Ito Excursion Theory. Calum G. Turvey Cornell University
|
|
- Isaac Singleton
- 7 years ago
- Views:
Transcription
1 Ito Excursion Theory Calum G. Turvey Cornell University
2 Problem Overview Times series and dynamics have been the mainstay of agricultural economic and agricultural finance for over 20 years. Much of the literature makes natural assumptions about dynamics and spends a great deal of time searching for unit roots without much further remark on what is implied by acceptance or rejections of a unit root. Rejection of a unit root simply means that variance of time series is not a function with time Not the same as the variance ratio property that the variance increases linearly in time for a Brownian motion
3 Quantitative Finance in Agriculture There is a need to better understand dynamics in agricultural economics Financial engineering and Ito s lemma is critical for modeling random variables over time From basic pricing of options to valuing farm programs (Turvey et al 2014) and the structure of markets (Assa 2015) Particularly useful for Monte Carl simulation But patterns in time series are also important to understand Mean regression or ergodic systems Persistent or long-memory systems Brownian vs Fractional Brownian motion.
4 Ito Excursion Theory we investigate how Itô s excursion theory can be usefully applied to economic time series data (Itô 2007) We relate excursion theory to geometric and fractional Brownian motion and the Hurst coefficient (also important for valuing and modeling exotic path dependant op[tions) We then calculate the Hurst coefficient for all stocks on the DOW 30, S&P 500 and Russell 2000, showing the distribution of Hurst measures and relating them statistically to excursions. Have also examined ag commodities provide a nice and intuitive link between Brownian motion and excursions, an application and consequence that we have not seen before
5 Ito Excursion Theory Itô s excursion theory is a probabilistic tool that can be applied to any continuous-time (near) Markov process with a recurrent state recurrent state -at some unknown and random point (time) in the future it will return to its original point (state). Excursion theory allows one to evaluate, measure, and quantify certain characteristic of the stochastic process and can be developed with great generality
6 A Simple Understanding of Excursion (Rogers 1989) game with a fair coin repeatedly tossed, with 1 assigned to a score each time the coin falls heads and -1 each time the coin falls tails. TT 0 = 0, TT 1 = 6, TT 2 = 10, TT 3 = 12, TT 4 = 18, TT 5 = 20 ξξ 1 = YY 0, YY 1, YY 2, YY 3, YY 4, YY 5, YY 6 ξξ 2 = YY 6, YY 7, YY 8, YY 9, YY 10 ξξ 3 = YY 10, YY 11, YY 12 ξξ 4 = {YY 12, YY 13, YY 14, YY 15, YY 16, YY 17, YY 18 } ξξ 5 = YY 18, YY 19, YY 20
7 Purpose of Ito Excursion Theory purpose of Itô s excursion theory is to describe the evolution of a (Markov) process in terms of its behavior between visits to a particular point m in the state space. E.g. probability distribution about the number of days that the security price returns to reference price. local time LL mm tt = ll is defined as the number of visits to point m up to time t. In the coin toss example, time is equal to 20 and LL 0 20 = 5 excluding the origin. Stopping Time: counts the number of excursions of type γ that occurs before the local time reaches l. It is a simple Poisson process
8 Simulated Random Walks Example Paths of Random Walk Canola Cash Price Cash Random 1 Random 2 Random Day
9 Binomial (Poisson) Distribution of first 10 Excursions in Simulated Random Walk (iter=30k)
10 Some Propositions about the Relationship between excursion theory and fractional Brownian motion A stationary autoregressive process AR(q>=1) may have multiple roots. If at least one root is a unit root it is a stationary process (extended proof from Assa and Turvey 2015 forthcoming) A time series with AR(q>1) is a (quasi) fractional Brownian motion with excursion patterns determined by nature of lags Most time series can be modeled using an autoregressive process with econometric (regression) techniques If Y ay ay ay ε q i= 1 t= 1 t 1+ 2 t q t q+ t a i = 1 at least one real root must be a unit root Then if q i= 1 a i 1 it has no unit root and the time series will converge to zero or infinite
11 The fractional Brownian motion dx αxdt xσ 2H = + dz dz =ε t H=0.5 : geometric Brownian motion H>0.5 : Persistence/long memory (Black noise) H<0.5 : Antipersistence/mean-reverting (Pink to White noise) H is the Hurst Coefficient (estimated from Variance ratio) [ ] = σ E xt ( ) xt ( ) ( t t) H Variance and Covariance [ ][ ] x { } = σ + E xt ( ) x(0) xt ( t) xt ( ) 0.5 ( t t) H t H t H 11
12 Estimated H, from simulation and from R/S calculation, with null Hypothesis Ho= 0.5 (GBM) Days/Contract (R/S) Alberta Barley price coffee price a,b,c cocoa price a,b,c a,b,c corn price a,b a a a,b Feeder Cattle price a a,b,c a,b,c Fluid Milk price Lean Hogs price a a,b,c a,b,c live cattle price a,b,c a,b,c a,b,c a,b,c a,b,c oats price a,b a,b a,b a,b,c orange juice price a,b,c a,b,c Pork Bellies price a a a,b,c a,b Rapeseed canola price a a a,b,c a,b Soybeans price a,b a,b a,b a,b a,b Sugar price a,b,c a,b,c a,b,c a,b,c wheat price a,b,c a,b,c a,b,c a,b,c a,b,c Winnipeg oats price a,b,c Winnipeg Wheat price a,b a a a a,b
13 The following graphs Illustrate by simulation how AR(q>1) processes of various lags generate non-unique quasi-fractional Brownian Motion Not how the excursion patterns for each process is unique Hurst Coefficients <0.5 reverse quickly with small excursions Hurst coefficients > 0.5 are persistence and with positive memory in the system show larger excursion patterns as H increases.
