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Article
Publication date: 19 January 2015

Thomas Kokholm and Martin Stisen

This paper studies the performance of commonly employed stochastic volatility and jump models in the consistent pricing of The CBOE Volatility Index (VIX) and The S&P 500…

Abstract

Purpose

This paper studies the performance of commonly employed stochastic volatility and jump models in the consistent pricing of The CBOE Volatility Index (VIX) and The S&P 500 Index (SPX) options. With the existence of active markets for volatility derivatives and options on the underlying instrument, the need for models that are able to price these markets consistently has increased. Although pricing formulas for VIX and vanilla options are now available for commonly used models exhibiting stochastic volatility and/or jumps, it remains to be shown whether these are able to price both markets consistently. This paper fills this vacuum.

Design/methodology/approach

In particular, the Heston model, the Heston model with jumps in returns and the Heston model with simultaneous jumps in returns and variance (SVJJ) are jointly calibrated to market quotes on SPX and VIX options together with VIX futures.

Findings

The full flexibility of having jumps in both returns and volatility added to a stochastic volatility model is essential. Moreover, we find that the SVJJ model with the Feller condition imposed and calibrated jointly to SPX and VIX options fits both markets poorly. Relaxing the Feller condition in the calibration improves the performance considerably. Still, the fit is not satisfactory, and we conclude that one needs more flexibility in the model to jointly fit both option markets.

Originality/value

Compared to existing literature, we derive numerically simpler VIX option and futures pricing formulas in the case of the SVJ model. Moreover, the paper is the first to study the pricing performance of three widely used models to SPX options and VIX derivatives.

Details

The Journal of Risk Finance, vol. 16 no. 1
Type: Research Article
ISSN: 1526-5943

Keywords

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Article
Publication date: 31 August 2012

Ling‐Yun He and Wen‐Si Xie

There is a distinct separation of price discovery from pricing power in China's sugar spot and futures markets. The purpose of this paper is to identify the reasons and…

Abstract

Purpose

There is a distinct separation of price discovery from pricing power in China's sugar spot and futures markets. The purpose of this paper is to identify the reasons and provide plausible explanations for this stylized phenomenon. Therefore, the research may deepen the understandings of the operational mechanisms and internal efficiency of China's sugar spot and futures markets.

Design/methodology/approach

The authors analyze the historical spot and futures price time series from China's sugar spot market and China's Zhengzhou Commodity Exchange (CZCE) within a co‐integration framework.

Findings

It is found that China's sugar spot market has the pricing power, even though the futures market leads the spot market in price discovery. The phenomenon of observed separation of price discovery in spot market from pricing power in futures market may be caused by: irrational speculation in CZCE sugar futures market; oligopoly and local government politics; or the operational efficiency of the wholesale spot market, especially for its comparative advantages of information accessibility in the sugar producing areas. The results are compared with other empirical findings in many other commodities markets to obtain deeper understandings.

Originality/value

The paper uncovers and provides the earliest econometric evidence of the observed stylized phenomenon and also provides plausible explanations for this phenomenon.

Details

China Agricultural Economic Review, vol. 4 no. 3
Type: Research Article
ISSN: 1756-137X

Keywords

Content available
Article
Publication date: 31 May 2003

Jin U Park and Youngsoo Choi

This paper shows the limitation of the cost-of-carry model which is used for pricing the theoretical value of the KTB futures, and proposes an alternative pricing model…

Abstract

This paper shows the limitation of the cost-of-carry model which is used for pricing the theoretical value of the KTB futures, and proposes an alternative pricing model based on the term structure of interest rates. Under the assumption of 1-factor term structure, this paper treats the theoretical price of KTB futures price as a risk-neutral expectation of payoff function at maturity and derives the approximated formula for pricing the KTB futures. As compared with our price of KTB futures using the term structure of interest rates, the conventional KOFEX price based on the cost-of-carry model tends to be overvalued as the time to maturity increases. This result is due to the difference between the futures and forward prices which is caused by treating the futures contract as the forward contract in the conventional KOFEX pricing model. In particular, this discrepancy becomes more significant when the price of underlying asset and the interest rates are negatively correlated and the time to maturity is longer. The bond futures contract is a typical example of financial instrument whose price has a negative correlation with interest rates

Details

Journal of Derivatives and Quantitative Studies, vol. 11 no. 1
Type: Research Article
ISSN: 2713-6647

Keywords

Content available
Article
Publication date: 9 November 2018

Monsurat Ayojimi Salami and Razali Haron

The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the…

Abstract

Purpose

The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the daily closing price of CPO and CPO futures (CPO-F) for the period ranging from June 2009 to August 2016 while taking structural breaks into account.

