as bubbles and crashes, as well as some of the factors that influence such phenomena. In
Financing Asset Sales and Business Cycles
Arnold, Marc; Hackbarth, Dirk; Puhan, Tatjana-Xenia
2013-01-01
This paper analyzes the decision of firms to sell assets to fund investments (financing asset sales). For a sample of U.S. manufacturing firms during the 1971-2010 period, we document new stylized facts about financing asset sales that cannot be explained by traditional motives for selling assets, such as financial distress or financing constraints. Using a structural model of financing, investment, and macroeconomic risk, we show that financing asset sales attenuate the debt overhang problem...
Prices, production, and inventories over the automotive model year
Adam Copeland; Wendy E. Dunn; George J. Hall
2005-01-01
This paper studies the within-model-year pricing and production of new automobiles. Using new monthly data on U.S. transaction prices, we document that for the typical new vehicle, prices typically fall over the model year at a 9.2 percent annual rate. Concurrently, both sales and inventories are hump shaped. To explain these time series, we formulate a market equilibrium model for new automobiles in which inventory and pricing decisions are made simultaneously. On the demand side, we use mic...
WEATHER DERIVATIVES: THE MOST COMMON PRICING AND VALUATION METHODS
Directory of Open Access Journals (Sweden)
Botos Horia Mircea
2013-07-01
Full Text Available In recent years , weather derivatives have become a common tool in risk management for many sectors. This has its roots in that there is no unique way to determine de value and price solutions that would be generally approved by market-participants, like in the case of the Black-Scholes formula for options on non-dividend-paying stocks is the source for a constant debate between academics and practitioners. One look for fair and truly correct prices, while the others search every-day applicable solutions. To be honest... this is somehow like alchemy. This paper has as purpose the examination of statistical characteristics of weather data, data clearing and filling techniques. The study will be referring to temperatures because that is the best analyzed phenomenon, being the most common. This was also heavily influenced by energy companies and energetic interests, because the degree days were of interest ever before weather derivatives were put for sale. Main ideas are explaining what ways of pricing and valuation are, put into perspective for this financial instrument, taking into consideration that the Black-Scholes Model is not suitable. Also here, we will present the pros and cons that we found for each method. The methods are: the Burn analysis, the index value simulation method (IVSM, the daily simulation method (DSM.On the hole, this paper wants to shed light the weather derivatives pricing methods a mix of insurance pricing and standard financial models. At the end we will prospect the discounting problem, by means of the Consumption based Capital Asset Pricing Model (CCAPM.
Electricity price forecasting through transfer function models
International Nuclear Information System (INIS)
Nogales, F.J.; Conejo, A.J.
2006-01-01
Forecasting electricity prices in present day competitive electricity markets is a must for both producers and consumers because both need price estimates to develop their respective market bidding strategies. This paper proposes a transfer function model to predict electricity prices based on both past electricity prices and demands, and discuss the rationale to build it. The importance of electricity demand information is assessed. Appropriate metrics to appraise prediction quality are identified and used. Realistic and extensive simulations based on data from the PJM Interconnection for year 2003 are conducted. The proposed model is compared with naive and other techniques. Journal of the Operational Research Society (2006) 57, 350-356.doi:10.1057/palgrave.jors.2601995; published online 18 May 2005. (author)
Bayesian Option Pricing using Mixed Normal Heteroskedasticity Models
DEFF Research Database (Denmark)
Rombouts, Jeroen; Stentoft, Lars
2014-01-01
Option pricing using mixed normal heteroscedasticity models is considered. It is explained how to perform inference and price options in a Bayesian framework. The approach allows to easily compute risk neutral predictive price densities which take into account parameter uncertainty....... In an application to the S&P 500 index, classical and Bayesian inference is performed on the mixture model using the available return data. Comparing the ML estimates and posterior moments small differences are found. When pricing a rich sample of options on the index, both methods yield similar pricing errors...... measured in dollar and implied standard deviation losses, and it turns out that the impact of parameter uncertainty is minor. Therefore, when it comes to option pricing where large amounts of data are available, the choice of the inference method is unimportant. The results are robust to different...
Directory of Open Access Journals (Sweden)
Henry Jordaan
2010-12-01
Full Text Available Price risk associated with maize production became a reason for concern in South Africa only after the deregulation of the agricultural commodities markets in the mid-1990s, when farmers became responsible for marketing their own crops. Although farmers can use, inter alia, the cash forward contracting and/or the derivatives market to manage price risk, few farmers actually participate in forward pricing. A similar reluctance to use forward pricing methods is also found internationally. A number of different model specifications have been used in previous research to model forward pricing behaviour which is based on the assumption that the same variables influence both the adoption and the quantity decision. This study compares the results from a model specification which models forward pricing behaviour in a single-decision framework with the results from modelling the quantity decision conditional to the adoption decision in a two-step approach. The results suggest that substantially more information is obtained by modelling forward pricing behaviour as two separate decisions rather than a single decision. Such information may be valuable in educational material compiled to educate farmers in the effective use of forward pricing methods in price risk management. Modelling forward pricing behaviour as two separate decisions is thus a more effective means of modelling forward pricing behaviour than modelling it as a single decision.