14 Geometric Brownian Motion, H=0.5, y = 1.0y t 1 + ε 14
15 Fractional Brownian Motion, H=0.4 y = 0.7 y + 0.2y + 0.1y + ε t 1 t 2 t 3 15
16 Fractional Brownian Motion, H=0.3, y = 0.4y + 0.2y + 0.4y + ε t 1 t 2 t 3 16
17 Fractional Brownian Motion, H=0.6, y = 1.4y 0.3y 0.1y + ε t 1 t 2 t 3 17
18 Fractional Brownian Motion, H=0.7, y = 1.5y 0.3y 0.2y + ε t 1 t 2 t 3 18
19 Time Path of Nonstationary Series,to Zero y = 1.0y 0.1y + ε t 1 t 2 19
20 Time Path of Nonstationary Series, to Infinite y = 1.0y + 0.1y + ε t 1 t 2 20
21 Dynamics of the excursion reference level. All simulations start at a base level of For all simulations, we computed the mean values and used these for the reference levels. The figure shows that the mean reference levels increase as H increases
22 Dynamics of the stopping natural time. The vertical axis measures the average time required for each process to complete 10 excursions across 30,000 replications. As expected the mean stopping natural time increases with Hurst. Mean Stopping Natural Time Stopping Natural Time H01 H02 H03 H04 H05 H06 H07 H08 H09 Hurst Exponent
23 Dynamics of the overall local time. The vertical axis measures the number of time the excursion crosses the reference point. As expected, the number of excursions in the simulated 2,150 step path is much higher for low Hurst than high Hurst. 250 Overall Local Time Mean Overall Local Time H01 H02 H03 H04 H05 H06 H07 H08 H09 Hurst Exponent
24 Relationship between Hurst exponent and mean excursion measure. Hurst exponent is measured on the vertical axis and excursion length is measured on the horizontal axis. The solid line is an exponential fit with R-squared of 0.78 showing that short excursion lengths are dominated by low Hurst, while high Hurst series are often associated with longer excursions 1 Corresponding Hurst Exponent with Highest Mean Count in Each Bin Hurst Exponent y = ln(x) R² = Bin (Excursion Length)
25 Further tests using stock market data.. Stock market gives many observations to test distributional assumptions Russel 2500, Standard and Poor, Dow Jones 2,023 time series with daily observations
26 Hurst coefficients and excursion measures for 2,023 stocks Local Time measures length of excursion Stopping time measures number of days for 10 excursions R2500 SPX DJIA Weighted Average Count 1, ,023 Hurst Coefficient Minimum Maximum Average Standard Deviations % > H > % > H > % > H > Overall Local Time Minimum Maximum Average Standard Deviations Stopping Natural Time (Days) Minimum Maximum 2,149 2,149 2,149 2, Average Standard Deviations
27 Frequency Distribution of Hurst Coefficients for DOW, S&P 500 and Russel Frequency DOW S&P Russel
28 Further Results For R2500, on average a 1% increase in Hurst value will decrease overall local time by %. For the SPX, this elasticity measure is % DJIA it is %. Hence, for a fixed sample size, the overall local time decreases as Hurst increases. We do not find strong a relationship for stopping time for the R2500 is and significant, which suggests that on average a 1% increase in Hurst will increase the stopping natural time by around 1%. We find very strong inverse relationship between stopping time and local time ( a tautology)
29 Conclusions and Discussion From an agricultural finance and risk management point of view advancing concepts in quantitative finance is important Understanding dynamics to understand price movements Modeling underlying processes Ito s lemma Recognizing that AR(q>1) models are quasi fractional is important in interpreting commodity pricing model. Part and parcel to this is drilling down to basic underlying structure Excursions Local time and stopping time Randomness is about things that are random and long excursions occur with lower frequency
30 Conclusions and Discussion Traders, insurers, farmers, researchers seem surprised when markets make a long term departure Long positive excursions are natural occurrences in a random walk More likely in persistent series (H> 0.5) Less likely in mean reverting processes (H<0.5) These things are natural and their occurrence says nothing about inefficient markets. A bubble is an excursion; it is special because it is rare, but the existence of a bubble says nothing about market efficiency. Bubbles are natural, periodic, excursions that are fully captured in a Brownian motion
