In order to rationally deal with the belief degree, Liu proposed uncertainty theory and refined into a branch of mathematics based on normality, self-duality, sub-additivity and product axioms. Subsequently, Liu defined the uncertainty process to des...
This article constructs an entropy pricing framework by incorporating a set of informative risk-neutral moments (RNMs) extracted from the market-available options as constraints. Within the RNM-constrained entropic framework, a unique distribution cl...
Risk neutral measures are defined such that the basic random assets in a portfolio are martingales. Hence, when the market model is complete, valuation of other financial instruments is a relatively straightforward task when those basic random assets...
It is common in financial markets for market makers to offer prices on derivative instruments even though they are uncertain about the underlying asset’s value. This paper studies the mathematical problem that arises as a result. Derivatives ar...
The joint uncertainties of wholesale price and end-user demand quantity often poses huge pricing challenges to energy retailers. However, the literature lacks analysis of such uncertainties’ impacts on retailer pricing behaviors and possible he...
Indonesia suffers significant economic losses from floods, and state budget allocations are often inadequate. Flood bonds provide an alternative funding source, but the pricing framework is complex due to simultaneous flood and financial risk conside...
The risk-neutral density is a fundamental concept in pricing financial derivatives, risk management, and assessing financial markets’ perceptions over significant political or economic events. In this paper, we propose a new nonparametric metho...
A new method for pricing contingent claims based on an asymptotic expansion of the dynamics of the pricing density is introduced. The expansion is conducted in a preferred coordinate frame, in which the pricing density looks stationary. The resulting...
The celebrated Heston’s stochastic volatility (SV) model for the valuation of European options provides closed form solutions that are given in terms of characteristic functions. However, the numerical calibration of this five-parameter model,...
Traditional insurance’s earthquake contingency costs are insufficient for earthquake funding due to extreme differences from actual losses. The earthquake bond (EB) links insurance to capital market bonds, enabling higher and more sustainable e...
We present the Generalized Gamma (GG) distribution as a possible risk neutral distribution (RND) for modeling European options prices under Heston’s stochastic volatility (SV) model. We demonstrate that under a particular reparametrization, thi...
Due to the low demand for conventional annuities, alternative retirement products are sought. Quite recently, tontines have been frequently brought up as a promising option in this respect. Inspired by unit-linked life insurance and retirement produc...
In this paper, we suggest a Bayesian multivariate approach for pricing a reverse mortgage, allowing for house price risk, interest rate risk and longevity risk. We adopt the principle of maximum entropy in risk-neutralisation of these three risk comp...
This paper investigates the approximated arbitrage bounds of option prices in an incomplete market setting and draws implications for option pricing and risk management. It gives consideration to periods of global financial crisis and European sovere...
This paper develops a unified framework for mathematical finance under general semimartingale models that allow for dividend payments, negative asset prices, and unbounded jumps. We present a rigorous approach to the mathematical modeling of financia...
We review a decision theoretic, i.e., utility-based, motivation for entropy and Kullback-Leibler relative entropy, the natural generalizations that follow, and various properties of thesegeneralized quantities. We then consider these generalized quan...
Under the background of climate change, the risk spillover within the energy system is constantly intensifying. Clarifying the coupling relationship between entities within the energy system can help policymakers propose more reasonable policy measur...
Recent studies have suggested that it is feasible to recover a physical measure from a risk-neutral measure. Given a market state variable modeled as a Markov process, the key concept is to extract a unique positive eigenfunction of the generator of...
We develop a binary tree pricing model with underlying asset price dynamics following Itô–McKean skew Brownian motion. Our work was motivated by the Corns–Satchell, continuous-time, option pricing model. However, the Corns–Sat...
In this article, we first provide a survey of the exponential option pricing models and show that in the framework of the risk-neutral approach, they are governed by the space-fractional diffusion equation. Then, we introduce a more general class of...
In this paper, we modify Duan’s (1995) local risk-neutral valuation relationship (mLRNVR) for the GARCH option-pricing models. In our mLRNVR, the conditional variances under two measures are designed to be different and the variance process is more p...
As economic fluctuations and market uncertainty intensify, supply chain members face enormous challenges. To explore the role of revenue-sharing contracts in supply chain members with different risk preferences, we study the risk-averse two-stage sup...
In this study, we first present a time-fractional L e ^ vy diffusion equation of the exponential option pricing models of European option pricing and the risk-neutral parameter. Then, we modify a particular L e ^ vy-time fractional diffus...
The application of stochastic volatility (SV) models in the option pricing literature usually assumes that the market has sufficient option data to calibrate the model’s risk-neutral parameters. When option data are insufficient or unavailable, marke...
This paper considers fundamental questions of arbitrage pricing that arises when the uncertainty model incorporates ambiguity about risk. This additional ambiguity motivates a new principle of risk- and ambiguity-neutral valuation as an extension of...