Design/methodology/approach

In this study, symmetric and asymmetric long-run relationship model are employed, such as the Johansen cointegration, VECM, TAR and M-TAR models, to examine the impact of structural breaks on the pricing efficiency of the Malaysian CPO market.

Findings

This finding establish that Malaysian CPO price is efficient before and after the structural break. The consistent efficiency of the Malaysian CPO market supports the trading of the CPO-F in Globex and the use of Malaysian CPO pricing as the reference price. This study establishes that a structural break in the Malaysian CPO price series does not affect the pricing efficiency of the market.

Research limitations/implications

This study shows that using Malaysian CPO price as a reference price is sustainable even in the event of a structural break. Therefore, market participants in the Malaysian CPO market have less to worry about the CPO price as it supports the weak form of efficiency. Price deviation in the short run may not lead to arbitrage profit as transaction cost may not be covered.

Practical implications

This study implies that if there is distortion in the price due to shocks, both manufacturers and producers need to hedge their positions in the futures market (subject to their positions in the underlying market). By entering into the futures market, pricing is locked in advance; hence, price risk is eliminated. Such a distortion could also affect the efficiency of the CPO price, therefore this study also addresses the issue of efficiency of the local CPO market.

Originality/value

Previous studies on Malaysian CPO pricing efficiency did not take the effect of structural break into consideration, making it difficult for these studies to show consistency in the efficiency of the Malaysian CPO market.

Details

Journal of Capital Markets Studies, vol. 2 no. 2
Type: Research Article
ISSN: 2514-4774

Keywords

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Article
Publication date: 6 November 2017

Minghua Ye, Rongming Wang, Guozhu Tuo and Tongjiang Wang

The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting…

Abstract

Purpose

The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting risks in the futures market.

Design/methodology/approach

Based on data from spot and futures market in China, this paper develops an improved B-S model for the calculation of crop price insurance premium and tests the possibility of hedging underwriting risks by insurance firms in the futures market.

Findings

The authors find that spot price of crops in China can be estimated with agricultural commodity futures prices, and can be taken as the insured price for crop price insurance. The authors also find that improved B-S model yields better estimation of crop price insurance premium than traditional B-S model when spot price does not follow geometric Brownian motion. Finally, the authors find that hedging can be one good alternative for insurance firms to manage underwriting risks.

Originality/value

This paper develops an improved B-S model that is data-driven in nature. Insured price of the crop price insurance, or the exercise price used in the B-S model, is estimated from a co-integration model built on spot and futures market price series. Meanwhile, distributional patterns of spot price series, one important factor determining the applicability of B-S model, is factored into the improved B-S model so that the latter is more robust and friendly to data with varied distributions. This paper also verifies the possibility of hedging of underwriting risks by insurance firms in the futures market.

Details

China Agricultural Economic Review, vol. 9 no. 4
Type: Research Article
ISSN: 1756-137X

Keywords

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Article
Publication date: 1 April 2003

Seow Eng Ong, Fook Jam Cheng, Boaz Boon and Tien Foo Sing

Real estate developers often operate in oligopolistic environments. Pricing strategies must be made in an interactive framework that makes empirical evaluation difficult…

Abstract

Real estate developers often operate in oligopolistic environments. Pricing strategies must be made in an interactive framework that makes empirical evaluation difficult. This study appeals to economic experiments to examine how developers price their properties, especially when there is an option to market pre‐completed units. In addition, the interaction between bidding for land and pricing the end product is examined. The results indicate that competitor actions are important considerations in pricing decisions. In particular, the profit maximizing pricing strategy depends critically on being competitive, not necessarily being the most aggressive. Interestingly, pre‐completed units sell only at prices that incorporate future price expectations, and successful bids tend to precipitate more aggressive pricing. Finally, competitive bidding and pricing strategies appear to the best profit maximizing strategy.

