Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/136741
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- Title
- Option pricing under threshold autoregressive models by threshold Esscher transform
- Related
- Journal of industrial and management optimization, Vol. 2, No. 2, (2006), p.177-197
- DOI
- 10.3934/jimo.2006.2.177
- Publisher
- American Institute of Mathematical Sciences
- Date
- 2006
- FoR/RFCD Code(s)
-
010200 Applied Mathematics
010300 Numerical and Computational Mathematics
- Author/Creator
- Siu, Tak Kuen
- Author/Creator
- Tong, Howell
- Author/Creator
- Yang, Hailiang
- Description
- This paper develops a valuation model for options under the class of self-exciting threshold autoregressive (SETAR) models and their variants for the price dynamics of the underlying asset using the self-exciting threshold autoregressive Esscher transform (SETARET). In particular, we focus on the first generation SETAR models first proposed by Tong (1977, 1978) and later developed in Tong (1980, 1983) and Tong and Lim (1980), and the second generation models, including the SETAR-GARCH model proposed in Tong (1990) and the double-threshold autoregressive heteroskedastic time series model (DTARCH) proposed by Li and Li (1996). The class of SETAR-GARCH models has the advantage of modelling the non-linearity of the conditional first moment and the varying conditional second moment of the financial time series. We adopt the SETARET to identify an equivalent martingale measure for option valuation in the incomplete market described by the discrete-time SETAR models. We are able to justify our choice of probability measure by the SETARET by considering the self-exciting threshold dynamic utility maximization. Simulation studies will be conducted to investigate the impacts of the threshold effect in the conditional mean described by the first generation model and that in the conditional variance described by the second generation model on the qualitative behaviors of the option prices as the strike price varies.
- Description
- 21 page(s)
- Subject Keyword
- 010200 Applied Mathematics
- Subject Keyword
- 010300 Numerical and Computational Mathematics
- Subject Keyword
- option valuation
- Subject Keyword
- Setar models
- Subject Keyword
- Setar-Garch models
- Subject Keyword
- Dtarch models
- Subject Keyword
- Setaret
- Subject Keyword
- infinitely divisible distributions
- Subject Keyword
- threshold dynamic utility maximization
- Resource Type
- journal article
- Organisation
- Macquarie University. Dept. of Applied Finance and Actuarial Studies
- Identifier
- http://hdl.handle.net/1959.14/136741
- Identifier
- ISSN:1547-5816
- Identifier
- mq-rm-2009000357
- Language
- eng
- Rights
- Copyright 2006 AIMS. First published in Journal of industrial and management optimization, Vol. 2, No. 2, published by the American Institute of Mathematical Society. The original article can be found at http://dx.doi.org/10.3934/jimo.2006.2.177 Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.
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