PITFALLS IN TIME SERIES ANALYSIS. Cliff Hurvich Stern School, NYU
PITFALLS IN TIME SERIES ANALYSIS Cliff Hurvich Stern School, NYU The t -Test If x 1,..., x n are independent and identically distributed with mean 0, and n is not too small, then t = x 0 s n has a standard
More informationFinancial Market Efficiency and Its Implications
Financial Market Efficiency: The Efficient Market Hypothesis (EMH) Financial Market Efficiency and Its Implications Financial markets are efficient if current asset prices fully reflect all currently available
More informationIEOR 6711: Stochastic Models I Fall 2012, Professor Whitt, Tuesday, September 11 Normal Approximations and the Central Limit Theorem
IEOR 6711: Stochastic Models I Fall 2012, Professor Whitt, Tuesday, September 11 Normal Approximations and the Central Limit Theorem Time on my hands: Coin tosses. Problem Formulation: Suppose that I have
More informationMARKETS, INFORMATION AND THEIR FRACTAL ANALYSIS. Mária Bohdalová and Michal Greguš Comenius University, Faculty of Management Slovak republic
MARKETS, INFORMATION AND THEIR FRACTAL ANALYSIS Mária Bohdalová and Michal Greguš Comenius University, Faculty of Management Slovak republic Abstract: We will summarize the impact of the conflict between
More informationTesting against a Change from Short to Long Memory
Testing against a Change from Short to Long Memory Uwe Hassler and Jan Scheithauer Goethe-University Frankfurt This version: January 2, 2008 Abstract This paper studies some well-known tests for the null
More informationProbability Calculator
Chapter 95 Introduction Most statisticians have a set of probability tables that they refer to in doing their statistical wor. This procedure provides you with a set of electronic statistical tables that
More informationTesting against a Change from Short to Long Memory
Testing against a Change from Short to Long Memory Uwe Hassler and Jan Scheithauer Goethe-University Frankfurt This version: December 9, 2007 Abstract This paper studies some well-known tests for the null
More informationA Sarsa based Autonomous Stock Trading Agent
A Sarsa based Autonomous Stock Trading Agent Achal Augustine The University of Texas at Austin Department of Computer Science Austin, TX 78712 USA achal@cs.utexas.edu Abstract This paper describes an autonomous
More informationSimple approximations for option pricing under mean reversion and stochastic volatility
Simple approximations for option pricing under mean reversion and stochastic volatility Christian M. Hafner Econometric Institute Report EI 2003 20 April 2003 Abstract This paper provides simple approximations
More informationE3: PROBABILITY AND STATISTICS lecture notes
E3: PROBABILITY AND STATISTICS lecture notes 2 Contents 1 PROBABILITY THEORY 7 1.1 Experiments and random events............................ 7 1.2 Certain event. Impossible event............................
More informationPricing Corn Calendar Spread Options. Juheon Seok and B. Wade Brorsen
Pricing Corn Calendar Spread Options by Juheon Seok and B. Wade Brorsen Suggested citation format: Seok, J., and B. W. Brorsen. 215. Pricing Corn Calendar Spread Options. Proceedings of the NCCC-134 Conference
More informationCS 522 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options
CS 5 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options 1. Definitions Equity. The common stock of a corporation. Traded on organized exchanges (NYSE, AMEX, NASDAQ). A common
More informationBinomial lattice model for stock prices
Copyright c 2007 by Karl Sigman Binomial lattice model for stock prices Here we model the price of a stock in discrete time by a Markov chain of the recursive form S n+ S n Y n+, n 0, where the {Y i }
More informationAppendix 1: Time series analysis of peak-rate years and synchrony testing.
