Search Results (28)

It is well-known that, in the Bachelier model, when asset prices and volatilities are uncorrelated, the at-the-money implied volatility coincides with the fair value of the volatility swap. Using this identity as a starting point and applying classical Itô calculus and Taylor expansions, we write the price for out-of the-money (OTM) and in-the-money (ITM) options as an expansion with respect to the moneyness, where the coefficients are related to the negative (non-integer) powers of the future mean volatility. As an a application, we use it as a control variate to reduce the variance of Monte Carlo option prices in the correlated case. Full article

This study investigates the forward discount puzzle by examining the dynamic relationships among excess returns arising from interest rate parity deviations, interest rate differentials, and the USD/JPY exchange rate. The empirical analysis employs correlation analysis, the Autoregressive Distributed Lag (ARDL) cointegration test, and variance decomposition together with impulse response functions derived from a Toda–Yamamoto augmented Vector Autoregressive (VAR) model, using data spanning January 2001 to September 2025. The correlation results indicate that the spot exchange rate is negatively related to both the swap rate and the interest rate differential. Impulse response analysis shows that the USD/JPY rate responds positively to swap rate shocks in the medium to long run, while responding negatively to interest rate differential shocks in the short run. Variance decomposition results are consistent with the impulse response analysis and underscore the dominant bilateral linkage between the exchange rate and the swap rate. The long-run ARDL estimates further reveal that the swap rate is positively associated with dollar appreciation, whereas both the interest rate differential and relative output are negatively related. Overall, although short-run arbitrage appears temporarily, the cointegration and dynamic results provide robust evidence that the forward discount puzzle persists for a substantial period rather than interest rate parity holding. Full article

Sustainable pavement solutions that lessen the dependency on virgin materials are required due to mounting environmental and economic pressures. Although recycled asphalt concrete (RAC) has structural and environmental advantages, binder heterogeneity and non-linear material interactions make it difficult to predict the ideal bitumen content in RAC mixtures. This study predicts the bitumen content of asphalt mixtures infused with RAC by combining sophisticated machine learning (ML) with traditional laboratory testing. While this study combines AI-driven predictions with experimental insights to create a state-of-the-art framework for sustainable pavement engineering, 780 data points were obtained from the preparation and testing of three mixtures (0%, 30%, and 50% RAC) for volumetric and mechanical characteristics. Controlled Autoregressive Integrated Moving Average (CARIMA), Swapped Autoregressive Integrated Moving Average (SARIMA), radial basis function artificial neural network (RBF), bagging (BAG), multilayer perceptron (MLP) artificial neural network, and boosting (BOT) ensembles were among the models created. BAG-CARIMA-LGM is a new hybrid model that combines logistic probabilistic generalization, ensemble variance reduction, and time-series forecasting. Higher predictive accuracy and resilience across different RAC levels were attained by the hybrid BAG-CARIMA-LGM model, which performed noticeably better than standalone algorithms. The findings demonstrated improved Marshall stability and controlled flow along with a progressive decrease in mean bitumen content as RAC increased. While 50% RAC with rejuvenators maintained durability and structural integrity, the 30% RAC mixture produced the most balanced performance. The model’s capacity to manage non-linear interactions, volumetric variability, and aging effects was validated by statistical analyses. The BAG-CARIMA-LGM hybrid model optimizes RAC incorporation in asphalt mixtures, supports circular economy goals, and improves technical accuracy. The results point to a revolutionary route towards intelligent, environmentally friendly road systems that support international sustainability objectives. Full article