We develop an entropic framework to model the dynamics of stocks and European Options. Entropic inference is an inductive inference framework equipped with proper tools to handle situations where incomplete information is available. The objective of...
Under two different power structures, where the supplier and the distributor, respectively, are modeled as the leader, this paper studies water pricing strategies in two competing water resources supply chains. We assume that each water supply chain...
Capacity expansion models for electricity grids typically use deterministic optimization, addressing uncertainty through ex-post analysis by varying input parameters. This paper presents a stochastic capacity expansion model that integrates uncertain...
This study focuses on the impact of a supply chain manufacturer’s fairness concern and risk aversion on the green supply chain and constructs a two-level green supply chain consisting of a manufacturer and a retailer. It compares three models:...
This paper introduces a new computational tool for the analysis of the risks embedded in a set of prices of European-style options. The software enables the estimation of the risk-neutral density (RND) from the observed option prices by means of orth...
In this paper, we carry out a comprehensive comparison of Gaussian generalized autoregressive conditional heteroskedasticity (GARCH) and autoregressive stochastic volatility (ARSV) models for volatility forecasting using the S&P 500 Index. In par...
This paper evaluates the deposit and purchase pricing of purchase contracts in a risk-neutral framework. First, we determine the fair deposit price of a single-installment purchase contract based on theoretical modeling and numerical analysis. Second...
We propose a multi-cohort model that is able to capture the mortality correlation between different cohorts. The model is based on the Hull and White process to which we incorporate inter-generational risk factors, by modifying its stochastic part. W...
Connecting derivative pricing with tail risk management has become urgent for financial practice and academia. This paper proposes a novel option pricing model based on the exponential generalized beta of the second kind (EGB2) distribution. The newl...
Shadow prices simplify the derivation of optimal trading strategies in markets with transaction costs by transferring optimization into a more tractable, frictionless market. This paper establishes that a naïve shadow price ansatz for maximizing...
Investors’ decisions on capital markets depend on their anticipation and preferences about risk, and volatility is one of the most common measures of risk. This paper proposes a method of estimating the market price of volatility risk by incorporatin...
We introduce a binary tree for pricing contingent claims when the underlying security prices exhibit history dependence. We apply the model to the specific cases of moving-average and autoregressive behavior that are characteristic of price histories...
We address the process of discounting in random environments, which allows valuation of the future in economic terms. We review several approaches to the problem regarding different well-established stochastic market dynamics in the continuous-time c...
24 February 2022
To mitigate climate change, the governments of various countries have formulated and implemented corresponding low-carbon emission reduction policies. Meanwhile, consumers’ awareness of the necessity of environmental protection is gradually imp...
This research article provides criticism and arguments why the canonical framework for derivatives pricing is incomplete and why the delta-hedging approach is not appropriate. An argument is put forward, based on the efficient market hypothesis, why...
Motivated by new financial markets where there is no canonical choice of a risk-neutral measure, we compared two different methods for pricing options: calibration with an entropic penalty term and valuation by the Esscher measure. The main aim of th...
We explore a multi-asset jump-diffusion pricing model, combining a systemic risk asset with several conditionally independent ordinary assets. Our approach allows for analyzing and modeling a portfolio that integrates high-activity security, such as...
Pricing decisions for construction and demolition waste recycling are severely hampered by consumer uncertainty in assessing the value of recycled building materials. This paper uses a construction and demolition waste (CDW) recycling utilization mod...
Global environmental goals and the Paris agreement declared the need to avoid dangerous climate change by reducing emissions of greenhouse gases with an ultimate goal to transform today’s policies and reach climate neutrality before the end of...
This study deals with the problem of pricing compound options when the underlying asset follows a mixed fractional Brownian motion with jumps. An analytic formula for compound options is derived under the risk neutral measure. Then, these results are...
We present a unified, market-complete model that integrates both Bachelier and Black–Scholes–Merton frameworks for asset pricing. The model allows for the study, within a unified framework, of asset pricing in a natural world that experie...
In this study, we investigate inventory allocation and pricing strategies for retailers by incorporating demand information into the issue of inventory allocation during the presale period. In a presale system, retailers offer presale goods at a pric...
Bitcoin Pricing Kernels (PKs) are estimated using a novel data set from Deribit, the leading Bitcoin options exchange. The PKs, as the ratio between risk-neutral and physical density, dynamically reflect the change in investor preferences. Thus, the...
The Dupire formula is a very useful tool for pricing financial derivatives. This paper is dedicated to deriving the aforementioned formula for the European call option in the space of distributions by applying a mathematically rigorous approach devel...
This paper analyses the impact of different volatility structures on a range of traditional option pricing models for the valuation of call down and out style barrier options. The construction of a Risk-Neutral Probability Term Structure (RNPTS) is o...
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