Appendix 1: Time series analysis of peak-rate years and synchrony testing. Overview The raw data are accessible at Figshare ( Time series of global resources, DOI 10.6084/m9.figshare.929619), sources are
More informationThe Power of the KPSS Test for Cointegration when Residuals are Fractionally Integrated
The Power of the KPSS Test for Cointegration when Residuals are Fractionally Integrated Philipp Sibbertsen 1 Walter Krämer 2 Diskussionspapier 318 ISNN 0949-9962 Abstract: We show that the power of the
More informationStephane Crepey. Financial Modeling. A Backward Stochastic Differential Equations Perspective. 4y Springer
Stephane Crepey Financial Modeling A Backward Stochastic Differential Equations Perspective 4y Springer Part I An Introductory Course in Stochastic Processes 1 Some Classes of Discrete-Time Stochastic
More informationNumerical Methods for Option Pricing
Chapter 9 Numerical Methods for Option Pricing Equation (8.26) provides a way to evaluate option prices. For some simple options, such as the European call and put options, one can integrate (8.26) directly
More informationSimple Linear Regression Inference
Simple Linear Regression Inference 1 Inference requirements The Normality assumption of the stochastic term e is needed for inference even if it is not a OLS requirement. Therefore we have: Interpretation
More informationWorking Papers. Cointegration Based Trading Strategy For Soft Commodities Market. Piotr Arendarski Łukasz Postek. No. 2/2012 (68)
Working Papers No. 2/2012 (68) Piotr Arendarski Łukasz Postek Cointegration Based Trading Strategy For Soft Commodities Market Warsaw 2012 Cointegration Based Trading Strategy For Soft Commodities Market
More informationPeople have thought about, and defined, probability in different ways. important to note the consequences of the definition:
PROBABILITY AND LIKELIHOOD, A BRIEF INTRODUCTION IN SUPPORT OF A COURSE ON MOLECULAR EVOLUTION (BIOL 3046) Probability The subject of PROBABILITY is a branch of mathematics dedicated to building models
More informationEffects of index-fund investing on commodity futures prices
1/33 Effects of index-fund investing on commodity futures prices James Hamilton 1 Jing Cynthia Wu 2 1 University of California, San Diego 2 University of Chicago, Booth School of Business 2/33 Commodity
More informationChapter 3 RANDOM VARIATE GENERATION
Chapter 3 RANDOM VARIATE GENERATION In order to do a Monte Carlo simulation either by hand or by computer, techniques must be developed for generating values of random variables having known distributions.
More information5. Continuous Random Variables
5. Continuous Random Variables Continuous random variables can take any value in an interval. They are used to model physical characteristics such as time, length, position, etc. Examples (i) Let X be
More informationOverview of Monte Carlo Simulation, Probability Review and Introduction to Matlab
Monte Carlo Simulation: IEOR E4703 Fall 2004 c 2004 by Martin Haugh Overview of Monte Carlo Simulation, Probability Review and Introduction to Matlab 1 Overview of Monte Carlo Simulation 1.1 Why use simulation?
More informationNon-Stationary Time Series andunitroottests
Econometrics 2 Fall 2005 Non-Stationary Time Series andunitroottests Heino Bohn Nielsen 1of25 Introduction Many economic time series are trending. Important to distinguish between two important cases:
More informationSTT315 Chapter 4 Random Variables & Probability Distributions KM. Chapter 4.5, 6, 8 Probability Distributions for Continuous Random Variables
Chapter 4.5, 6, 8 Probability Distributions for Continuous Random Variables Discrete vs. continuous random variables Examples of continuous distributions o Uniform o Exponential o Normal Recall: A random
More informationChicago Booth BUSINESS STATISTICS 41000 Final Exam Fall 2011
Chicago Booth BUSINESS STATISTICS 41000 Final Exam Fall 2011 Name: Section: I pledge my honor that I have not violated the Honor Code Signature: This exam has 34 pages. You have 3 hours to complete this
More informationLOGNORMAL MODEL FOR STOCK PRICES
LOGNORMAL MODEL FOR STOCK PRICES MICHAEL J. SHARPE MATHEMATICS DEPARTMENT, UCSD 1. INTRODUCTION What follows is a simple but important model that will be the basis for a later study of stock prices as
More informationChapter 2 Mean Reversion in Commodity Prices
Chapter 2 Mean Reversion in Commodity Prices 2.1 Sources of Mean Reversion In this chapter, we discuss the sources, empirical evidence and implications of mean reversion in asset prices. As for the sources
More informationChapter 9: Univariate Time Series Analysis
Chapter 9: Univariate Time Series Analysis In the last chapter we discussed models with only lags of explanatory variables. These can be misleading if: 1. The dependent variable Y t depends on lags of
More information第 9 讲 : 股 票 期 权 定 价 : B-S 模 型 Valuing Stock Options: The Black-Scholes Model
1 第 9 讲 : 股 票 期 权 定 价 : B-S 模 型 Valuing Stock Options: The Black-Scholes Model Outline 有 关 股 价 的 假 设 The B-S Model 隐 性 波 动 性 Implied Volatility 红 利 与 期 权 定 价 Dividends and Option Pricing 美 式 期 权 定 价 American
More informationCHAPTER 6: Continuous Uniform Distribution: 6.1. Definition: The density function of the continuous random variable X on the interval [A, B] is.