Climate change significantly challenges efforts to maintain and improve crop production worldwide. Diversified crop rotations have emerged as a promising way to adapt cropping systems and bolster food security under changing climate conditions; however, robust empirical evidence remains limited. This study evaluates the long-term performance of diversified crop rotations under future climate scenarios in the North China Plain via an 80-year scenario analysis (2020–2100) spanning three shared socioeconomic pathways (SSPs:126, 370, 585). The calibrated and validated SWAP (Soil–Water–Atmosphere–Plant)–WOFOST (WOrld FOod STudies) model simulated water consumption and yield. Sustainability indices were employed to assess the cereal yield stability and compensation effect to yield loss caused by climate change. The study compares the conventional winter wheat–summer maize rotation (WM) with two legume-based rotations: soybean–WM (S–WM) and peanut–WM (P–WM). The results indicate that, under all three climate scenarios, the two legume-based rotations reduced annual water consumption by 7–9%, maintained system economic equivalent yields with one crop less, and improved water productivity by up to 10%. Future climate change decreased cereal yields by 9–26% across all rotations compared to historical baselines. However, the two legume-based rotations showed a significant residual effect, increasing subsequent cereal yields by 9–14% over the conventional WM under all scenarios. Consequently, the legume-based rotations provided a 25–51% yield compensation. Additionally, these rotations improved the sustainable yield index and system resilience and reduced cereal yield variance under future climate scenarios compared to the more vulnerable WM. This study demonstrates that diversified crop rotations are a viable strategy to mitigate negative climate impacts. The study provides critical insights for policy-makers, supporting crop-rotation diversification as a core component of risk-reduction strategies to mitigate future climate change impacts. Full article

The COVID-19 pandemic has caused market turmoil and economic distress. To understand the effect of the pandemic on the U.S. financial systemic risk, we analyze the explanatory power of detailed COVID-19 data on three market-based systemic risk measures (SRMs): Conditional Value at Risk, Distress Insurance Premium, and SRISK. In the time-series dimension, we use the Dynamic OLS model and find that financial variables, such as credit default swap spreads, equity correlation, and firm size, significantly affect the SRMs, but the COVID-19 variables do not appear to drive the SRMs. However, if we focus on the first wave of the COVID-19 pandemic in March 2020, we find a positive and significant COVID-19 effect, especially before the government interventions. In the cross-sectional dimension, we run fixed-effect and event-study regressions with clustered variance-covariance matrices. We find that market capitalization helps to reduce a firm’s contribution to the SRMs, while firm size significantly predicts the surge in a firm’s SRM contribution when the pandemic first hits the system. The policy implications include that proper market interventions can help to mitigate the negative pandemic effect, and policymakers should continue the current regulation of required capital holding and consider size when designating systemically important financial institutions. Full article

As life expectancy increases, pension plans face growing longevity risk. Standardized longevity-linked securities such as survivor contracts allow pension plans to transfer this risk to capital markets. However, more consensus is needed on the appropriate mortality model and premium principle to price these contracts. This paper investigates the impact of the mortality model and premium principle choice on the pricing, risk measurement, and modeling of survivor contracts. We present a framework for evaluating risk measures associated with survivor contracts, specifically survivor forwards (S-forward) and survivor swaps (S-swaps). We analyze how the mortality model and premium principle assumptions affect pricing and risk measures (value-at-risk and expected shortfall). Four mortality models (Lee–Carter, Renshaw–Haberman, Cairns–Blake–Dowd, and M6) and eight premium principles (Wang, proportional hazard, dual power, Gini, exponential, standard deviation, variance, and median absolute deviation) are considered. Our analysis highlights the need to refine mortality models and premium principles to enhance pricing accuracy and risk management. We also suggest regulators and practitioners incorporate expected shortfall alongside value-at-risk to capture tail risks and improve capital allocation. Full article

This paper develops a simplified agent-based model to investigate the dynamics of risk transfer and its implications for systemic risk within financial networks, focusing specifically on credit default swaps (CDSs) as instruments of risk allocation among banks and firms. Unlike broader models that incorporate multiple types of economic agents, our approach explicitly targets the interactions between banks and firms across three markets: credit, interbank loans, and CDSs. This model diverges from the frameworks established by prior researchers by simplifying the agent structure, which allows for more focused calibration to empirical data—specifically, a sample of Swiss banks—and enhances interpretability for regulatory use. Our analysis centers around two control variables, $CD{S}_c$ and $CD{S}_n$, which control the likelihood of institutions participating in covered and naked CDS transactions, respectively. This approach allows us to explore the network’s behavior under varying levels of interconnectedness and differing magnitudes of deposit shocks. Our results indicate that the network can withstand minor shocks, but higher levels of CDS engagement significantly increase variance and kurtosis in equity returns, signaling heightened instability. This effect is amplified during severe shocks, suggesting that CDSs, instead of mitigating risk, propagate systemic risk, particularly in highly interconnected networks. These findings underscore the need for regulatory oversight to manage risk concentration and ensure financial stability. Full article

