Optimal Portfolios with Bounded Capital at Risk

We consider some continuous-time Markowitz type portfolio problems that consist of maximizing expected terminal wealth under the constraint of an upper bound for the capital at risk. In a Black–Scholes setting we obtain closed-form explicit solutions and compare their form and implications to those of the classical continuous-time mean-variance problem. We also consider more general price processes that allow for larger fluctuations in the returns.     

Optimal portfolios with a positive lower bound on final wealth

We consider the determination of optimal portfolios under a lower bound on the final wealth. Possible applications range from capital guarantee strategies over life insurance investment where part of the benefit is a guaranteed return on capital to continuous-time mean-variance problems with a strictly positive lower bound. Our solution method consists of transforming the original problem into a portfolio problem without a positive lower bound but a transformed utility function and a modified initial wealth.     

Voluntary Disclosure of Nonproprietary Information: A Complete Equilibrium Characterization

The so-called disclosure principle is a 'puzzle' in the accounting literature: Game theoretic models of financial markets show that in equilibrium firms should disclose all their private information. Yet, the result is not convincing. Researchers have therefore built sophisticated models in order to demonstrate for which reasons the disclosure principle might fail. This note shows that even in the original model there are multiple equilibria. In those equilibria good types disclose and bad types do not. The commonly known full disclosure equilibrium is a limit point of the equilibrium set.     

Drift matters: An analysis of commodity derivatives

This article presents a reduced‐form, two‐factor model to price commodity derivatives, which generalizes the model by Schwartz and Smith (2000). The model allows for two mean‐reverting stochastic factors and therefore implies that spot and futures prices can be stationary. An empirical study for the crude oil market tests the new model. Out‐of‐sample pricing and hedging results for futures and forwards show that the new model dominates the nonstationary model by Schwartz and Smith in the following sense: It works equally well for short‐term contracts but leads to major improvements for long‐term contracts. This finding is particularly relevant for typical applications like the valuation of commodity‐linked real assets with long maturities. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:211–241, 2005     

Can outstanding dividend payments be estimated by American options?

Based on historical market data for American options on a stock and no-arbitrage bounds on future dividends they can!      

How to hedge if the payment date is uncertain?

This paper investigates how firms should hedge price risk when payment dates are uncertain. We derive variance-minimizing strategies and show that the instrument choice is essential for this problem, similar to the choice between a strip and a stack hedge. The first setting concentrates on futures hedges, whereas the second allows for nonlinear derivatives. In both settings, firms should take positions in derivatives with different maturities simultaneously. We present an empirical analysis for commodities and exchange rates, showing that in both settings the optimal strategy clearly outperforms the commonly used heuristic strategies which consider only one hedging instrument at a time.     

A machine learning-based price state prediction model for agricultural commodities using external factors

Decisions in Economics and Finance - In recent times of noticeable climate change the consideration of external factors, such as weather and economic key figures, becomes even more crucial for a...     

Risk-adjusted option-implied moments

This paper provides a new way of converting risk-neutral moments into the corresponding physical moments, which are required for many applications. The main theoretical result is a new analytical representation of the expected payoffs of put and call options under the physical measure in terms of current option prices and a representative investor’s preferences. This representation is then used to derive analytical expressions for a variety of ex-ante physical return moments, showing explicitly how moment premiums depend on current option prices and preferences. As an empirical application of our theoretical results, we provide option-implied estimates of the representative stock market investor’s disappointment aversion using S&P 500 index option prices. We find that disappointment aversion has a procyclical pattern. It is high in times of high index levels and declines when the index falls. We confirm the view that investors with high risk aversion and disappointment aversion leave the stock market during times of turbulence and reenter it after a period of high returns.     

A structural Heath–Jarrow–Morton framework for consistent intraday spot and futures electricity prices

The framework is based on stochastic processes with economic interpretations and is consistent with the initial forward price curve