Some Continuous Probability Distributions CHAPTER 6: Continuous Uniform Distribution: 6. Definition: The density function of the continuous random variable X on the interval [A, B] is B A A x B f(x; A,
More informationOptions 1 OPTIONS. Introduction
Options 1 OPTIONS Introduction A derivative is a financial instrument whose value is derived from the value of some underlying asset. A call option gives one the right to buy an asset at the exercise or
More informationHYPOTHESIS TESTING: POWER OF THE TEST
HYPOTHESIS TESTING: POWER OF THE TEST The first 6 steps of the 9-step test of hypothesis are called "the test". These steps are not dependent on the observed data values. When planning a research project,
More informationKCBOT: The Kansas City Board of Trade was formally chartered in 1876 and trades hard red winter
Section I Introduction to Futures and Options Markets Learning objectives To know major agricultural futures exchanges To see the types of commodities traded To understand common characteristics of futures
More informationBetting on Volatility: A Delta Hedging Approach. Liang Zhong
Betting on Volatility: A Delta Hedging Approach Liang Zhong Department of Mathematics, KTH, Stockholm, Sweden April, 211 Abstract In the financial market, investors prefer to estimate the stock price
More informationADVANCED FORECASTING MODELS USING SAS SOFTWARE
ADVANCED FORECASTING MODELS USING SAS SOFTWARE Girish Kumar Jha IARI, Pusa, New Delhi 110 012 gjha_eco@iari.res.in 1. Transfer Function Model Univariate ARIMA models are useful for analysis and forecasting
More informationAlgorithmic Trading Session 6 Trade Signal Generation IV Momentum Strategies. Oliver Steinki, CFA, FRM
Algorithmic Trading Session 6 Trade Signal Generation IV Momentum Strategies Oliver Steinki, CFA, FRM Outline Introduction What is Momentum? Tests to Discover Momentum Interday Momentum Strategies Intraday
More informationSales forecasting # 2
Sales forecasting # 2 Arthur Charpentier arthur.charpentier@univ-rennes1.fr 1 Agenda Qualitative and quantitative methods, a very general introduction Series decomposition Short versus long term forecasting
More informationWald s Identity. by Jeffery Hein. Dartmouth College, Math 100
Wald s Identity by Jeffery Hein Dartmouth College, Math 100 1. Introduction Given random variables X 1, X 2, X 3,... with common finite mean and a stopping rule τ which may depend upon the given sequence,
More informationTime series Forecasting using Holt-Winters Exponential Smoothing
Time series Forecasting using Holt-Winters Exponential Smoothing Prajakta S. Kalekar(04329008) Kanwal Rekhi School of Information Technology Under the guidance of Prof. Bernard December 6, 2004 Abstract
More informationBrownian Motion and Stochastic Flow Systems. J.M Harrison
Brownian Motion and Stochastic Flow Systems 1 J.M Harrison Report written by Siva K. Gorantla I. INTRODUCTION Brownian motion is the seemingly random movement of particles suspended in a fluid or a mathematical
More informationCalculating VaR. Capital Market Risk Advisors CMRA
Calculating VaR Capital Market Risk Advisors How is VAR Calculated? Sensitivity Estimate Models - use sensitivity factors such as duration to estimate the change in value of the portfolio to changes in
More informationMaximum likelihood estimation of mean reverting processes
Maximum likelihood estimation of mean reverting processes José Carlos García Franco Onward, Inc. jcpollo@onwardinc.com Abstract Mean reverting processes are frequently used models in real options. For
More informationMonte Carlo Methods in Finance
Author: Yiyang Yang Advisor: Pr. Xiaolin Li, Pr. Zari Rachev Department of Applied Mathematics and Statistics State University of New York at Stony Brook October 2, 2012 Outline Introduction 1 Introduction
More informationSAIF-2011 Report. Rami Reddy, SOA, UW_P
1) Title: Market Efficiency Test of Lean Hog Futures prices using Inter-Day Technical Trading Rules 2) Abstract: We investigated the effectiveness of most popular technical trading rules on the closing
More information6.4 Normal Distribution
Contents 6.4 Normal Distribution....................... 381 6.4.1 Characteristics of the Normal Distribution....... 381 6.4.2 The Standardized Normal Distribution......... 385 6.4.3 Meaning of Areas under
More informationAn Introduction to Modeling Stock Price Returns With a View Towards Option Pricing
An Introduction to Modeling Stock Price Returns With a View Towards Option Pricing Kyle Chauvin August 21, 2006 This work is the product of a summer research project at the University of Kansas, conducted
More informationOnline Appendix. Supplemental Material for Insider Trading, Stochastic Liquidity and. Equilibrium Prices. by Pierre Collin-Dufresne and Vyacheslav Fos
Online Appendix Supplemental Material for Insider Trading, Stochastic Liquidity and Equilibrium Prices by Pierre Collin-Dufresne and Vyacheslav Fos 1. Deterministic growth rate of noise trader volatility
More informationOverview: Past, Present and Future
Overview: Past, Present and Future Founded in 1957, the Reuters CRB Index has a long history as the most widely followed Index of commodities futures. Since 1961, there have been 9 previous revisions to
More informationSection 14 Simple Linear Regression: Introduction to Least Squares Regression
Slide 1 Section 14 Simple Linear Regression: Introduction to Least Squares Regression There are several different measures of statistical association used for understanding the quantitative relationship