Directory of Open Access Journals (Sweden)
Mathius Tandiontong
2017-03-01
Full Text Available Investing in the stock market is one option for investors. Investment in ordinary shares was classified as longterminvestments to be able to provide added value and the risk for fixed income. This study focused on thedifference of APTM versus CAPM, and it also focused on the sensitivity of the APTM on the stock returns. Thisstudy was based on the assumption that: there were differences in sectoral stock return volatility, volatility ofmarket risk factors, and macroeconomic risks affecting sectoral differences in the sensitivity of stock returns;there were differences in the results of testing the validity, robustness unconditional CAPM and APTMmultifactorial; and time-varying volatility referring to the phenomena of structural breaks and asymmetriceffect. The method of analysis used nested models with panel data. Data were analyzed by using secondary datafrom 2005-2012. The results of this study concluded that: there was no different sensitivity of stock returnsacross sectors, but there was different insensitivity between systematic risk factors, CAPM and APTM multifactorthat showed the inconsistency of the sectoral shares, but the proven model of unconditional CAPM wasvalid; the difference of factor risk premiums was as a result of the structural break, the financial crisis period of2008 within the period 2005-2012.
Models and Tabu Search Metaheuristics for Service Network Design with Asset-Balance Requirements
DEFF Research Database (Denmark)
Pedersen, Michael Berliner; Crainic, T.G.; Madsen, Oli B.G.
2009-01-01
This paper focuses on a generic model for service network design, which includes asset positioning and utilization through constraints on asset availability at terminals. We denote these relations as "design-balance constraints" and focus on the design-balanced capacitated multicommodity network...... design model, a generalization of the capacitated multicommodity network design model generally used in service network design applications. Both arc-and cycle-based formulations for the new model are presented. The paper also proposes a tabu search metaheuristic framework for the arc-based formulation....... Results on a wide range of network design problem instances from the literature indicate the proposed method behaves very well in terms of computational efficiency and solution quality....
Methodological aspects of network assets accounting
Directory of Open Access Journals (Sweden)
Yuhimenko-Nazaruk I.A.
2017-08-01
Full Text Available The necessity of using innovative tools of processing and representation of information about network assets is substantiated. The suggestions for displaying network assets in accounts are presented. The main reasons for the need to display the network assets in the financial statements of all members of the network structure (the economic essence of network assets as the object of accounting; the non-additional model for the formation of the value of network assets; the internetworking mechanism for the formation of the value of network assets are identified. The stages of accounting valuation of network assets are allocated and substantiated. The analytical table for estimating the value of network assets and additional network capital in accounting is developed. The order of additional network capital reflection in accounting is developed. The method of revaluation of network assets in accounting in the broad sense is revealed. The order of accounting of network assets with increasing or decreasing the number of participants in the network structure is determined.
Intelligent tactical asset allocation support system
Hiemstra, Y.
1995-01-01
This paper presents an advanced support system for Tactical Asset Allocation. Asset allocation explains over 90% of portfolio performance (Brinson, Hood and Beebower, 1988). Tactical asset allocation adjusts a strategic portfolio on the basis of short term market outlooks. The system includes aprediction model that forecasts quarterly excess returns on the S and PSOO, an optimization model that adjusts a user-specified strategic portfolio on thebasis of the excess return forecast, and a compo...
Challenging the myths: the mid-stream asset provider's view
International Nuclear Information System (INIS)
Findlay, R.
1996-01-01
The term 'mid-stream asset business' implies custom processing and gathering, meaning that a gas producer sells his gas at the wellhead, thereby transferring the business of gathering, processing and marketing of the gas and liquids to a third party. The concept is popular in the United States, but is not yet common in Canada. In Canada, producers own the gas gathering and processing systems. The mid-stream asset business was claimed to be more user friendly than the old custom processing business. Three myths about the mid-stream asset business were challenged: (1) all the risk is on the producer, the processor takes no risk, (2) the mid-stream asset business is an expensive means of financing further exploration, and (3) owning and operating gathering and processing facilities is an integral part of a producer's business. Arguments were brought forth to dispel these myths and to emphasize that a processor should be prepared to accept risks associated with the commodity, prices, production and operations. To be operationally effective, the producer's flexibility and strategic advantages must approach the same level as if he were the owner of the facility
Housing price prediction: parametric versus semi-parametric spatial hedonic models
Montero, José-María; Mínguez, Román; Fernández-Avilés, Gema
2018-01-01
House price prediction is a hot topic in the economic literature. House price prediction has traditionally been approached using a-spatial linear (or intrinsically linear) hedonic models. It has been shown, however, that spatial effects are inherent in house pricing. This article considers parametric and semi-parametric spatial hedonic model variants that account for spatial autocorrelation, spatial heterogeneity and (smooth and nonparametrically specified) nonlinearities using penalized splines methodology. The models are represented as a mixed model that allow for the estimation of the smoothing parameters along with the other parameters of the model. To assess the out-of-sample performance of the models, the paper uses a database containing the price and characteristics of 10,512 homes in Madrid, Spain (Q1 2010). The results obtained suggest that the nonlinear models accounting for spatial heterogeneity and flexible nonlinear relationships between some of the individual or areal characteristics of the houses and their prices are the best strategies for house price prediction.
A Financial Market Model Incorporating Herd Behaviour.
Wray, Christopher M; Bishop, Steven R
2016-01-01
Herd behaviour in financial markets is a recurring phenomenon that exacerbates asset price volatility, and is considered a possible contributor to market fragility. While numerous studies investigate herd behaviour in financial markets, it is often considered without reference to the pricing of financial instruments or other market dynamics. Here, a trader interaction model based upon informational cascades in the presence of information thresholds is used to construct a new model of asset price returns that allows for both quiescent and herd-like regimes. Agent interaction is modelled using a stochastic pulse-coupled network, parametrised by information thresholds and a network coupling probability. Agents may possess either one or two information thresholds that, in each case, determine the number of distinct states an agent may occupy before trading takes place. In the case where agents possess two thresholds (labelled as the finite state-space model, corresponding to agents' accumulating information over a bounded state-space), and where coupling strength is maximal, an asymptotic expression for the cascade-size probability is derived and shown to follow a power law when a critical value of network coupling probability is attained. For a range of model parameters, a mixture of negative binomial distributions is used to approximate the cascade-size distribution. This approximation is subsequently used to express the volatility of model price returns in terms of the model parameter which controls the network coupling probability. In the case where agents possess a single pulse-coupling threshold (labelled as the semi-infinite state-space model corresponding to agents' accumulating information over an unbounded state-space), numerical evidence is presented that demonstrates volatility clustering and long-memory patterns in the volatility of asset returns. Finally, output from the model is compared to both the distribution of historical stock returns and the market
A Financial Market Model Incorporating Herd Behaviour.
