Efficient Pricing of European-Style Options Under Heston's Stochastic Volatility Model

Heston's stochastic volatility model is frequently employed by finance researchers and practitioners. Fast pricing of European-style options in this setting has considerable practical significance. This paper derives a computationally efficient formula for the value of a European-style put under Heston's dynamics, by utilizing a transform approach based on inverting the characteristic function of the underlying stock's log-price and by exploiting the characteristic function's symmetry. The value of a European-style call is computed using a parity relationship. The required characteristic function is obtained as a special case of a more general solution derived in prior research. Computational advantage of the option value formula is illustrated numerically. The method can help to mitigate the time cost of algorithms that require repeated evaluation of European-style options under Heston's dynamics.characteristic function inversion; Heston's model; European-style option

Pricing American-style Derivatives under the Heston Model Dynamics: A Fast Fourier Transformation in the Geske–Johnson Scheme

Theoretical research on option valuation tends to focus on pricing the plain-vanilla European-style derivatives. Duffie, Pan, and Singleton (Econometrica, 2000) have recently developed a general transform method to determine the value of European options for a broad class of the underlying price dynamics. Contrastingly, no universal and analytically attractive approach to pricing of American-style derivatives is yet available. When the underlying price follows simple dynamics, literature suggests using finite difference methods. Simulation methods are often applied in more complicated cases. This paper addresses the valuation of American-style derivatives when the price of an underlying asset follows the Heston model dynamics (Rev.Fin.S., 1993). The model belongs to the class of stochastic volatility models, which have been proposed in the hope of remedying the strike-price biases of the Black–Scholes formula. Option values are obtained by a variant of the Geske–Johnson scheme (JF, 1984), which has been devised in the context of the Black–Scholes model. The scheme exploits the fact that an American option is the limit of a sequence of “Bermudan†derivatives. The latter ones can be priced recursively according to a simple formula, and iterations start from valuing a corresponding European-style security. To implement the recursion, one needs to obtain the expected value of “Bermudan†prices in the joint measure of the state variables of the model. Since the joint density must be, in turn, recovered by inverting the joint characteristic function, an unmodified Geske–Johnson algorithm implies a computationally unfeasible multiple integration. To drastically reduce the cost of numerical integration, I suggest applying a kernel-smoothed bivariate fast Fourier transformation to obtain the density function. Numerical accuracy of the method is assessed by predicting option prices of the S&P 100 index optionsAmerican-style option, stochastic volatility model, Geske–Johnson scheme, characteristic function inversion, fast Fourier transform

Efficient Pricing of European-Style Options under Heston’s Stochastic Volatility Model

Heston’s stochastic volatility model is frequently employed by finance researchers and practitioners. Fast pricing of European-style options in this setting has considerable practical significance. This paper derives a computationally efficient formula for the value of a European-style put under Heston’s dynamics, by utilizing a transform approach based on inverting the characteristic function of the underlying stock’s log-price and by exploiting the characteristic function’s symmetry. The value of a European-style call is computed using a parity relationship. The required characteristic function is obtained as a special case of a more general solution derived in prior research. Computational advantage of the option value formula is illustrated numerically. The method can help to mitigate the time cost of algorithms that require repeated evaluation of European-style options under Heston’s dynamics

The impact of deposit insurance on depositor behavior during a crisis: A conjoint analysis approach

We investigate the effectiveness of initiating deposit insurance at the outset of a banking crisis. Using a conjoint analysis approach that allows us to consider the simultaneous impact of multiple deposit insurance attributes and various counterfactuals, we ask a multinational sample of respondents how they would view hypothetical account profiles following the failure of a large competing bank. Previous experience matters: respondents from countries without explicit deposit insurance exhibit greater withdrawal risk, suggesting that the introduction of deposit insurance during a crisis may be only partially successful in preventing bank runs. They also impose a higher deposit interest rate premium. Having a long-term bank relationship reduces withdrawal risk, as does the absence of co-insurance

Can Banks Placate Knowledgeable Depositors by Offering Higher Interest Rates During a Banking Crisis?

