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1 – 10 of 217
Open Access
Article
Publication date: 21 December 2022

GyeHong Kim

This paper shows a new methodology for evaluating the value and sensitivity of autocall knock-in type equity-linked securities. While the existing evaluation methods, Monte Carlo

467

Abstract

This paper shows a new methodology for evaluating the value and sensitivity of autocall knock-in type equity-linked securities. While the existing evaluation methods, Monte Carlo simulation and finite difference method, have limitations in underestimating the knock-in effect, which is one of the important characteristics of this type, this paper presents a precise joint probability formula for multiple autocall chances and knock-in events. Based on this, the calculation results obtained by utilizing numerical and Monte Carlo integration are presented and compared with those of existing models. The results of the proposed model show notable improvements in terms of accuracy and calculation time.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 31 no. 1
Type: Research Article
ISSN: 1229-988X

Keywords

Open Access
Article
Publication date: 30 November 2014

Hanki Seong and Sang Bin Lee

This paper examines which basis functions are efficient to employ a combined method of Hull and White (1990) with the Monte Carlo simulation when we price a callable range note or…

37

Abstract

This paper examines which basis functions are efficient to employ a combined method of Hull and White (1990) with the Monte Carlo simulation when we price a callable range note or a callable bond. We use the Huge and Rom-Poulsen (2007) method which has modified the least squared Monte Carlo simulation proposed by Longstaff and Schwartz (2001) to reduce the estimation errors of the continuation value or the underlying assets. To use Monte carlo Simulation for pricing the early exercise premium, it is essential to accurately estimate the continuation value, because the investors will choose the higher value between the exercise and the continuation value at the possible early exercise dates. The main purpose of this paper is to analyze the estimation errors originating from the choice of the basis functions for the underlying asset and the continuation value estimation.

We choose the callable bond and the callable range accrual note to show which basis functions are reliable to reduce the estimation errors. For this purpose, we replicate the callable range accrual note with a portfolio of a fixed rate bond and a delayed digital option. We use several basis functions such as a constant, the instantaneous interest rates, and the range in order to see which basis function is efficient for our purpose. We examine several combinations of the basis functions depending on which basis functions will be used for the underlying asset or the continuation value estimation. We show that the range which is an important determinant of the callable range accrual note is an effective basis function to accurately determine the underlying asset and the continuation value for the pricing of the callable range accrual note.

Details

Journal of Derivatives and Quantitative Studies, vol. 22 no. 4
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 August 2009

Byungwook Choi

The purpose of this paper is to examine the argument that the put options traded in the exchanges are too high, compared to the asset prices based on the classical CAPM model, and…

20

Abstract

The purpose of this paper is to examine the argument that the put options traded in the exchanges are too high, compared to the asset prices based on the classical CAPM model, and thus the short position of the put option would make a significant profit from trading. In order to explore the earlier report, this paper, using the KOSPI 200 index options market price, estimates the historical rate of return on several option trading strategies such as naked option, protective put, covered call, straddle, and strangle. Secondly this paper compares the historical rates of return on the option trading strategies and Sharpe ratios with those generated by Monte-Carlo simulation and examines whether the historical option returns are inconsistent with Black-Scholes model, Jump-diffusion model, Stochastic Volatility model, or Stochastic Volatility with Jump model. Thirdly, this paper computes the optimal asset allocation ratio among the risk-free asset, risky assets, and option trading strategies in the viewpoint of rational investors who maximize the CRRA utility function.

The results show that the historical returns on short position of ATM and OTM puts are too high to explain based on the classical CAPM, and the optimal allocation ratios among put, risky asset, and the risk-free asset are different from those derived using Monte-Carlo simulation.

Details

Journal of Derivatives and Quantitative Studies, vol. 17 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 14 August 2018

Yiming Xu, Yajie Zou and Jian Sun

It would take billions of miles’ field road testing to demonstrate that the safety of automated vehicle is statistically significantly higher than the safety of human driving…

2144

Abstract

Purpose

It would take billions of miles’ field road testing to demonstrate that the safety of automated vehicle is statistically significantly higher than the safety of human driving because that the accident of vehicle is rare event.

