Pricing European and Barrier Options in the Fractional Black-Scholes Market

The aim of this paper is to obtain the valuation formulas for European and barrier options if the underlying of the option contract is supposed to be driven by a fractional Brownian motion with Hurst parameter greater than 0.5. The paper is build upon the framework developed in Necula (2007) for the valuation of derivative products in the fractional Black-Scholes market. We also obtain a reflection principle for the fractional Brownian motion.fractional Brownian motion, fractional Black-Scholes market, the reflection principle for the fractional Brownian motion, mathematical finance, European option, barrier option

Asset Pricing in a Two-Country Discontinuous General Equilibrium Model

The aim of this paper is to develop a framework for asset pricing in a continuous time general equilibrium model for a two country Lucas type economy. The model assumes that the output in the two countries follows a jump-diffusion stochastic process characterized by constant growth rates and volatilities and by log-normal amplitude of the jumps. Using this specification we deduce the fundamental evaluation equations for financial assets as well as a formula for the price of exchange rate options in this economy.general equilibrium model, two-country Lucas economy, exchange rate, risk premium, jump-diffusion

A Two-Country Discontinuous General Equilibrium Model

The aim of this paper is to develop a continuous time general equilibrium model for a two country Lucas type economy. The model assumes that the output in the two countries follows a jump-diffusion stochastic process. We obtain the results concerning the evaluation of financial assets, the determination of the exchange rate, of the interest rate, and of the risk premium in this two-country economy.general equilibrium model, two-country Lucas economy, exchange rate, risk premium, jump-diffusion

Modeling Heavy-Tailed Stock Index Returns Using the Generalized Hyperbolic Distribution

In the present study, we estimate the parameters of the Generalized Hyperbolic Distribution for a series of stock index returns including the Romanian BETC and indexes from other two Eastern European countries, Hungary and the Czech Republic. Using different econometric techniques, we investigate whether the estimated Generalized Hyperbolic Distribution is an appropriate approximation for the empirical distribution computed by non-parametric kernel econometric methods. The main finding of the analysis is that the probability density function of the estimated Generalized Hyperbolic Distribution represents a very close approximation (at least up to the 4th order term) of the empirical probability distribution function.Generalized Hyperbolic Distribution, heavy-tailed returns, non-parametric density estimation

A Framework for Derivative Pricing in the Fractional Black-Scholes Market

The aim of this paper is to develop a framework for evaluating derivatives if the underlying of the derivative contract is supposed to be driven by a fractional Brownian motion with Hurst parameter greater than 0.5. For this purpose we first prove some results regarding the quasi-conditional expectation, especially the behavior to a Girsanov transform. We obtain the risk-neutral valuation formula and the fundamental evaluation equation in the case of the fractional Black-Scholes market.fractional Brownian motion, fractional Black-Scholes market, quasiconditional expectation, mathematical finance, contingent claim

Modeling the Dependency Structure of Stock Index Returns using a Copula Function Approach

In the present study we assess the dependency structure between stock indexes by econometrically estimating the empirical copula function and the parameters of various parametric copula functions. The main finding is that the t-copula and the Gumbel-Clayton mixture copula are the most appropriate copula functions to capture the dependency structure of two financial return series. With the dependency structure given by the estimated copula functions we quantify the efficient portfolio frontier using as a risk measure CVaR (Conditional VaR) computed by Monte Carlo simulation. We find that in the case of using normal distributions for modeling individual returns the market risk is underestimated no mater what copula function is employed to capture the dependency structure.copula functions, copula mixtures, the efficient portfolio frontier, Conditional VAR, Monte Carlo simulation

The cost of Roma slavery

This article is about the voluntary or involuntary contribution of the Roma through the histoy to the economical and social development in the Romanian space. Over the centuries, Roma have suffered social exclusion, discrimination,slavery and deportations to Nazi and Romanian concentration camps. What is less documented is that they have managed to survive over the centuries as an ethnic group, even becoming privileged in certain fields. The Roma attained a high level of knowlege as handicraftsmen in an agrarian cultural space, as army tools providers, as famous musicians and appreciated entertainers; they gained recognition as of being from a different culture and speaking another language. Therefore, this article is part of a series of analyses ol Roma contribution to economic and social development of the societies that they live in, focusing on Romania - home of the largest population of Roma in Europe. I have decided to start with Roma siavery for two reasons: first of all, Roma were first mentioned in Romanian history as slaves and second, the rote and economic contribution of the slaves in the Romanian Principalities are highly relevant for the current situation of the Romanian Roma. This article makes use of the avaitabte literature on slavery of Roma ethnic groups in the Romanian Principalities as well as other materials related to Roma history, including anthropological and sociological research

DETECTING REGIME SWITCHES IN THE EUR/RON EXCHANGE RATE VOLATILITY

In the present study we develop and implement a short term exchange rate forecasting methodology using dynamic confidence intervals based on GARCH processes and we analyze whether this methodology can be used to model a regime switch in the volatility ofconditional heteroskedasticity, regime switch, exchange rates, long memory

Modelling and Detecting Long Memory in Stock Returns

In this paper we revisit this issue of long memory in stock returns by applying a range of parametric and semi-parametric techniques to daily, weekly and monthly index return data on nine countries, namely the USA, Japan, France, Great Britain, Taiwan, Singapore and Romania. We also discuss a continuous trading model based on the fractional Brownian motion (a stochastic process that exhibit long memory) and pricing derivative securities under this model.Long Memory

A Robust Assessment of the Romanian Business Cycle

The paper provides potential output and output gap estimates for the Romanian economy in the period 1998 - 2008. Our approach consists in combining the structural method of the production function with several non-structural statistical detrending methods: Hodrick-Prescott, Kalman, band-pass, and wavelet transform filters. In this way, the obtained results benefit both from the economic foundations the production function method is relying on, as well as from the flexibility of the detrending techniques. The contribution of our analysis to the scarce literature dealing with the estimation of the cyclical position of the Romanian economy is twofold. First, we identify the contribution of the production factors to the potential output growth. Second, we aggregate the results obtained through filtering techniques in a consensus estimate ascribing to each method a weight inversely related to its revision stability. Our results suggest for the period 2000-2008 an average annual growth rate of the potential output equal to 5.8%, but on a descendant slope at the end of the analyzed period, due to the adverse developments in the macroeconomic context.potential GDP, output gap, NAIRU, business cycle