More informationTime Series Analysis
Time Series Analysis Autoregressive, MA and ARMA processes Andrés M. Alonso Carolina García-Martos Universidad Carlos III de Madrid Universidad Politécnica de Madrid June July, 212 Alonso and García-Martos
More informationINDIRECT INFERENCE (prepared for: The New Palgrave Dictionary of Economics, Second Edition)
INDIRECT INFERENCE (prepared for: The New Palgrave Dictionary of Economics, Second Edition) Abstract Indirect inference is a simulation-based method for estimating the parameters of economic models. Its
More informationThe Behavior of Bonds and Interest Rates. An Impossible Bond Pricing Model. 780 w Interest Rate Models
780 w Interest Rate Models The Behavior of Bonds and Interest Rates Before discussing how a bond market-maker would delta-hedge, we first need to specify how bonds behave. Suppose we try to model a zero-coupon
More informationMath 431 An Introduction to Probability. Final Exam Solutions
Math 43 An Introduction to Probability Final Eam Solutions. A continuous random variable X has cdf a for 0, F () = for 0 <
More informationThe Black-Scholes Formula
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 The Black-Scholes Formula These notes examine the Black-Scholes formula for European options. The Black-Scholes formula are complex as they are based on the
More informationLOCAL SCALING PROPERTIES AND MARKET TURNING POINTS AT PRAGUE STOCK EXCHANGE
Vol. 41 (2010) ACTA PHYSICA POLONICA B No 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 LOCAL SCALING PROPERTIES AND MARKET TURNING POINTS AT PRAGUE STOCK EXCHANGE Ladislav Kristoufek Institute
More informationIntroduction to Hypothesis Testing. Hypothesis Testing. Step 1: State the Hypotheses
Introduction to Hypothesis Testing 1 Hypothesis Testing A hypothesis test is a statistical procedure that uses sample data to evaluate a hypothesis about a population Hypothesis is stated in terms of the
More informationNotes on Continuous Random Variables
Notes on Continuous Random Variables Continuous random variables are random quantities that are measured on a continuous scale. They can usually take on any value over some interval, which distinguishes
More informationFinancial Risk Management Exam Sample Questions/Answers
Financial Risk Management Exam Sample Questions/Answers Prepared by Daniel HERLEMONT 1 2 3 4 5 6 Chapter 3 Fundamentals of Statistics FRM-99, Question 4 Random walk assumes that returns from one time period
More informationMath 526: Brownian Motion Notes
Math 526: Brownian Motion Notes Definition. Mike Ludkovski, 27, all rights reserved. A stochastic process (X t ) is called Brownian motion if:. The map t X t (ω) is continuous for every ω. 2. (X t X t
More informationInvestment Statistics: Definitions & Formulas
Investment Statistics: Definitions & Formulas The following are brief descriptions and formulas for the various statistics and calculations available within the ease Analytics system. Unless stated otherwise,
More informationTrading activity as driven Poisson process: comparison with empirical data
Trading activity as driven Poisson process: comparison with empirical data V. Gontis, B. Kaulakys, J. Ruseckas Institute of Theoretical Physics and Astronomy of Vilnius University, A. Goštauto 2, LT-008
More information1 Short Introduction to Time Series
ECONOMICS 7344, Spring 202 Bent E. Sørensen January 24, 202 Short Introduction to Time Series A time series is a collection of stochastic variables x,.., x t,.., x T indexed by an integer value t. The
More informationIEOR 6711: Stochastic Models, I Fall 2012, Professor Whitt, Final Exam SOLUTIONS
IEOR 6711: Stochastic Models, I Fall 2012, Professor Whitt, Final Exam SOLUTIONS There are four questions, each with several parts. 1. Customers Coming to an Automatic Teller Machine (ATM) (30 points)
More informationQuantitative Methods for Finance
Quantitative Methods for Finance Module 1: The Time Value of Money 1 Learning how to interpret interest rates as required rates of return, discount rates, or opportunity costs. 2 Learning how to explain
More informationChapter 4 Lecture Notes
Chapter 4 Lecture Notes Random Variables October 27, 2015 1 Section 4.1 Random Variables A random variable is typically a real-valued function defined on the sample space of some experiment. For instance,
More informationPractice problems for Homework 11 - Point Estimation
Practice problems for Homework 11 - Point Estimation 1. (10 marks) Suppose we want to select a random sample of size 5 from the current CS 3341 students. Which of the following strategies is the best:
More informationOption pricing. Vinod Kothari
Option pricing Vinod Kothari Notation we use this Chapter will be as follows: S o : Price of the share at time 0 S T : Price of the share at time T T : time to maturity of the option r : risk free rate
More informationNew Evidence on Job Vacancies, the Hiring Process, and Labor Market Flows
New Evidence on Job Vacancies, the Hiring Process, and Labor Market Flows Steven J. Davis University of Chicago Econometric Society Plenary Lecture 3 January 2010, Atlanta Overview New evidence The role
More informationMonte Carlo Methods and Models in Finance and Insurance
Chapman & Hall/CRC FINANCIAL MATHEMATICS SERIES Monte Carlo Methods and Models in Finance and Insurance Ralf Korn Elke Korn Gerald Kroisandt f r oc) CRC Press \ V^ J Taylor & Francis Croup ^^"^ Boca Raton
More informationForward Price. The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow.