Design/methodology/approach

This paper proposes an accelerated testing method for automated vehicles safety evaluation based on improved importance sampling (IS) techniques. Taking the typical cut-in scenario as example, the proposed method extracts the critical variables of the scenario. Then, the distributions of critical variables are statistically fitted. The genetic algorithm is used to calculate the optimal IS parameters by solving an optimization problem. Considering the error of distribution fitting, the result is modified so that it can accurately reveal the safety benefits of automated vehicles in the real world.

Findings

Based on the naturalistic driving data in Shanghai, the proposed method is validated by simulation. The result shows that compared with the existing methods, the proposed method improves the test efficiency by 35 per cent, and the accuracy of accelerated test result is increased by 23 per cent.

Originality/value

This paper has three contributions. First, the genetic algorithm is used to calculate IS parameters, which improves the efficiency of test. Second, the result of test is modified by the error correction parameter, which improves the accuracy of test result. Third, typical high-risk cut-in scenarios in China are analyzed, and the proposed method is validated by simulation.

Details

Journal of Intelligent and Connected Vehicles, vol. 1 no. 1
Type: Research Article
ISSN: 2399-9802

Keywords

Open Access
Article
Publication date: 25 April 2022

Hooman Sadeh, Claudio Mirarchi, Farzad Shahbodaghlou and Alberto Pavan

Occupational Safety and Health Administration (OSHA) of the U.S. government ensures that all health and safety regulations, protecting the workers, are enforced. OSHA officers…

1342

Abstract

Purpose

Occupational Safety and Health Administration (OSHA) of the U.S. government ensures that all health and safety regulations, protecting the workers, are enforced. OSHA officers conduct inspections and assess fines for non-compliance and regulatory violations. Literature discussion on the economic impact of OSHA inspections with COVID-19 related citations for the construction sector is lacking. This study aims to investigate the relationships between the number of COVID-19 cases, construction employment and OSHA citations and it further evaluates the total and monthly predicted cost impact of OSHA citations associated with COVID-19 violations.

Design/methodology/approach

An application of multiple regression analysis, a supervised machine learning linear regression model, based on K-fold cross validation sampling and a probabilistic risk-based cost estimate Monte Carlo simulation were utilized to evaluate the data. The data were collected from numerous websites including OSHA, Centers for Disease Control and the World Health Organization.

Findings

The results show that as the monthly construction employment increased, there was a decrease in OSHA citations. Conversely, the cost impact of OSHA citations had a positive relationship with the number of COVID-19 cases. In addition, the monthly cost impact of OSHA COVID-19 related citations along with the total cost impact of citations were predicted and analyzed.

Originality/value

The application of the two models on cost analysis provides a thorough comparison of predicted and overall cost impact, which can assist the contractors to better understand the possible cost ramifications. Based on the findings, it is suggested that the contractors include contingency fees within their contracts, hire safety managers to implement specific safety protocols related to COVID-19 and request a safety action plan when qualifying their subcontractors to avoid potential fines and citations.

Details

Engineering, Construction and Architectural Management, vol. 30 no. 8
Type: Research Article
ISSN: 0969-9988

Keywords

Open Access
Article
Publication date: 30 November 2011

Suk Joon Byun and Jun Sik Kim

In Kampen et al.(2008), Monte Carlo estimators obtained by the WKB (Wentzel, Brillouin, Kramers) approximation had better results than Monte Carlo estimators obtained by the…

8

Abstract

In Kampen et al.(2008), Monte Carlo estimators obtained by the WKB (Wentzel, Brillouin, Kramers) approximation had better results than Monte Carlo estimators obtained by the lognormal approximation for European swaptions and Bermudan swaptions. We compare the WKB estimators with the lognormal estimators and the pathwise derivative estimators for ratchet caplets and sticky caplets with various maturities. The results show that the WKB estimators have similar performance compared with the lognormal estimators and the pathwise derivative estimators for ratchet caplets. However, the WKB estimators show worse performance than both the lognormal estimators and the pathwise derivative estimators for sticky caplets. These results indicate that the WKB estimators would be hard to substitute for the lognormal estimators for various derivatives.