Directory of Open Access Journals (Sweden)
Christopher M Wray
Full Text Available Herd behaviour in financial markets is a recurring phenomenon that exacerbates asset price volatility, and is considered a possible contributor to market fragility. While numerous studies investigate herd behaviour in financial markets, it is often considered without reference to the pricing of financial instruments or other market dynamics. Here, a trader interaction model based upon informational cascades in the presence of information thresholds is used to construct a new model of asset price returns that allows for both quiescent and herd-like regimes. Agent interaction is modelled using a stochastic pulse-coupled network, parametrised by information thresholds and a network coupling probability. Agents may possess either one or two information thresholds that, in each case, determine the number of distinct states an agent may occupy before trading takes place. In the case where agents possess two thresholds (labelled as the finite state-space model, corresponding to agents' accumulating information over a bounded state-space, and where coupling strength is maximal, an asymptotic expression for the cascade-size probability is derived and shown to follow a power law when a critical value of network coupling probability is attained. For a range of model parameters, a mixture of negative binomial distributions is used to approximate the cascade-size distribution. This approximation is subsequently used to express the volatility of model price returns in terms of the model parameter which controls the network coupling probability. In the case where agents possess a single pulse-coupling threshold (labelled as the semi-infinite state-space model corresponding to agents' accumulating information over an unbounded state-space, numerical evidence is presented that demonstrates volatility clustering and long-memory patterns in the volatility of asset returns. Finally, output from the model is compared to both the distribution of historical stock
A Financial Market Model Incorporating Herd Behaviour
2016-01-01
Herd behaviour in financial markets is a recurring phenomenon that exacerbates asset price volatility, and is considered a possible contributor to market fragility. While numerous studies investigate herd behaviour in financial markets, it is often considered without reference to the pricing of financial instruments or other market dynamics. Here, a trader interaction model based upon informational cascades in the presence of information thresholds is used to construct a new model of asset price returns that allows for both quiescent and herd-like regimes. Agent interaction is modelled using a stochastic pulse-coupled network, parametrised by information thresholds and a network coupling probability. Agents may possess either one or two information thresholds that, in each case, determine the number of distinct states an agent may occupy before trading takes place. In the case where agents possess two thresholds (labelled as the finite state-space model, corresponding to agents’ accumulating information over a bounded state-space), and where coupling strength is maximal, an asymptotic expression for the cascade-size probability is derived and shown to follow a power law when a critical value of network coupling probability is attained. For a range of model parameters, a mixture of negative binomial distributions is used to approximate the cascade-size distribution. This approximation is subsequently used to express the volatility of model price returns in terms of the model parameter which controls the network coupling probability. In the case where agents possess a single pulse-coupling threshold (labelled as the semi-infinite state-space model corresponding to agents’ accumulating information over an unbounded state-space), numerical evidence is presented that demonstrates volatility clustering and long-memory patterns in the volatility of asset returns. Finally, output from the model is compared to both the distribution of historical stock returns and the
Volatility modeling of asset returns | Babayemi | International Journal ...
African Journals Online (AJOL)
This research was carried out using the daily close share price of Nestle Nigeria Plc to identify and model its volatility of returns in the Nigerian Stock Exchange Market. The result of the study showed that basic Generalized Conditionally Heteroskedastic Model (GARCH (1,1)) model (with Gaussian Error Assumptions) best ...
Modelling prices in competitive electricity markets
International Nuclear Information System (INIS)
Bunn, D.W.
2004-04-01
Electricity markets are structurally different to other commodities, and the real-time dynamic balancing of the electricity network involves many external factors. Because of this, it is not a simple matter to transfer conventional models of financial time series analysis to wholesale electricity prices. The rationale for this compilation of chapters from international authors is, therefore, to provide econometric analysis of wholesale power markets around the world, to give greater understanding of their particular characteristics, and to assess the applicability of various methods of price modelling. Researchers and professionals in this sector will find the book an invaluable guide to the most important state-of-the-art modelling techniques which are converging to define the special approaches necessary for unravelling and forecasting the behaviour of electricity prices. It is a high-quality synthesis of the work of financial engineering, industrial economics and power systems analysis, as they relate to the behaviour of competitive electricity markets. (author)
Historical Cost Dan General Price Level Accounting: Analisis Relevansi Indikator Keuangan
-, Meythi; Teresa, Sheffie
2012-01-01
In conventional accounting, financial statements are based on the historical cost principle that assumes that prices (monetary unit) are stable. Conventional accounting recognizes neither changes in the general price level nor changes in the specific price level. Consequently, if there are any changes in purchasing power such as in inflation period, the historical financial statement are not economically relevant and also income is usually overstated, and the fixed assets are usually understa...