Using a conjoint analysis of 417 finance professionals from six countries, we find no evidence that higher interest rates cause knowledgeable depositors to moderate their withdrawals during a banking crisis. In fact, intended withdrawals are positively correlated with expected interest rate changes. After accounting for endogeneity, this relationship disappears, consistent with the attractiveness of higher returns being offset by increased doubts about bank solvency. The withdrawal decisions of finance professionals are also independent of their personal characteristics, but they appear to place considerable store on deposit insurance generosity and the presence of a formal insurance fund

Investigating Treatment Effects of Participating Jointly in SNAP and WIC when the Treatment is Validated Only for SNAP

USDA operates several food assistance programs aimed at alleviating food insecurity. Little is known about how they interact. We focus on SNAP and WIC, two of the largest means-tested programs that provide resources to low-income households to purchase food and differ in several respects. Our question is the extent to which participation in both programs alleviates food insecurity compared with participation in SNAP alone. We bound underlying causal effects by applying nonparametric treatment effect methods that allow for endogenous selection and underreported program participation to data from the National Household Food Acquisition and Purchase Survey (FoodAPS). FoodAPS contains administrative data to validate SNAP participation and data on the local food environment, including the cost of food, allowing us to tighten bounds on the causal effects. Under relatively weak assumptions about the selection process, combined with a food expenditure-based monotone instrumental variable, we identify that the marginal impact of participating in both programs is strictly positive. This finding provides evidence that the programs are nonredundant, which can aid policymakers in improving the design and targeting of food assistance programs. The methods showcase what can be learned about treatment effects when validation data are available for one program but not the other

The Effect of Household Financial, Time and Environmental Constraints on Very Low Food Security among Children

Food insecurity is detrimental to children’s well-being. A better understanding of factors contributing to low and very low food security among children in the United States can guide the design of food assistance programs. We analyze the effects of household characteristics and local food environment attributes, including food prices and availability of food stores and eating places, on children’s food insecurity. We also investigate the effects of these characteristics and attributes on food preparation time. Using Becker’s household production approach, we propose an economic model that formalizes the use of constrained financial and time resources in the household. The model motivates empirical specifications of food insecurity and food preparation time equations, which are estimated jointly by maximum likelihood. We assemble a large dataset of households with children by pooling across years and matching the Food Security Supplement of the Current Population Survey, 2002–2010, and the American Time Use Survey, 2003–2011. These data are supplemented with location-specific variables from several large national sources. The estimates suggest intuitively plausible effects of demographic and socioeconomic characteristics on food insecurity and food preparation time. They also indicate that residing in a location with higher fast food prices and with fewer convenience stores and specialty food stores tends to exacerbate food insecurity. Public policies supporting parents’ financial, transportation, and childcare needs, enhancing parents’ resource management skills, supporting the food needs of school-age children, and encouraging businesses to open specialty food stores in poorer neighborhoods can help alleviate very low food security among children

Effects of Family, Friends, and Relative Prices on Fruit and Vegetable Consumption by African American Youths

Facilitating healthy eating among young people, particularly among minorities who are at high risk for gaining excess weight, is at the forefront of current policy discussions and food program reviews. We investigate the effects of social interactions and relative prices on fruit and vegetable consumption by African American youths using rich behavioral data from the Family and Community Health Study and area-specific food prices. We find the presence of endogenous effects between a youth and parent, but not between a youth and friend. Lower relative prices of fruits and vegetables tend to increase intakes. Results suggest that health interventions targeting a family member may be an effective way to increase fruit and vegetable intake by African Americans as a result of spillover consumption effects between the youths and parents.social interactions, healthy food choices, fruit and vegetable consumption, African American youth, Agricultural and Food Policy, Consumer/Household Economics, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Health Economics and Policy, Institutional and Behavioral Economics, I12, J15, C35,