In this paper, we consider the problem of pricing variance, volatility, covariance and correlation swaps for financial markets with semi-Markov volatilities. The paper’s motivation derives from the fact that in many financial markets, the inter-arrival times between book events are not independent or exponentially distributed but instead have an arbitrary distribution, which means they can be accurately modelled using a semi-Markov process. Through the results of the paper, we hope to answer the following question: Is it possible to calculate averaged swap prices for financial markets with semi-Markov volatilities? This question has not been considered in the existing literature, which makes the paper’s results novel and significant, especially when one considers the increasing popularity of derivative securities such as swaps, futures and options written on the volatility index VIX. Within this paper, we model financial markets featuring semi-Markov volatilities and price-averaged variance, volatility, covariance and correlation swaps for these markets. Formulas used for the numerical evaluation of averaged variance, volatility, covariance and correlation swaps with semi-Markov volatilities are presented as well. The formulas that are detailed within the paper are innovative because they provide a new, simplified method to price averaged swaps, which has not been presented in the existing literature. A numerical example involving the pricing of averaged variance, volatility, covariance and correlation swaps in a market with a two-state semi-Markov process is presented, providing a detailed overview of how the model developed in the paper can be used with real-life data. The novelty of the paper lies in the closed-form formulas provided for the pricing of variance, volatility, covariance and correlation swaps with semi-Markov volatilities, as they can be directly applied by derivative practitioners and others in the financial industry to price variance, volatility, covariance and correlation swaps. Full article

This paper overviews our recent results of energy market modeling, including The option pricing formula for a mean-reversion asset, variance and volatility swaps on energy markets, applications of weather derivatives on energy markets, pricing crude oil options using the Lévy processes, energy contracts modeling with delayed and jumped volatilities, applications of mean-reverting processes on Alberta energy markets, and alternatives to the Black-76 model for options valuation of futures contracts. We will also consider the clean renewable energy prospective in Canada, and, in particular, in Alberta and Calgary. Full article

The main problem in pricing variance, volatility, and correlation swaps is how to determine the evolution of the stochastic processes for the underlying assets and their volatilities. Thus, sometimes it is simpler to consider pricing of swaps by so-called pseudo-statistics, namely, the pseudo-variance, -covariance, -volatility, and -correlation. The main motivation of this paper is to consider the pricing of swaps based on pseudo-statistics, instead of stochastic models, and to compare this approach with the most popular stochastic volatility model in the Cox–Ingresoll–Ross (CIR) model. Within this paper, we will demonstrate how to value different types of swaps (variance, volatility, covariance, and correlation swaps) using pseudo-statistics (pseudo-variance, pseudo-volatility, pseudo-correlation, and pseudo-covariance). As a result, we will arrive at a method for pricing swaps that does not rely on any stochastic models for a stochastic stock price or stochastic volatility, and instead relies on data/statistics. A data/statistics-based approach to swap pricing is very different from stochastic volatility models such as the Cox–Ingresoll–Ross (CIR) model, which, in comparison, follows a stochastic differential equation. Although there are many other stochastic models that provide an approach to calculating the price of swaps, we will use the CIR model for comparison within this paper, due to the popularity of the CIR model. Therefore, in this paper, we will compare the CIR model approach to pricing swaps to the pseudo-statistic approach to pricing swaps, in order to compare a stochastic model to the data/statistics-based approach to swap pricing that is developed within this paper. Full article

In this paper, we creatively price the discretely sampled variance swaps under the mean-reverting Gaussian model (MRG model in short) with regime-switching asymmetric double exponential jump diffusion. We extend the traditional MRG model by further considering the trend of the financial market as well as a sudden and unexpected event of the market. This new model is meaningful because it uses observable Markov chains that represent market states to adjust its parameters, which helps capture the movement of the market and fluctuations in asset prices. By utilizing the characteristic function and the conditional transition characteristic function, we obtain analytical solutions for pricing formulae. Note that this is our first effort to provide the analytical solution for the ordinary differential equations satisfied by the Feynman–Kac theorem. To achieve this, we have developed a new methodology in Proposition 2 that involves dividing the sampling interval into more detailed switching and non-switching intervals. One significant advantage of our closed-form solution is its high computational accuracy and efficiency. Subsequent semi-Monte Carlo simulations will provide specific validation results. Full article