Forward Price The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow. The forward price is the delivery price which makes the forward contract zero
More informationNonlinear Regression Functions. SW Ch 8 1/54/
Nonlinear Regression Functions SW Ch 8 1/54/ The TestScore STR relation looks linear (maybe) SW Ch 8 2/54/ But the TestScore Income relation looks nonlinear... SW Ch 8 3/54/ Nonlinear Regression General
More informationStatistical pitfalls in Solvency II Value-at-Risk models
Statistical pitfalls in Solvency II Value-at-Risk models Miriam Loois, MSc. Supervisor: Prof. Dr. Roger Laeven Student number: 6182402 Amsterdam Executive Master-programme in Actuarial Science Faculty
More informationIs the trailing-stop strategy always good for stock trading?
Is the trailing-stop strategy always good or stock trading? Zhe George Zhang, Yu Benjamin Fu December 27, 2011 Abstract This paper characterizes the trailing-stop strategy or stock trading and provides
More informationValuing Stock Options: The Black-Scholes-Merton Model. Chapter 13
Valuing Stock Options: The Black-Scholes-Merton Model Chapter 13 Fundamentals of Futures and Options Markets, 8th Ed, Ch 13, Copyright John C. Hull 2013 1 The Black-Scholes-Merton Random Walk Assumption
More informationMonte Carlo Simulation
1 Monte Carlo Simulation Stefan Weber Leibniz Universität Hannover email: sweber@stochastik.uni-hannover.de web: www.stochastik.uni-hannover.de/ sweber Monte Carlo Simulation 2 Quantifying and Hedging
More informationImplied Volatility of Leveraged ETF Options
IEOR Dept. Columbia University joint work with Ronnie Sircar (Princeton) Cornell Financial Engineering Seminar Feb. 6, 213 1 / 37 LETFs and Their Options Leveraged Exchange Traded Funds (LETFs) promise
More informationINTEREST RATES AND FX MODELS
INTEREST RATES AND FX MODELS 8. Portfolio greeks Andrew Lesniewski Courant Institute of Mathematical Sciences New York University New York March 27, 2013 2 Interest Rates & FX Models Contents 1 Introduction
More informationOnline Appendix to Stochastic Imitative Game Dynamics with Committed Agents
Online Appendix to Stochastic Imitative Game Dynamics with Committed Agents William H. Sandholm January 6, 22 O.. Imitative protocols, mean dynamics, and equilibrium selection In this section, we consider
More informationBROWNIAN MOTION DEVELOPMENT FOR MONTE CARLO METHOD APPLIED ON EUROPEAN STYLE OPTION PRICE FORECASTING
International journal of economics & law Vol. 1 (2011), No. 1 (1-170) BROWNIAN MOTION DEVELOPMENT FOR MONTE CARLO METHOD APPLIED ON EUROPEAN STYLE OPTION PRICE FORECASTING Petar Koĉović, Fakultet za obrazovanje
More informationA Comparison of Option Pricing Models
A Comparison of Option Pricing Models Ekrem Kilic 11.01.2005 Abstract Modeling a nonlinear pay o generating instrument is a challenging work. The models that are commonly used for pricing derivative might
More informationAlternative Price Processes for Black-Scholes: Empirical Evidence and Theory
Alternative Price Processes for Black-Scholes: Empirical Evidence and Theory Samuel W. Malone April 19, 2002 This work is supported by NSF VIGRE grant number DMS-9983320. Page 1 of 44 1 Introduction This
More informationLectures on Stochastic Processes. William G. Faris
Lectures on Stochastic Processes William G. Faris November 8, 2001 2 Contents 1 Random walk 7 1.1 Symmetric simple random walk................... 7 1.2 Simple random walk......................... 9 1.3
More informationAlgebra I Vocabulary Cards
Algebra I Vocabulary Cards Table of Contents Expressions and Operations Natural Numbers Whole Numbers Integers Rational Numbers Irrational Numbers Real Numbers Absolute Value Order of Operations Expression
More information3. Monte Carlo Simulations. Math6911 S08, HM Zhu
3. Monte Carlo Simulations Math6911 S08, HM Zhu References 1. Chapters 4 and 8, Numerical Methods in Finance. Chapters 17.6-17.7, Options, Futures and Other Derivatives 3. George S. Fishman, Monte Carlo:
More informationVolatility at Karachi Stock Exchange
The Pakistan Development Review 34 : 4 Part II (Winter 1995) pp. 651 657 Volatility at Karachi Stock Exchange ASLAM FARID and JAVED ASHRAF INTRODUCTION Frequent crashes of the stock market reported during
More informationThe VAR models discussed so fare are appropriate for modeling I(0) data, like asset returns or growth rates of macroeconomic time series.