Formation of an Integrated Stock Price Forecast Model in Lithuania
Directory of Open Access Journals (Sweden)
Audrius Dzikevičius
2016-12-01
Full Text Available Technical and fundamental analyses are widely used to forecast stock prices due to lack of knowledge of other modern models and methods such as Residual Income Model, ANN-APGARCH, Support Vector Machine, Probabilistic Neural Network and Genetic Fuzzy Systems. Although stock price forecast models integrating both technical and fundamental analyses are currently used widely, their integration is not justified comprehensively enough. This paper discusses theoretical one-factor and multi-factor stock price forecast models already applied by investors at a global level and determines possibility to create and apply practically a stock price forecast model which integrates fundamental and technical analysis with the reference to the Lithuanian stock market. The research is aimed to determine the relationship between stock prices of the 14 Lithuanian companies listed in the Main List by the Nasdaq OMX Baltic and various fundamental variables. Based on correlation and regression analysis results and application of c-Squared Test, ANOVA method, a general stock price forecast model is generated. This paper discusses practical implications how the developed model can be used to forecast stock prices by individual investors and suggests additional check measures.
Application of Markov Model in Crude Oil Price Forecasting
Directory of Open Access Journals (Sweden)
Nuhu Isah
2017-08-01
Full Text Available Crude oil is an important energy commodity to mankind. Several causes have made crude oil prices to be volatile. The fluctuation of crude oil prices has affected many related sectors and stock market indices. Hence, forecasting the crude oil prices is essential to avoid the future prices of the non-renewable natural resources to rise. In this study, daily crude oil prices data was obtained from WTI dated 2 January to 29 May 2015. We used Markov Model (MM approach in forecasting the crude oil prices. In this study, the analyses were done using EViews and Maple software where the potential of this software in forecasting daily crude oil prices time series data was explored. Based on the study, we concluded that MM model is able to produce accurate forecast based on a description of history patterns in crude oil prices.
Analysis of a decision model in the context of equilibrium pricing and order book pricing
Wagner, D. C.; Schmitt, T. A.; Schäfer, R.; Guhr, T.; Wolf, D. E.
2014-12-01
An agent-based model for financial markets has to incorporate two aspects: decision making and price formation. We introduce a simple decision model and consider its implications in two different pricing schemes. First, we study its parameter dependence within a supply-demand balance setting. We find realistic behavior in a wide parameter range. Second, we embed our decision model in an order book setting. Here, we observe interesting features which are not present in the equilibrium pricing scheme. In particular, we find a nontrivial behavior of the order book volumes which reminds of a trend switching phenomenon. Thus, the decision making model alone does not realistically represent the trading and the stylized facts. The order book mechanism is crucial.
The Hierarchical Trend Model for property valuation and local price indices
Francke, M.K.; Vos, G.A.
2002-01-01
This paper presents a hierarchical trend model (HTM) for selling prices of houses, addressing three main problems: the spatial and temporal dependence of selling prices and the dependency of price index changes on housing quality. In this model the general price trend, cluster-level price trends,
Testing the CAPM and Three Factors Model in China: Evidence from the Shanghai Stock Exchange
Wang, Weixi
2015-01-01
Since inception, China’s stock market has grown rapidly and has become one of the most important emerging markets in the world. However, many popular financial media depicts China’s stock market as irrational. Besides, empirical studies on asset pricing in China’s stock market do not provide a consistent conclusion for different periods. This study tests the Capital Asset Pricing Model (CAPM) and Fama-French Three Factors Model in Shanghai Stock Exchange, China. For validity test of the CAPM,...
PID feedback controller used as a tactical asset allocation technique: The G.A.M. model
Gandolfi, G.; Sabatini, A.; Rossolini, M.
2007-09-01
The objective of this paper is to illustrate a tactical asset allocation technique utilizing the PID controller. The proportional-integral-derivative (PID) controller is widely applied in most industrial processes; it has been successfully used for over 50 years and it is used by more than 95% of the plants processes. It is a robust and easily understood algorithm that can provide excellent control performance in spite of the diverse dynamic characteristics of the process plant. In finance, the process plant, controlled by the PID controller, can be represented by financial market assets forming a portfolio. More specifically, in the present work, the plant is represented by a risk-adjusted return variable. Money and portfolio managers’ main target is to achieve a relevant risk-adjusted return in their managing activities. In literature and in the financial industry business, numerous kinds of return/risk ratios are commonly studied and used. The aim of this work is to perform a tactical asset allocation technique consisting in the optimization of risk adjusted return by means of asset allocation methodologies based on the PID model-free feedback control modeling procedure. The process plant does not need to be mathematically modeled: the PID control action lies in altering the portfolio asset weights, according to the PID algorithm and its parameters, Ziegler-and-Nichols-tuned, in order to approach the desired portfolio risk-adjusted return efficiently.
Real options and asset valuation in competitive energy markets
Oduntan, Adekunle Richard
methodologies for gas-fired thermal power plants by factoring in uncertainty from gas supply/consumption imbalance which is usually faced by gas-fired power generators. This source of uncertainty arises because of mismatch between natural gas and electricity wholesale markets. Natural gas markets in North America operate on a day-ahead basis while power plants are dispatched in real time. Inability of a power generator to match its gas supply and consumption in real time, leading to unauthorized gas over-run or under-run, attracts penalty charges from the gas supplier to the extent that the generator can not manage the imbalance through other means. By considering an illustrative power plant operating in Ontario, we show effects of gas-imbalance on dispatch strategies on a daily cycling operation basis and the resulting impact on net revenue. Similarly, we employ the developed valuation framework to value a peaking hydroelectric power plant. This application also builds on previous real options valuation work for peaking hydroelectric power plants by considering their operations in a joint energy and ancillary services market. Specifically, the valuation model is developed to capture the value of a peaking power plant whose owner has the flexibility to participate in a joint operating reserve market and an energy market, which is currently the case in the Ontario wholesale power market. The model factors in water inflow uncertainty into the reservoir forebay of a hydroelectric facility and also considers uncertain energy and operating reserve prices. The switching options considered include (i) a joint energy and operating reserve bid (ii) an energy only bid and (iii) a do nothing (idle) strategy. Being an energy limited power plant, by doing nothing at a decision interval, the power asset operator is able to timeshift scarce water for use at a future period when market situations are expected to be better. Finally, the developed valuation framework was employed to optimize
Efficient Option Pricing under Levy Processes, with CVA and FVA
Directory of Open Access Journals (Sweden)
Jimmy eLaw
2015-07-01
Full Text Available We generalize the Piterbarg (2010 model to include 1 bilateral default risk as in Burgard and Kjaer (2012, and 2 jumps in the dynamics of the underlying asset using general classes of L'evy processes of exponential type. We develop an efficient explicit-implicit scheme for European options and barrier options taking CVA-FVA into account. We highlight the importance of this work in the context of trading, pricing and management a derivative portfolio given the trajectory of regulations.
