The evaluation of derivatives of double barrier options of the Bessel processes by methods of spectral analysis
-
Received July 10, 2017;Accepted August 21, 2017;Published October 11, 2017
-
Author(s)Link to ORCID Index: https://orcid.org/0000-0002-9440-1467Link to ORCID Index: https://orcid.org/0000-0002-5811-9288
-
DOIhttp://dx.doi.org/10.21511/imfi.14(3).2017.12
-
Article InfoVolume 14 2017, Issue #3, pp. 126-134
- TO CITE АНОТАЦІЯ
-
Cited by1 articlesJournal title: Statistics & Probability LettersArticle title: Double-barrier option pricing equations under extended geometric Brownian motion with bankruptcy riskDOI: 10.1016/j.spl.2022.109383Volume: 184 / Issue: / First page: 109383 / Year: 2022Contributors: Yu-Sheng Hsu, Pei-Chun Chen, Cheng-Hsun Wu
- 975 Views
-
268 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
The paper deals with the spectral methods to calculate the value of the double barrier option generated by the Bessel diffusion process. This technique enables us to calculate the option price in the form of a Fourier-Bessel series with the corresponding ratio. The autors propose a simple method to estimate options using the Green’s expansion function for boundary value problem for a singular parabolic equation. Thus, the accuracy of the estimation coincides with the accuracy of the convergence of the Fourier-Bessel series.
In this paper, the authors use the spectral theory to calculate the price of derivatives of financial assets considering that the processes described are by Markov and can be considered in Hilbert spaces. In this work, the authors use the diffusion process to find derivatives prices by introducing them through the Bessel functions of first kind. They also examine the Sturm-Liouville problem where the boundary conditions utilize the Bessel functions and their derivatives. All assumptions lead to analytical formulae that are consistent with the empirical evidence and, when implemented in practice, reflect adequately the passage of processes on stock markets.
The authors also focus on the financial flows generated by Bessel diffusion processes which are presented in the system of Bessel functions of the first order under the condition that the linear combination of the flow and its spatial derivative are taken into account. Such a presentation enables us to calculate the market value of a share portfolio, provides the measurement of internal volatility in the market at any given time, and allows us to investigate the dynamics of the stock market.
The splitting of Green’s function in the system of Bessel functions is presented by an analytical formula which is convenient for calculating the price level of options.
- Keywords
-
JEL Classification (Paper profile tab)G11, G13, G32
-
References18
-
Tables0
-
Figures1
-
- Figure 1. Graph of Green’s function as density distribution at L = 90, H = 120, ξ = 0.5
-
- Black, F., & Scholes, M. (1973). The Pricing of Options and Other Corporate Liabilities. Journal of Political Economy. 81(3), 637- 654.
- Carr, P., & Linetsky, V. (2006). A Jump to Default Extended CEV Model: An Application of Bessel Processes. Finance and Stochastics, 10, 303-330.
- Coffman, E. G., Puhalskii, A. A., & Reiman, M. I. (1998). Polling systems in heavy traffic: a Bessel process limit. Math. Operat. Res., 23, 257-304.
- Cox, J. C., Ross, S., Rubinstein, M. (1976). The Valuation of options for alternative stochastic processes. Journal of Financial economics, 3, 145-166.
- Cox, J. C., Ingersoll, J. E., Ross, S. A. (1985). A theory of the term structure of interest rates. Econometrica, 53(2), 385-408.
- Davydov, D., & Linetsky, V. (2003). Pricing options on scalar diffusions: an eigenfunction expansion approach. Operat. Res., 51, 185-209.
- Going-Jaeschke, A., & Yor, M. (2003). A Survey and Some Generalizations of Bessel Processes. Bernoulli, 9, 313-349.
- Gorovoi, V., & Linetsky, V. (2004). Black’s model of interest rates as options, eigenfunction expansions and japanese interest rates. Mathematical finance, 14(1), 49-78.
- Hull, J., & White, A. (1987). The pricing of options on assets with stochastic volatilities. The Journal of Finance, 42(2), 281-300.
- Lebedev, N. N. (1972). Special Functions and Their Applications. New York: Dover.
- Linetsky, V. (2004). The Spectral Representation of Bessel Processes with Drift: Applications in Queueing and Finance. Journal of Applied Probability, 41, 327-344.
- Linetsky, V. (2007). Chapter 6 spectral methods in derivatives pricing. In J. R. Birge, V. Linetsky (Eds.), Financial Engineering, 15, of Handbooks in Operations Research and Management Science (pp. 223-299). Elsevier.
- Lorig, M. J. (2014). Pricing Derivatives on Multiscale Diffusions: an Eigenfunction Expansion Approach. Mathematical Finance, 24(2), 331-363.
