Preference-free option pricing with path-dependent volatility: A closed-form approach

This paper shows how one can obtain a continuous-time preference-free option pricing model with a path-dependent volatility as the limit of a discrete-time GARCH model. In particular, the continuous-time model is the limit of a discrete-time GARCH model of Heston and Nandi (1997) that allows asymmetry between returns and volatility. For the continuous-time model, one can directly compute closed-form solutions for option prices using the formula of Heston (1993). Toward that purpose, we present the necessary mappings, based on Foster and Nelson (1994), such that one can approximate (arbitrarily closely) the parameters of the continuous-time model on the basis of the parameters of the discrete-time GARCH model. The discrete-time GARCH parameters can be estimated easily just by observing the history of asset prices. ; Unlike most option pricing models that are based on the absence of arbitrage alone, a parameter related to the expected return/risk premium of the asset does appear in the continuous-time option formula. However, given other parameters, option prices are not at all sensitive to the risk premium parameter, which is often imprecisely estimated.Options (Finance)

A closed-form GARCH option pricing model

This paper develops a closed-form option pricing formula for a spot asset whose variance follows a GARCH process. The model allows for correlation between returns of the spot asset and variance and also admits multiple lags in the dynamics of the GARCH process. The single-factor (one-lag) version of this model contains Heston's (1993) stochastic volatility model as a diffusion limit and therefore unifies the discrete-time GARCH and continuous-time stochastic volatility literature of option pricing. The new model provides the first readily computed option formula for a random volatility model in which current volatility is easily estimated from historical asset prices observed at discrete intervals. Empirical analysis on S&P 500 index options shows the single-factor version of the GARCH model to be a substantial improvement over the Black-Scholes (1973) model. The GARCH model continues to substantially outperform the Black-Scholes model even when the Black-Scholes model is updated every period and uses implied volatilities from option prices, while the parameters of the GARCH model are held constant and volatility is filtered from the history of asset prices. The improvement is due largely to the ability of the GARCH model to describe the correlation of volatility with spot returns. This allows the GARCH model to capture strike-price biases in the Black-Scholes model that give rise to the skew in implied volatilities in the index options market.Econometric models ; Financial markets ; Options (Finance) ; Prices

A discrete-time two-factor model for pricing bonds and interest rate derivatives under random volatility

This paper develops a discrete-time two-factor model of interest rates with analytical solutions for bonds and many interest rate derivatives when the volatility of the short rate follows a GARCH process that can be correlated with the level of the short rate itself. Besides bond and bond futures, the model yields analytical solutions for prices of European options on discount bonds (and futures) as well as other interest rate derivatives such as caps, floors, average rate options, yield curve options, etc. The advantage of our discrete-time model over continuous-time stochastic volatility models is that volatility is an observable function of the history of the spot rate and is easily (and exactly) filtered from the discrete observations of a chosen short rate/bond prices. Another advantage of our discrete-time model is that for derivatives like average rate options, the average rate can be exactly computed because, in practice, the payoff at maturity is based on the average of rates that can be observed only at discrete time intervals. ; Calibrating our two-factor model to the treasury yield curve (eight different maturities) for a few randomly chosen intervals in the period 1990–96, we find that the two-factor version does not improve (statistically and economically) upon the nested one-factor model (which is a discrete-time version of the Vasicek 1977 model) in terms of pricing the cross section of spot bonds. This occurs although the one-factor model is rejected in favor of the two-factor model in explaining the time-series properties of the short rate. However, the implied volatilities from the Black model (a one-factor model) for options on discount bonds exhibit a smirk if option prices are generated by our model using the parameter estimates obtained as above. Thus, our results indicate that the effects of random volatility of the short rate are manifested mostly in bond option prices rather than in bond prices.Bonds ; Options (Finance) ; Interest rates ; Derivative securities

Derivatives on volatility: some simple solutions based on observables

Proposals to introduce derivatives whose payouts are explicitly linked to the volatility of an underlying asset have been around for some time. In response to these proposals, a few papers have tried to develop valuation formulae for volatility derivatives—derivatives that essentially help investors hedge the unpredictable volatility risk. This paper contributes to this nascent literature by developing closed-form/analytical formulae for prices of options and futures on volatility as well as volatility swaps. The primary contribution of this paper is that, unlike all other models, our model is empirically viable and can be easily implemented. ; More specifically, our model distinguishes itself from other proposed solutions/models in the following respects: (1) Although volatility is stochastic, it is an exact function of the observed path of asset prices. This is crucial in practice because nonobservability of volatility makes it very difficult (in fact, impossible) to arrive at prices and hedge ratios of volatility derivatives in an internally consistent fashion, as it is akin to not knowing the stock price when trying to price an equity derivative. (2) The model does not require an unobserved volatility risk premium, nor is it predicated on the strong assumption of the existence of a continuum of options of all strikes and maturities as in some papers. (3) We show how it is possible to replicate (delta hedge) volatility derivatives by trading only in the underlying asset (on whose volatility the derivative exists) and a risk-free asset. This bypasses the problem of having to trade numerously many options on the underlying asset, a hedging strategy proposed in some other models.Derivative securities ; Hedging (Finance) ; Options (Finance)

{Bis[2-(diphenyl­phosphino)eth­yl]phenyl­phosphine-κ3 P,P′,P′′}chloridoplatinium(II) hexa­fluoridophosphate

In the title compound, [PtCl(C34H33P3)]PF6, the PtII cation adopts a distorted square-planar PtClP3 geometry, arising from the P,P′,P′′-tridentate triphos ligand and a chloride ion. Four of the F atoms of the PF6 − anion are disordered over two sets of positions in a 0.614 (17):0.386 (17) ratio