A queueing theory description of fat-tailed price returns in imperfect financial markets
Lamba, H.
2010-09-01
In a financial market, for agents with long investment horizons or at times of severe market stress, it is often changes in the asset price that act as the trigger for transactions or shifts in investment position. This suggests the use of price thresholds to simulate agent behavior over much longer timescales than are currently used in models of order-books. We show that many phenomena, routinely ignored in efficient market theory, can be systematically introduced into an otherwise efficient market, resulting in models that robustly replicate the most important stylized facts. We then demonstrate a close link between such threshold models and queueing theory, with large price changes corresponding to the busy periods of a single-server queue. The distribution of the busy periods is known to have excess kurtosis and non-exponential decay under various assumptions on the queue parameters. Such an approach may prove useful in the development of mathematical models for rapid deleveraging and panics in financial markets, and the stress-testing of financial institutions.
An Asset Protection Scheme for Banks Exposed to Troubled Loan Portfolios
DEFF Research Database (Denmark)
Grosen, Anders; Jessen, Pernille; Kokholm, Thomas
2014-01-01
We examine a specific portfolio credit derivative, an Asset Protection Scheme (APS), and its applicability as a discretionary regulatory tool to reduce asymmetric information and help restore the capital base of troubled banks. The APS can be a fair-valued contract with an appropriate structure...... of incentives. We apply two alternative multivariate structural default risk models: the classical Gaussian Merton model and a model based on Normal Inverse Gaussian processes. Using a data set on annual farm level data from 1996 to 2009, we use the Danish agricultural sector as a case study and price an APS...... on an agricultural loan portfolio. We compute the economic capital for this loan portfolio with and without an APS. Moreover, we illustrate how model risk in the form of parameter uncertainty is reduced when an APS is attached to the loan portfolio....
Canadian natural gas price debate
International Nuclear Information System (INIS)
Wight, G.
1998-01-01
Sunoco Inc. is a subsidiary of Suncor Energy, one of Canada's largest integrated energy companies having total assets of $2.8 billion. As one of the major energy suppliers in the country, Sunoco Inc has a substantial stake in the emerging trends in the natural gas industry, including the Canadian natural gas price debate. Traditionally, natural gas prices have been determined by the number of pipeline expansions, weather, energy supply and demand, and storage levels. In addition to all these traditional factors which still apply today, the present day natural gas industry also has to deal with deregulation, open competition and the global energy situation, all of which also have an impact on prices. How to face up to these challenges is the subject of this discourse. tabs., figs
Modelling energy spot prices by Lévy semistationary processes
DEFF Research Database (Denmark)
Barndorff-Nielsen, Ole; Benth, Fred Espen; Veraart, Almut
This paper introduces a new modelling framework for energy spot prices based on Lévy semistationary processes. Lévy semistationary processes are special cases of the general class of ambit processes. We provide a detailed analysis of the probabilistic properties of such models and we show how...... they are able to capture many of the stylised facts observed in energy markets. Furthermore, we derive forward prices based on our spot price model. As it turns out, many of the classical spot models can be embedded into our novel modelling framework....
Orphan Drug Pricing: An Original Exponential Model Relating Price to the Number of Patients
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Andrea Messori
2016-10-01
Full Text Available In managing drug prices at the national level, orphan drugs represent a special case because the price of these agents is higher than that determined according to value-based principles. A common practice is to set the orphan drug price in an inverse relationship with the number of patients, so that the price increases as the number of patients decreases. Determination of prices in this context generally has a purely empirical nature, but a theoretical basis would be needed. The present paper describes an original exponential model that manages the relationship between price and number of patients for orphan drugs. Three real examples are analysed in detail (eculizumab, bosentan, and a data set of 17 orphan drugs published in 2010. These analyses have been aimed at identifying some objective criteria to rationally inform this relationship between prices and patients and at converting these criteria into explicit quantitative rules.
Economic analysis of coal price-electricity price adjustment in China based on the CGE model
International Nuclear Information System (INIS)
He, Y.X.; Zhang, S.L.; Yang, L.Y.; Wang, Y.J.; Wang, J.
2010-01-01
In recent years, coal price has risen rapidly, which has also brought a sharp increase in the expenditures of thermal power plants in China. Meantime, the power production price and power retail price have not been adjusted accordingly and a large number of thermal power plants have incurred losses. The power industry is a key industry in the national economy. As such, a thorough analysis and evaluation of the economic influence of the electricity price should be conducted before electricity price adjustment is carried out. This paper analyses the influence of coal price adjustment on the electric power industry, and the influence of electricity price adjustment on the macroeconomy in China based on computable general equilibrium models. The conclusions are as follows: (1) a coal price increase causes a rise in the cost of the electric power industry, but the influence gradually descends with increase in coal price; and (2) an electricity price increase has an adverse influence on the total output, Gross Domestic Product (GDP), and the Consumer Price Index (CPI). Electricity price increases have a contractionary effect on economic development and, consequently, electricity price policy making must consequently consider all factors to minimize their adverse influence.