- Mendoza-Arriaga, R., Carr, P., & Linetsky, V. (2010). Time-changed Markov processes in unified credit-equity modeling. Mathematical Finance, 20, 527-569.
- Merton, R. C. (1973). Theory of Rational Option Pricing. Bell Journal of Economics and Management Science, 4, 141-183.
- Sharpe, W. (1985). Factor Models, CAPMs and APT. Journal of Portfolio Management, 21-25.
- Vladimirov, V. S. (1981). Equations of Mathematical Physics. Moscow: Science, 512 p.
- Yor, M. (1984). On square-root boundaries for Bessel processes, and pole-seeking Brownian motion. In A. Truman, D. Williams (Eds.), Stochastic Analysis and Applications (Lecture Notes Math. 1095) (pp. 100-107). Springer, Berlin.
-
Spectral study of options based on CEV model with multidimensional volatility
Investment Management and Financial Innovations Volume 15, 2018 Issue #1 pp. 18-25 Views: 1529 Downloads: 223 TO CITE АНОТАЦІЯThis article studies the derivatives pricing using a method of spectral analysis, a theory of singular and regular perturbations. Using a risk-neutral assessment, the authors obtain the Cauchy problem, which allows to calculate the approximate price of derivative assets and their volatility based on the diffusion equation with fast and slow variables of nonlocal volatility, and they obtain a model with multidimensional stochastic volatility. Applying a spectral theory of self-adjoint operators in Hilbert space and a theory of singular and regular perturbations, an analytic formula for approximate asset prices is established, which is described by the CEV model with stochastic volatility dependent on l-fast variables and r-slowly variables, l ≥ 1, r ≥ 1, l ∈ N, r ∈ N and a local variable. Applying the Sturm-Liouville theory, Fredholm’s alternatives, as well as the analysis of singular and regular perturbations at different time scales, the authors obtained explicit formulas for derivatives price approximations. To obtain explicit formulae, it is necessary to solve 2l Poisson equations.
-
Managing the equity risk using Short Put Ladder strategy by barrier options
Investment Management and Financial Innovations Volume 16, 2019 Issue #4 pp. 133-145 Views: 1051 Downloads: 188 TO CITE АНОТАЦІЯThe main aim of the paper is to measure hedging efficiency using the Short Put Ladder strategy formed by barrier options in the equity market. The researchers hedge full protection against price’s drop, combining the European down and knock-in put options with the lowest exercise price and vanilla or barrier put options with the higher exercise prices. The authors chose the analyzed alternatives according to the requirement of the zero-cost strategy. The aim of the investigated hedging variants is to secure the minimum constant selling price for the underlying asset’s price drop. Theoretical results of this approach were applied in the equity market, i.e., SPDR S&P 500 ETF. The authors analyzed and compared all hedging variants to each other, however, only the selected techniques were presented in the paper. The findings reveal that the barrier options used for managing the equity risk produce significant reductions of that risk. The right combination of options with the strike prices and the barrier levels wisely selected plays a significant role in risk elimination. Finally, according to the findings, the recommendations for potential investors are introduced.
-
The organizational-economic aspects of land relations provision by administrative-territorial reform in Ukraine
Galyna Liakhovych , Olha Pavlykivska , Lesia Marushchak , Oleksandra Kilyar , Svitlana Shpylyk doi: http://dx.doi.org/10.21511/ppm.17(2).2019.37Problems and Perspectives in Management Volume 17, 2019 Issue #2 pp. 479-492 Views: 687 Downloads: 181 TO CITE АНОТАЦІЯThe stable development of Ukraine as the agricultural state actualizes a complex of economic, organizational and legal issues, which are concerned with an implementation of the land relationship. The maximum usage of rental tools is the most effective among the existing budget filling mechanisms. The aim of the article is to conduct a research of land relationship by mechanisms of improving the agricultural lands rent management. The object of a study is the interaction of state institutions at different levels of land lease management. The basis of the study is a cognitive method in the patterns of development of the land relationship. Therefore, in the article, the alternative version of the organizational and economic mechanism for the implementation of land relations was proposed with the aim to improve the existing practice that will facilitate the additional financing of local self-government authorities. At the state regulation level, it is proposed to create an informational electronic database, which should display cadastral numbers and location of land plots, as well as information about land plot owners. Measures of control should be fulfilled by such state authorities as State Geo Cadastre and Ministry of Justice of Ukraine. In order to follow a principle of openness, it has been proved that this database should be public. As a result, methodological and organizational tools are based on the algorithm of lease relationship management as the main source of budget filling for local self-government authorities and main tasks for implementation of administrative-territorial reform that were declared by the government.