The robustness of an atomic fountain interferometer with respect to variations in the initial velocity of the atoms and deviations from the optimal pulse amplitude is examined. We numerically simulate the dynamics of an interferometer in momentum space with a maximum separation of $20\hslash k$ and map out the expected signal contrast depending on the variance of the initial velocity distribution and the value of the laser field amplitude. We show that an excitation scheme based on rapid adiabatic passage significantly enhances the expected signal contrast, compared to the commonly used scheme consisting of a series of $\pi /2$ and $\pi$ pulses. We demonstrate further substantial increase of the robustness by using optimal control theory to identify splitting and swapping pulses that perform well on an ensemble average of pulse amplitudes and velocities. Our results demonstrate the ability of optimal control to significantly enhance future implementations of atomic fountain interferometry. Full article

We study two credit risk models with occupation time and liquidation barriers: the structural model and the hybrid model with hazard rate. The defaults within the models are characterized in accordance with Chapter 7 (a liquidation process) and Chapter 11 (a reorganization process) of the U.S. Bankruptcy Code. The models assume that credit events trigger as soon as the occupation time (the cumulative time the firm’s value process spends below some threshold level) exceeds the grace period (time allowance). The hazard rate model extends the structural occupation time models and presumes that other random factors may also lead to credit events. Both approaches allow the firm to fulfill its obligations during the grace period. We derive new closed-from pricing formulas for credit derivatives containing the (risk-neutral) probability of defaults and credit default swap (CDS) spreads as special cases, which are derived analytically via a spectral expansion methodology. Our method works for any solvable diffusion, such as the geometric Brownian motion (GBM) and several state-dependent volatility processes, including the constant elasticity of variance (CEV) model. It allows us to write the pricing formulas explicitly as infinite series that converges rapidly. We then calibrate our models (assuming that GBM governs the firm’s value) to market CDS spreads from the Total Energy company. Our calibration results show that the computations are fast, and the fit is near-perfect. Full article

The ability of animal orthologs of human mitochondrial transcription factor A (hTFAM) to support the replication of human mitochondrial DNA (hmtDNA) does not follow a simple pattern of phylogenetic closeness or sequence similarity. In particular, TFAM from chickens (Gallus gallus, chTFAM), unlike TFAM from the “living fossil” fish coelacanth (Latimeria chalumnae), cannot support hmtDNA replication. Here, we implemented the recently developed GeneSwap approach for reverse genetic analysis of chTFAM to obtain insights into this apparent contradiction. By implementing limited “humanization” of chTFAM focused either on amino acid residues that make DNA contacts, or the ones with significant variances in side chains, we isolated two variants, Ch13 and Ch22. The former has a low mtDNA copy number (mtCN) but robust respiration. The converse is true of Ch22. Ch13 and Ch22 complement each other’s deficiencies. Opposite directionalities of changes in mtCN and respiration were also observed in cells expressing frog TFAM. This led us to conclude that TFAM’s contributions to mtDNA replication and respiratory chain biogenesis are genetically separable. We also present evidence that TFAM residues that make DNA contacts play the leading role in mtDNA replication. Finally, we present evidence for a novel mode of regulation of the respiratory chain biogenesis by regulating the supply of rRNA subunits. Full article

This paper presents analytical formulas for pricing generalized swaps, including the moment swap, gamma swap, entropy swap and self-quantoed variance swap. The formulas are based on closed-form formulas for the conditional expectations of the product of the price and its logarithm and the product of the price and the convenience yield obtained by solving a partial differential equation corresponding to the infinitesimal generator for the two-dimensional diffusion process. In this respect, the formulas obtained are combinatorial in nature and are solved via an affine transformation involving the complete Bell polynomials. The formulas are quite suitable for practical usage with symmetric and skew-symmetric properties, i.e., they are simpler and more compact compared with those existing in the literature. Moreover, for moments swaps, we show in general that the strike price does not depend on the initial spot price but depends only on the initial convenience yield, which highlights the resulting versatility in this respect. Full article