Extreme-Strike and Small-time Asymptotics for Gaussian Stochastic Volatility Models
Zhang, Xin
2016-01-01
Asymptotic behavior of implied volatility is of our interest in this dissertation. For extreme strike, we consider a stochastic volatility asset price model in which the volatility is the absolute value of a continuous Gaussian process with arbitrary prescribed mean and covariance. By exhibiting a Karhunen-Loève expansion for the integrated variance, and using sharp estimates of the density of a general second-chaos variable, we derive asymptotics for the asset price density for large or smal...
Carbon prices for the next thousand years
Energy Technology Data Exchange (ETDEWEB)
Gerlagh, Reyer [Tilburg Univ. (Netherlands). Dept. of Economics; Liski, Matti [Aalto Univ., Helsinki (Finland). School of Economics
2012-06-15
Climate is a persistent asset, bar none: changes in climate-related stocks have consequences spanning over centuries or possibly millennia to the future. To reconcile the discounting of such far-distant impacts and realism of the shorter-term decisions, we consider hyperbolic time-preferences in a climate-economy model. Time-changing utility discount rates have unexplored general-equilibrium effects: carbon prices exceed the pure carbon externality costs - the Pigouvian tax level - by multiple factors in our quantitative assessment. The climateeconomy model is rich in details but can be solved in closed-form yielding Markov carbon prices dependent on climate system parameters, damage estimates, technology parameters, and both short- and long-term time preferences. The equilibrium time discount rate is endogenous, and it can justify high carbon taxes as advocated by Stern while maintaining the realism of the macroeconomic outcome, thus providing a solution for the dilemma centering the carbon tax-discount rate debate. The welfare ranking of the policy alternatives is unambiguous: enforcing the Pigouvian tax decreases a consistently-defined welfare measure vis-a-vis the Markov equilibrium.
Integrated Space Asset Management Database and Modeling
MacLeod, Todd; Gagliano, Larry; Percy, Thomas; Mason, Shane
2015-01-01
Effective Space Asset Management is one key to addressing the ever-growing issue of space congestion. It is imperative that agencies around the world have access to data regarding the numerous active assets and pieces of space junk currently tracked in orbit around the Earth. At the center of this issues is the effective management of data of many types related to orbiting objects. As the population of tracked objects grows, so too should the data management structure used to catalog technical specifications, orbital information, and metadata related to those populations. Marshall Space Flight Center's Space Asset Management Database (SAM-D) was implemented in order to effectively catalog a broad set of data related to known objects in space by ingesting information from a variety of database and processing that data into useful technical information. Using the universal NORAD number as a unique identifier, the SAM-D processes two-line element data into orbital characteristics and cross-references this technical data with metadata related to functional status, country of ownership, and application category. The SAM-D began as an Excel spreadsheet and was later upgraded to an Access database. While SAM-D performs its task very well, it is limited by its current platform and is not available outside of the local user base. Further, while modeling and simulation can be powerful tools to exploit the information contained in SAM-D, the current system does not allow proper integration options for combining the data with both legacy and new M&S tools. This paper provides a summary of SAM-D development efforts to date and outlines a proposed data management infrastructure that extends SAM-D to support the larger data sets to be generated. A service-oriented architecture model using an information sharing platform named SIMON will allow it to easily expand to incorporate new capabilities, including advanced analytics, M&S tools, fusion techniques and user interface for
An Empirical Comparison of Default Swap Pricing Models
P. Houweling (Patrick); A.C.F. Vorst (Ton)
2002-01-01
textabstractAbstract: In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the
An equivalent marginal cost-pricing model for the district heating market
International Nuclear Information System (INIS)
Zhang, Junli; Ge, Bin; Xu, Hongsheng
2013-01-01
District heating pricing is a core element in reforming the heating market. Existing district heating pricing methods, such as the cost-plus pricing method and the conventional marginal-cost pricing method, cannot simultaneously provide both high efficiency and sufficient investment cost return. To solve this problem, the paper presents a new pricing model, namely Equivalent Marginal Cost Pricing (EMCP) model, which is based on the EVE pricing theory and the unique characteristics of heat products and district heating. The EMCP model uses exergy as the measurement of heating product value and places products from different district heating regions into the same competition platform. In the proposed model, the return on investment cost is closely related to the quoted cost, and within the limitations of the Heating Capacity Cost Reference and the maximum compensated shadow capacity cost, both lower and higher price speculations of heat producers are restricted. Simulation results show that the model can guide heat producers to bid according to their production costs and to provide reasonable returns on investment, which contributes to stimulate the role of price leverage and to promote the optimal allocation of heat resources. - Highlights: • Presents a new district heating pricing model. • Provides both high market efficiency and sufficient investment cost return. • Provides a competition mechanism for various products from different DH regions. • Both of lower and higher price speculations are restricted in the new model
Three-dimensional GIS approach for management of assets
Lee, S. Y.; Yee, S. X.; Majid, Z.; Setan, H.
2014-02-01
Assets play an important role in human life, especially to an organization. Organizations strive and put more effort to improve its operation and assets management. The development of GIS technology has become a powerful tool in management as it is able to provide a complete inventory for managing assets with location-based information. Spatial information is one of the requirements in decision making in various areas, including asset management in the buildings. This paper describes a 3D GIS approach for management of assets. An asset management system was developed by integrating GIS concept and 3D model assets. The purposes of 3D visualization to manage assets are to facilitate the analysis and understanding in the complex environment. Behind the 3D model of assets is a database to store the asset information. A user-friendly interface was also designed for more easier to operate the application. In the application developed, location of each individual asset can be easily tracked according to the referring spatial information and 3D viewing. The 3D GIS approach described in this paper is certainly would be useful in asset management. Systematic management of assets can be carried out and this will lead to less-time consuming and cost-effective. The results in this paper will show a new approach to improve asset management.
