Quote inefficiency in options markets

In an arbitrage-free economy with non-zero bid-ask spreads the existence of payoffs whose price is lower than the price of a dominated payoff cannot be discarded in general. However, when the former price corresponds to trivial portfolios which involve buying or selling one unit of the basis assets, its presence, although not an arbitrage, is a severe market anomaly which we refer to as an inefficient quote. In an empirical study, we report evidence that indicates that in options markets both the frequency and the magnitude of these anomalies are substantial and we document puzzling patterns in their behavior.     

Financing Technological Innovation: Evidence from Patent-Intensive Firms

ABSTRACT

Equityholders of firms with high debt loads have an incentive to underinvest, a distortion that can be most costly for firms with attractive growth options. Using a novel patent-based measure of a firm's growth options, we find that firms issue more equity and shy away from debt financing when they have larger investment opportunities sets. The results are more pronounced among firms in patent-intensive industries. The findings suggest the existence of conflicts of interest between debtholders and equityholders. Our results are consistent with the use of conservative debt policies by technology-intensive firms to mitigate the debt overhang associated with their future growth options.     

Semitractability of optimal stopping problems via a weighted stochastic mesh algorithm

In this paper, we propose a Weighted Stochastic Mesh (WSM) algorithm for approximating the value of discrete‐ and continuous‐time optimal stopping problems. In this context, we consider tractability of such problems via a useful notion of semitractability and the introduction of a tractability index for a particular numerical solution algorithm. It is shown that in the discrete‐time case the WSM algorithm leads to semitractability of the corresponding optimal stopping problem in the sense that its complexity is bounded in order by with being the dimension of the underlying Markov chain. Furthermore, we study the WSM approach in the context of continuous‐time optimal stopping problems and derive the corresponding complexity bounds. Although we cannot prove semitractability in this case, our bounds turn out to be the tightest ones among the complexity bounds known in the literature. We illustrate our theoretical findings by a numerical example.     

Valuation of VIX and target volatility options with affine GARCH models

In this paper we propose semiclosed-form solutions, subject to an inversion of the Fourier transform, for the price of VIX options and target volatility options under affine GARCH models based on Gaussian and Inverse Gaussian distributions. We illustrate the advantage of the proposed analytic expressions by comparing them with those obtained from benchmark Monte–Carlo simulations. The empirical performance of the two affine GARCH models is tested using different calibration exercises based on historical returns and market quotes on VIX and SPX options.     

Extendible stock loan

In this paper, the model of extendible stock loan with forbearance is proposed. The loan is extendible, so as to prevent immediate losses or to prevent subsequent price drop; while the forbearance is granted only when the pledged share’s value is above threshold, so as to mitigate the risk-taking behavior induced by the extension. The non-synchronization of the liquidation of insolvent stock loans also alleviates the downward leverage spiral in a market downturn. Numerical analysis shows that fair extendible stock loan rates increase with the forbearance level as well as extension period, and loan rates are quite sensitive to the change of asset volatility and debt ratio. For lenders waiving the interest rates during extension period, their burden grows with extension rapidly when they grant looser forbearance and when asset volatility or loan-to-value is higher. Some suggestions are made accordingly. First, lenders offering uniform extendible loan rate can let borrowers choose between looser forbearance with shorter extension, or tighter forbearance with longer extension. Second, if the loan rate is priced fairly, lower margin requirement can only be accomplished with tighter forbearance. More looser forbearance worth higher rates.     

Expanding airport capacity of cities under uncertainty: Strategies to mitigate congestion

Airport capacity constraints are increasingly challenging the growth of air traffic. At the same time, decision-making about airport capacity investments is extremely complex, involving trade-offs. This paper’s objective is to optimise a privately owned airport system’s capacity investment decision in a city under demand uncertainty. Next to the investment size, our real options model incorporates the timing of the investment, as well as the cost of congestion. The results reveal that the larger a city’s initial airport capacity, the smaller its investment will relatively be and the lower the occupancy rate threshold at which investment will take place. We also show that, in case of a higher demand growth combined with more demand uncertainty, the city will benefit from a significantly larger investment, but made later at a higher occupancy rate. In this case, cities with a small initial capacity will sometimes even more than double current capacity. Higher airport charges and an increase in non-aeronautical revenues both lead to a later investment in more capacity, due to the increased project attractiveness. An increase in congestion costs results in a larger investment made earlier, in order to eliminate delays. Airport operational cost and capacity holding cost increases both lead to smaller investments.     

城市经营者还是市场监管者？——市场波动下地方政府土地供给非对称行为研究

研究目的:分析市场监管激励对于地方政府土地供给决策的影响。研究方法:通过建立模型对市场监管激励的影响机制进行理论分析,并基于2004—2014年中国30个省的面板数据构建门限模型进行实证检验。研究结果:地方政府的土地供给决策同时受到经济绩效和市场监管双重激励的影响,在不同的市场波动下存在非对称性:在市场较平稳时,地方政府会通过减少土地供给、提升土地价格实现其经济绩效目标;而在市场波动较大时,地方政府则会兼顾"市场监管者"的职责,通过增加土地有效供应、维持土地价格实现其经济绩效目标。研究结论:市场监管激励在地方政府的土地供给决策机制中具有显著作用,可以通过加强政绩考核中市场监管的权重来规范地方政府的土地供给行为。     

Carry trade strategies based on option-implied information: Evidence from a cross-section of funding currencies

We document carry trade returns based on the moments extracted from options on the underlying currencies. We establish three important results. First, a currency pair is predicted to have greater excess returns if option-implied returns are more volatile, are more left-skewed, and have fatter tails than the returns of other currency pairs. Second, strategies based on option-implied information improve on benchmark strategies based on realized market returns and macroeconomic data. Third, if the option-implied returns of a currency pair are more left-skewed than in the past, anti-carry trades rather than carry trades perform better.     

Valuation of forward start options under affine jump-diffusion models

Under the general affine jump-diffusion framework of Duffie et al. [Econometrica, 2000, 68, 1343–1376], this paper proposes an alternative pricing methodology for European-style forward start options that does not require any parallel optimization routine to ensure square integrability. Therefore, the proposed methodology is shown to possess a better accuracy–efficiency trade-off than the usual and more general approach initiated by Hong [Forward Smile and Derivative Pricing. Working paper, UBS, 2004] that is based on the knowledge of the forward characteristic function. Explicit pricing solutions are also offered under the nested jump-diffusion setting proposed by Bakshi et al. [J. Finance, 1997, 52, 2003–2049], which accommodates stochastic volatility and stochastic interest rates, and different integration schemes are numerically tested.     

A NEW LOOK AT SHORT‐TERM IMPLIED VOLATILITY IN ASSET PRICE MODELS WITH JUMPS

We analyze the behavior of the implied volatility smile for options close to expiry in the exponential Lévy class of asset price models with jumps. We introduce a new renormalization of the strike variable with the property that the implied volatility converges to a nonconstant limiting shape, which is a function of both the diffusion component of the process and the jump activity (Blumenthal–Getoor) index of the jump component. Our limiting implied volatility formula relates the jump activity of the underlying asset price process to the short‐end of the implied volatility surface and sheds new light on the difference between finite and infinite variation jumps from the viewpoint of option prices: in the latter, the wings of the limiting smile are determined by the jump activity indices of the positive and negative jumps, whereas in the former, the wings have a constant model‐independent slope. This result gives a theoretical justification for the preference of the infinite variation Lévy models over the finite variation ones in the calibration based on short‐maturity option prices.