A survey of current reproducibility practices in linguistics publications

Poster: In order to move forward toward reproducible research in linguistics, we first need to know where we are now with regard to our practices for methodological clarity and data citation in publications. In this poster we share the results of a study of over 370 journal articles, dissertations, and grammars, which is taken as a sample of current practices in the field. The publications all come from a ten-year span. The journals were selected for broad coverage. Grammars included published grammars and dissertations written as grammars, with broad geographic coverage, both in terms of subject language and publisher or university.These publications are critiqued on the basis of transparency of data source, data collection methods, analysis, and storage. While we find examples of transparent reporting, most of the surveyed research does not include key metadata, methodological information, or citations that are resolvable to the data on which the analyses are based.In order to move forward toward reproducible research in linguistics, we first need to know where we are now with regard to our practices for methodological clarity and data citation in publications. In this poster we share the results of a study of over 370 journal articles, dissertations, and grammars, which is taken as a sample of current practices in the field. The publications all come from a ten-year span. The journals were selected for broad coverage. Grammars included published grammars and dissertations written as grammars, with broad geographic coverage, both in terms of subject language and publisher or university.These publications are critiqued on the basis of transparency of data source, data collection methods, analysis, and storage. While we find examples of transparent reporting, most of the surveyed research does not include key metadata, methodological information, or citations that are resolvable to the data on which the analyses are based.This material is based upon work supported by the National Science Foundation under grant SMA-1447886

Putting practice into words: The state of data and methods transparency in grammatical descriptions

Language documentation and description are closely related practices, often performed as part of the same fieldwork project on an un(der)-studied language. Research trends in recent decades have seen a great volume of publishing in regards to the methods of language documentation, however, it is not clear that linguists' awareness of the importance of robust data-collection methods is translating into transparency about those methods or data citation in resultant publications. We analyze 50 dissertations and 50 grammars from a ten-year span (2003-2012) to assess the current state of the field. Publications are critiqued on the basis of transparency of data collection methods, analysis and storage, as well as citation of primary data. While we found examples of transparent reporting in these areas, much of the surveyed research does not include key information about methodology or data. We acknowledge that descriptive linguists often practice good methodology in data collection, but as a field we need to build a better culture with regard to making this clear in research writing. Thus we conclude with suggested benchmarks for the kind of information we believe is vital for creating a rich and useful research methodology in both long and short format descriptive research writing.National Foreign Language Resource Cente

Putting practice into words: Fieldwork methodology in grammatical descriptions

Language documentation and description are closely related tasks, often performed as part of the same fieldwork project on an un(der)-studied language. However, since Himmelmann (1998) we have been encouraged to consider that documentation and description are methodologically different, and that data collected with documentary methods can enable verification of descriptive claims based upon them. The last decade has seen a surge in the literature on good fieldwork methodology, including Gippert, Himmelmann & Mosel (2006), Crowley (2007), Bowern (2008), Chelliah & De Reuse (2011) and Thieberger (2012). The result is that linguists are more aware of good methodological practices for data collection than ever. These include attention to metadata about speaker demographics, setting, linguistic and discourse types; information about tools, equipment, and stimuli; a description of the fieldwork conditions including time spent among speakers; and a description of archiving practices and locatability of data. However, it is not clear that linguists' awareness of the importance of robust data-collection methods is translating into transparency about those methods in resultant publications. Clear methodological description is a hallmark of reproducible and reliable scientific research (Author 2014, Authors In Prep), but documentary and descriptive linguists rarely receive clear advice on how to discuss the methods they use. In this paper we present a survey of 50 published grammars, 50 grammar-based dissertations and 200+ journal articles with regard to how explicitly authors discuss their data collection methods, and what kinds of information they include. The publications surveyed were selected from a ten-year period beginning five years after Himmelmann 1998 encouraged the use of language documentation to provide verification for language description; journal articles come from nine journals selected for breadth of geography, linguistic subfield, and theoretical approach. We find that while there are some examples of strong methodologically-driven writing, the majority of authors do not include key documentary metadata or methodological information. The result is that it is often difficult or impossible to verify or reproduce descriptive linguistic claims, making descriptive linguistics one of the few social sciences to not require researchers to back up claims with an explicit statement of methodology. We acknowledge that descriptive linguists often practice good methodology in data collection, but need encouragement to make this clear in their writing. Thus we conclude with clear benchmarks for the kind of information we believe is vital for creating a rich and useful research methodology in both long and short format descriptive research writing. References Author. 2014. [Title omitted for anonymity]. In Amanda Harris, Nick Thieberger & Linda Barwick (eds.), Research, records, and responsibility: Ten years of the Pacific and Regional Archive for Digital Sources in Endangered Cultures. Sydney: University of Sydney Press. Authors. In prep. Citation and transparency in descriptive linguistics. Bowern, Claire. 2008. Linguistic fieldwork: a practical guide. Basingstoke [England] ; New York: Palgrave Macmillan. Chelliah, Shobhana L., and Willem J. De Reuse. 2011. Handbook of descriptive linguistic fieldwork. London: Springer. Crowley, Terry. 2007. Field linguistics: a beginner's guide. Edited by Nicholas Thieberger, Oxford linguistics. Oxford ; New York: Oxford University Press. Gippert, Jost, Nikolaus P. Himmelmann, & Ulrike Mosel. 2006. Essentials of language documentation. Berlin: Mouton de Gruyter. Himmelmann, Nikolaus P. 1998. "Documentary and descriptive linguistics." Linguistics no. 36:161–195. Thieberger, Nicholas. 2012. The Oxford handbook of linguistic fieldwork. Oxford: Oxford University Press