Three-dimensional GIS approach for management of assets
International Nuclear Information System (INIS)
Lee, S Y; Yee, S X; Majid, Z; Setan, H
2014-01-01
Assets play an important role in human life, especially to an organization. Organizations strive and put more effort to improve its operation and assets management. The development of GIS technology has become a powerful tool in management as it is able to provide a complete inventory for managing assets with location-based information. Spatial information is one of the requirements in decision making in various areas, including asset management in the buildings. This paper describes a 3D GIS approach for management of assets. An asset management system was developed by integrating GIS concept and 3D model assets. The purposes of 3D visualization to manage assets are to facilitate the analysis and understanding in the complex environment. Behind the 3D model of assets is a database to store the asset information. A user-friendly interface was also designed for more easier to operate the application. In the application developed, location of each individual asset can be easily tracked according to the referring spatial information and 3D viewing. The 3D GIS approach described in this paper is certainly would be useful in asset management. Systematic management of assets can be carried out and this will lead to less-time consuming and cost-effective. The results in this paper will show a new approach to improve asset management
Minimum Price Guarantees In a Consumer Search Model
M.C.W. Janssen (Maarten); A. Parakhonyak (Alexei)
2009-01-01
textabstractThis paper is the first to examine the effect of minimum price guarantees in a sequential search model. Minimum price guarantees are not advertised and only known to consumers when they come to the shop. We show that in such an environment, minimum price guarantees increase the value of
Fuzzy pricing for urban water resources: model construction and application.
Zhao, Ranhang; Chen, Shouyu
2008-08-01
A rational water price system plays a crucial role in the optimal allocation of water resources. In this paper, a fuzzy pricing model for urban water resources is presented, which consists of a multi-criteria fuzzy evaluation model and a water resources price (WRP) computation model. Various factors affecting WRP are comprehensively evaluated with multiple levels and objectives in the multi-criteria fuzzy evaluation model, while the price vectors of water resources are constructed in the WRP computation model according to the definition of the bearing water price index, and then WRP is calculated. With the incorporation of an operator's knowledge, it considers iterative weights and subjective preference of operators for weight-assessment. The weights determined are more rational and the evaluation results are more realistic. Particularly, dual water supply is considered in the study. Different prices being fixed for water resources with different qualities conforms to the law of water resources value (WRV) itself. A high-quality groundwater price computation model is also proposed to provide optimal water allocation and to meet higher living standards. The developed model is applied in Jinan for evaluating its validity. The method presented in this paper offers some new directions in the research of WRP.
A rough multi-factor model of electricity spot prices
International Nuclear Information System (INIS)
Bennedsen, Mikkel
2017-01-01
We introduce a new continuous-time mathematical model of electricity spot prices which accounts for the most important stylized facts of these time series: seasonality, spikes, stochastic volatility, and mean reversion. Empirical studies have found a possible fifth stylized fact, roughness, and our approach explicitly incorporates this into the model of the prices. Our setup generalizes the popular Ornstein–Uhlenbeck-based multi-factor framework of and allows us to perform statistical tests to distinguish between an Ornstein–Uhlenbeck-based model and a rough model. Further, through the multi-factor approach we account for seasonality and spikes before estimating – and making inference on – the degree of roughness. This is novel in the literature and we present simulation evidence showing that these precautions are crucial for accurate estimation. Lastly, we estimate our model on recent data from six European energy exchanges and find statistical evidence of roughness in five out of six markets. As an application of our model, we show how, in these five markets, a rough component improves short term forecasting of the prices. - Highlights: • Statistical modeling of electricity spot prices • Multi-factor decomposition • Roughness • Electricity price forecasting
Penalty methods for the numerical solution of American multi-asset option problems
Nielsen, Bjørn Fredrik; Skavhaug, Ola; Tveito, Aslak
2008-12-01
We derive and analyze a penalty method for solving American multi-asset option problems. A small, non-linear penalty term is added to the Black-Scholes equation. This approach gives a fixed solution domain, removing the free and moving boundary imposed by the early exercise feature of the contract. Explicit, implicit and semi-implicit finite difference schemes are derived, and in the case of independent assets, we prove that the approximate option prices satisfy some basic properties of the American option problem. Several numerical experiments are carried out in order to investigate the performance of the schemes. We give examples indicating that our results are sharp. Finally, the experiments indicate that in the case of correlated underlying assets, the same properties are valid as in the independent case.
EXPLANATORY MODEL OF SPOT PRICE OF IRON ORE
Directory of Open Access Journals (Sweden)
Juan Enrique Villalva A.
2015-11-01
Full Text Available The objective of this study was to construct an explanatory model of the spot price of iron ore in the international market. For this, the method of multiple linear regressions was used. As a dependent variable, the spot price of iron ore (62% Fe China Tianjin port was taken, between 2010 and 2013. As independents variables were taken seven variables of international iron ore market. The resulting model includes variables: Iron ore inventory in Chinese ports, Baltic Dry Index (BDI, Iron ore exports from Brazil & Australia and Chinese Rebar Steel Price, as explanatory variables of the behavior of the spot price of iron ore in the international market. The model has an adjusted coefficient of determination R2 of 0.90, and was validated by comparing its predictions vs. known values of 2014.