Details

Journal of Property Investment & Finance, vol. 21 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

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Book part
Publication date: 19 November 2012

Allan Gray, Michael Lucaccioni, Jamie Rapperport and Elliott Yama

Recent years have seen explosive growth in the use of enterprise pricing software. Pricing software contributes to business returns by improving pricing decision-making…

Abstract

Recent years have seen explosive growth in the use of enterprise pricing software. Pricing software contributes to business returns by improving pricing decision-making, and by providing monitoring and process control for pricing processes across the corporation. This software has developed in a number of significant ways over the past decade and continues to evolve in terms of sophistication and ability to contribute to both top- and bottom-line growth. In this paper, the authors present a brief historical context for the role that pricing software fulfills in a typical B2B corporation, and a set of predictions of future capabilities based on emerging trends.

Details

Visionary Pricing: Reflections and Advances in Honor of Dan Nimer
Type: Book
ISBN: 978-1-78052-996-7

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Article
Publication date: 15 February 2019

Alexander T. Hanisch

Real estate is the last major asset class without liquid derivatives markets. The reasons for that are not fully known or understood. Therefore, the purpose of this paper…

Abstract

Purpose

Real estate is the last major asset class without liquid derivatives markets. The reasons for that are not fully known or understood. Therefore, the purpose of this paper is to better understand the main factors that influence the propensity of commercial real estate investors in the UK to employ property derivatives.

Design/methodology/approach

The research methodology that was chosen for this research is grounded theory which, in its original form, goes back to Glaser and Strauss (1967). A total of 43 interviews were conducted with 46 real estate professionals in the UK from property investment management firms (investing directly or indirectly in real estate), multi-asset management firms, real estate investment trusts, banks, and brokerage and advisory firms, among others.

Findings

The research results show 29 factors that influence the propensity of direct and indirect real estate investors in the UK to employ property derivatives. Out of the 29 factors, the current research identified 12 factors with high-explanatory power, 6 with a contributing role and 11 with low explanatory power. Moreover, factors previously discussed in the literature are tested and assessed as to their explanatory power. The focus of this paper is on those factors with high-explanatory power. From the research data, three main reasons have been identified as the sources of investor reluctance to trade in property derivatives. The first and main reason is related to a mismatch between motivations of property investment managers and what can be achieved with the instruments. The second reason, which ties in with the first one, is a general misunderstanding as to the right pricing technique of property derivatives. Finally, the third reason is a general lack of hedging demand from the investor base owing to the long investment horizons through market cycles.

Research limitations/implications

The research contributes to the literature on property derivatives in various ways. First, it extends the literature on market hurdles in property derivatives markets by testing and extending the hurdles that were proposed previously. Second, the research shows that the existing pricing models need to be extended in order to account for the risk perception of practitioners and their concerns with regard to liquidity levels.

Practical implications

For both theory and practice, the research has shown some limitations in using property derivatives for purposes such as creating index exposure or hedging. Another contribution, in this case to practice, is that this study provides a clearer picture as to the reasons that keep property investment managers away from using property derivatives.

Originality/value

The research results indicate that liquidity per se is not a universal remedy for the problems in the market. In addition to the need for improving the understanding of the pricing mechanism, practitioners should give more thought to the notion of real estate market risk and the commensurate returns that can reasonably be expected when they take or reduce it. This implies that property index futures currently do not price like those on any other investable asset class.

Details

Journal of Property Investment & Finance, vol. 37 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

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Article
Publication date: 1 September 1996

R. Guy Thomas

Discusses the features which distinguish the market for residential property from the markets for other assets. Proposes that financial institutions should offer…

Abstract

Discusses the features which distinguish the market for residential property from the markets for other assets. Proposes that financial institutions should offer house‐buyers indemnity policies which pay out an amount related to any fall in the level of a general index of house prices, on the sale of the house at a loss at any time during the mortgage term. To facilitate hedging the risk of a portfolio of such policies (and therefore, the pricing of the policies), a market in “perpetual futures” on indices of housing assets is proposed. Discusses possible users of these contracts and outlines further research.

Details

Journal of Property Finance, vol. 7 no. 3
Type: Research Article
ISSN: 0958-868X

Keywords

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Book part
Publication date: 23 September 2019

Yi-Ming Wei, Qiao-Mei Liang, Gang Wu and Hua Liao

Abstract

Details

Energy Economics
Type: Book
ISBN: 978-1-83867-294-2

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