Cointegration The VAR models discussed so fare are appropriate for modeling I(0) data, like asset returns or growth rates of macroeconomic time series. Economic theory, however, often implies equilibrium
More informationMomentum s Hidden Sensitivity to the Starting Day
Momentum s Hidden Sensitivity to the Starting Day Philip Z. Maymin, Zakhar G. Maymin, Gregg S. Fisher Abstract: We show that the profitability of time- series momentum strategies on commodity futures across
More informationChapter 1. Vector autoregressions. 1.1 VARs and the identi cation problem
Chapter Vector autoregressions We begin by taking a look at the data of macroeconomics. A way to summarize the dynamics of macroeconomic data is to make use of vector autoregressions. VAR models have become
More informationMath/Stats 425 Introduction to Probability. 1. Uncertainty and the axioms of probability
Math/Stats 425 Introduction to Probability 1. Uncertainty and the axioms of probability Processes in the real world are random if outcomes cannot be predicted with certainty. Example: coin tossing, stock
More informationChapter 9 Monté Carlo Simulation
MGS 3100 Business Analysis Chapter 9 Monté Carlo What Is? A model/process used to duplicate or mimic the real system Types of Models Physical simulation Computer simulation When to Use (Computer) Models?
More informationOPTIONS, FUTURES, & OTHER DERIVATI
Fifth Edition OPTIONS, FUTURES, & OTHER DERIVATI John C. Hull Maple Financial Group Professor of Derivatives and Risk Manage, Director, Bonham Center for Finance Joseph L. Rotinan School of Management
More informationChapter 9. The Valuation of Common Stock. 1.The Expected Return (Copied from Unit02, slide 36)
Readings Chapters 9 and 10 Chapter 9. The Valuation of Common Stock 1. The investor s expected return 2. Valuation as the Present Value (PV) of dividends and the growth of dividends 3. The investor s required
More informationStatistics Review PSY379
Statistics Review PSY379 Basic concepts Measurement scales Populations vs. samples Continuous vs. discrete variable Independent vs. dependent variable Descriptive vs. inferential stats Common analyses
More informationMath 425 (Fall 08) Solutions Midterm 2 November 6, 2008
Math 425 (Fall 8) Solutions Midterm 2 November 6, 28 (5 pts) Compute E[X] and Var[X] for i) X a random variable that takes the values, 2, 3 with probabilities.2,.5,.3; ii) X a random variable with the
More informationR/S Analysis and Long Term Dependence in Stock Market Indices
R/S Analysis and Long Term Dependence in Stock Market Indices David Nawrocki College of Commerce and Finance Villanova University Villanova, PA 19085 USA 610-519-4323 610-489-7520 Fax Rev 2 1 R/S Analysis
More information5.1 Radical Notation and Rational Exponents
Section 5.1 Radical Notation and Rational Exponents 1 5.1 Radical Notation and Rational Exponents We now review how exponents can be used to describe not only powers (such as 5 2 and 2 3 ), but also roots
More informationMartingale Pricing Applied to Options, Forwards and Futures
IEOR E4706: Financial Engineering: Discrete-Time Asset Pricing Fall 2005 c 2005 by Martin Haugh Martingale Pricing Applied to Options, Forwards and Futures We now apply martingale pricing theory to the
More information16 : Demand Forecasting
16 : Demand Forecasting 1 Session Outline Demand Forecasting Subjective methods can be used only when past data is not available. When past data is available, it is advisable that firms should use statistical
More information