Problems with Cash and Other Non-Operating Assets Value in the Process of Valuing Company
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Piotr Szczepankowski
2007-12-01
Full Text Available In economic practice the process of valuing enterprises is based on potential earnings from companies operating assets ñ operating fixed assets and operating working capital. Cash and other non-operating assets (mainly financial are treated as unproductive, non-income assets. Eventually, in process of pricing their current, accounting value is added to income value of enterprise or cash is treated as source for quick covering the debts of firm, what of course indirectly improve for better value of equity (the lower financial risk. Not taking into account the profitable influence of cash value and other non-operating assets can negatively affect on result of final value of enterprise, reducing it. In the article two alternative approaches (separate and inclusive of cash value is presented. Also main determinants of estimating value of cash are described as well as potential threats of its valuation.
Trades, quotes and prices financial markets under the microscope
Bouchaud, Jean-Philippe; Donier, Jonathan; Gould, Martin
2018-01-01
The widespread availability of high-quality, high-frequency data has revolutionised the study of financial markets. By describing not only asset prices, but also market participants' actions and interactions, this wealth of information offers a new window into the inner workings of the financial ecosystem. In this original text, the authors discuss empirical facts of financial markets and introduce a wide range of models, from the micro-scale mechanics of individual order arrivals to the emergent, macro-scale issues of market stability. Throughout this journey, data is king. All discussions are firmly rooted in the empirical behaviour of real stocks, and all models are calibrated and evaluated using recent data from Nasdaq. By confronting theory with empirical facts, this book for practitioners, researchers and advanced students provides a fresh, new, and often surprising perspective on topics as diverse as optimal trading, price impact, the fragile nature of liquidity, and even the reasons why people trade a...
Palm oil price forecasting model: An autoregressive distributed lag (ARDL) approach
Hamid, Mohd Fahmi Abdul; Shabri, Ani
2017-05-01
Palm oil price fluctuated without any clear trend or cyclical pattern in the last few decades. The instability of food commodities price causes it to change rapidly over time. This paper attempts to develop Autoregressive Distributed Lag (ARDL) model in modeling and forecasting the price of palm oil. In order to use ARDL as a forecasting model, this paper modifies the data structure where we only consider lagged explanatory variables to explain the variation in palm oil price. We then compare the performance of this ARDL model with a benchmark model namely ARIMA in term of their comparative forecasting accuracy. This paper also utilize ARDL bound testing approach to co-integration in examining the short run and long run relationship between palm oil price and its determinant; production, stock, and price of soybean as the substitute of palm oil and price of crude oil. The comparative forecasting accuracy suggests that ARDL model has a better forecasting accuracy compared to ARIMA.
Directory of Open Access Journals (Sweden)
David C. Ling
2013-08-01
Full Text Available We examine the impact of heterogeneous investors with asymmetric bargaining positions on transaction prices in private commercial real estate markets. Using a dataset that contains nearly 100,000 commercial real estate transactions during 1997-2009, we examine the extent to which common conditions of sale and buyer characteristics affect bargaining power and negotiated prices. We find that tax-motivated buyers seeking to complete a delayed Section 1031 exchange pay an average price premium of 12.5% when purchasing smaller properties. However, these price premiums for exchange motivated buyers are not observed among more expensive properties. We find strong evidence that out-of-state buyers pay significantly more (8 - 11% premium for commercial properties than in-state buyers. Consistent with our expectations, we find that sellers of distressed properties negotiate significantly lower transaction prices (13 - 15% discount than sellers of non-distressed properties, all else equal. Finally, we find evidence that REITs pay price premiums between 14 - 16% for office and industrial and retail properties. Our results strongly support the notion that relative bargaining power influences negotiated transaction prices.
Valuing carbon assets for high-tech with application to the wind energy industry
International Nuclear Information System (INIS)
Han, Liyan; Liu, Yang; Lin, Qiang; Huang, Gubo
2015-01-01
In contrast to the traditional methods for high-tech evaluation, we introduce a new, more active idea for considering the carbon asset effect, in addition to the economic and technological considerations for strategic significance. The method proposed in this paper considers a reduced amount of carbon emissions, less than that of the current industry baseline, to be an asset that is beneficial to a firm that adopts a new technology. The measured carbon asset values vary across different technologies, in different industries and over time. The new method is applied to the valuing of wind energy technology and uses the Weibull distribution to estimate the wind energy capacity and a concrete sensitivity analysis. These applications support the validity of the new method and show that the impact of the fluctuations of carbon sinks on the values of carbon assets is significantly greater than that of volatility in the production output. The paper also presents some policy recommendations based on the results. - Highlights: • Carbon asset dimension for high-tech evaluation. • Valuing wind energy technology by Weibull distribution. • Greater impact of the carbon sink price on the carbon asset value than that of production output. • The environmental risk could be measured based on the carbon asset assessment.
Probabilistic Electricity Price Forecasting Models by Aggregation of Competitive Predictors
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Claudio Monteiro
2018-04-01
Full Text Available This article presents original probabilistic price forecasting meta-models (PPFMCP models, by aggregation of competitive predictors, for day-ahead hourly probabilistic price forecasting. The best twenty predictors of the EEM2016 EPF competition are used to create ensembles of hourly spot price forecasts. For each hour, the parameter values of the probability density function (PDF of a Beta distribution for the output variable (hourly price can be directly obtained from the expected and variance values associated to the ensemble for such hour, using three aggregation strategies of predictor forecasts corresponding to three PPFMCP models. A Reliability Indicator (RI and a Loss function Indicator (LI are also introduced to give a measure of uncertainty of probabilistic price forecasts. The three PPFMCP models were satisfactorily applied to the real-world case study of the Iberian Electricity Market (MIBEL. Results from PPFMCP models showed that PPFMCP model 2, which uses aggregation by weight values according to daily ranks of predictors, was the best probabilistic meta-model from a point of view of mean absolute errors, as well as of RI and LI. PPFMCP model 1, which uses the averaging of predictor forecasts, was the second best meta-model. PPFMCP models allow evaluations of risk decisions based on the price to be made.