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This paper aims to test three parametric models in pricing and hedging higher-order moment swaps. Using vanilla option prices from the volatility surface of the Euro Stoxx 50 Index, the paper shows that the pricing accuracy of these models is very satisfactory under four different pricing error functions. The result is that taking a position in a third moment swap considerably improves the performance of the standard hedge of a variance swap based on a static position in the log-contract and a dynamic trading strategy. The position in the third moment swap is taken by running a Monte Carlo simulation.

This paper undertook empirical tests of three parametric models. The aim of the paper is twofold: assess the pricing accuracy of these models and show how the classical hedge of the variance swap in terms of a position in a log-contract and a dynamic trading strategy can be significantly enhanced by using third-order moment swaps. The pricing accuracy was measured under four different pricing error functions. A Monte Carlo simulation was run to take a position in the third moment swap.

The results of the paper are twofold: the pricing accuracy of the Heston (1993) model and that of two Levy models with stochastic time and stochastic volatility are satisfactory; taking a position in third-order moment swaps can significantly improve the performance of the standard hedge of a variance swap.

The limitation is that these empirical tests are conducted on existing three parametric models. Maybe more critical insights could have been revealed had these tests been conducted in a brand new derivatives pricing model.

This work is 100 per cent original, and it undertook empirical tests of the pricing and hedging accuracy of existing three parametric models.

Black (1976) model assumes a lognormal distribution for futures prices, and has been shown to misprice deep in-the-money and deep out-of-the-money futures options. in this paper, the jump-diffusion stochastic interest rates model developed by Doffou and Hilliard (1999a) is fitted to currency futures and futures options data to yield probabilistic information. The model implies non-normal skewness and kurtosis for the log of price relative, and prices currency futures options better than Bates' (1991) model and far better than Black's model.

This chapter investigates empirically the existence of periodically collapsing bubbles in the Asian emerging stock markets using the Enders–Siklos (2001) momentum threshold autoregressive model. As explained in Bohl (2003), this non-linear time series technique can be used to analyze bubble driven run-ups in stock prices followed by a crash in a non-cointegration framework with asymmetric adjustment. This technique offers a more potent insight in the stock prices behavior than can possibly be obtained using conventional non-cointegration tests. The empirical findings for 10 Asian emerging stock markets from 1993 to 2005 refute the bubble hypothesis.

Perhaps the most significant development in the global business arena in the post-war period has been the emergence of the Asia-Pacific rim countries as a significant economic force.