Details

Journal of Derivatives and Quantitative Studies, vol. 19 no. 4
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 May 2002

Jin Yoo

This paper raises an issue of calculating a value at risk (VaR) of a stock price in the presence of daily price limits, suggests an appropriate methodology for it, and discusses…

59

Abstract

This paper raises an issue of calculating a value at risk (VaR) of a stock price in the presence of daily price limits, suggests an appropriate methodology for it, and discusses its practical implications. One finding is that the VaR with price limits is never bigger than without. It turns out that the discrepancy between the two VaRs increases as the confidence level rises, the holding period lengthens, the volatility goes up, or the price limits get tighter.

Details

Journal of Derivatives and Quantitative Studies, vol. 10 no. 1
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 6 June 2022

Katsuhiro Sugita

The paper compares multi-period forecasting performances by direct and iterated method using Bayesian vector autoregressive (VAR) models.

1385

Abstract

Purpose

The paper compares multi-period forecasting performances by direct and iterated method using Bayesian vector autoregressive (VAR) models.

Design/methodology/approach

The paper adopts Bayesian VAR models with three different priors – independent Normal-Wishart prior, the Minnesota prior and the stochastic search variable selection (SSVS). Monte Carlo simulations are conducted to compare forecasting performances. An empirical study using US macroeconomic data are shown as an illustration.

Findings

In theory direct forecasts are more efficient asymptotically and more robust to model misspecification than iterated forecasts, and iterated forecasts tend to bias but more efficient if the one-period ahead model is correctly specified. From the results of the Monte Carlo simulations, iterated forecasts tend to outperform direct forecasts, particularly with longer lag model and with longer forecast horizons. Implementing SSVS prior generally improves forecasting performance over unrestricted VAR model for either nonstationary or stationary data.

Originality/value

The paper finds that iterated forecasts using model with the SSVS prior generally best outperform, suggesting that the SSVS restrictions on insignificant parameters alleviates over-parameterized problem of VAR in one-step ahead forecast and thus offers an appreciable improvement in forecast performance of iterated forecasts.

Details

Asian Journal of Economics and Banking, vol. 6 no. 2
Type: Research Article
ISSN: 2615-9821

Keywords

Open Access
Article
Publication date: 7 March 2019

Manuel E. Rademaker, Florian Schuberth and Theo K. Dijkstra

The purpose of this paper is to enhance consistent partial least squares (PLSc) to yield consistent parameter estimates for population models whose indicator blocks contain a…

2111

Abstract

Purpose

The purpose of this paper is to enhance consistent partial least squares (PLSc) to yield consistent parameter estimates for population models whose indicator blocks contain a subset of correlated measurement errors.

Design/methodology/approach

Correction for attenuation as originally applied by PLSc is modified to include a priori assumptions on the structure of the measurement error correlations within blocks of indicators. To assess the efficacy of the modification, a Monte Carlo simulation is conducted.

Findings

In the presence of population measurement error correlation, estimated parameter bias is generally small for original and modified PLSc, with the latter outperforming the former for large sample sizes. In terms of the root mean squared error, the results are virtually identical for both original and modified PLSc. Only for relatively large sample sizes, high population measurement error correlation, and low population composite reliability are the increased standard errors associated with the modification outweighed by a smaller bias. These findings are regarded as initial evidence that original PLSc is comparatively robust with respect to misspecification of the structure of measurement error correlations within blocks of indicators.

Originality/value

Introducing and investigating a new approach to address measurement error correlation within blocks of indicators in PLSc, this paper contributes to the ongoing development and assessment of recent advancements in partial least squares path modeling.

Open Access
Article
Publication date: 19 March 2019

Ako Doffou

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…

1341

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Research limitations/implications

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.

Originality/value

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

Details

Studies in Economics and Finance, vol. 36 no. 2
Type: Research Article
ISSN: 1086-7376

Keywords

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