OpenAlex · American Economic Review · 2000 · cites 2549
We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets—i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of…
Anil Kashyap, Jeremy C. Stein
arXiv · arXiv · 2016
Testing procedures for predictive regressions with lagged autoregressive variables imply a suboptimal inference in presence of small violations of ideal assumptions. We propose a novel testing framework resistant to such violations, which is consistent with nearly integrated regressors and applicable to multi-predictor settings, when the data may only approximately follow a predictive regression model. The Monte Carl…
Lorenzo Camponovo, Olivier Scaillet, Fabio Trojani
arXiv · arXiv q-fin · 2025
Conditional Autoencoders (CAEs) offer a flexible, interpretable approach for estimating latent asset-pricing factors from firm characteristics. However, existing studies usually limit the latent factor dimension to around K=5 due to concerns that larger K can degrade performance. To overcome this challenge, we propose a scalable framework that couples a high-dimensional CAE with an uncertainty-aware factor selection …
Ryan Engel, Yu Chen, Pawel Polak, Ioana Boier
arXiv · arXiv q-fin · 2021
In this work we deal with the funding costs rising from hedging the risky securities underlying a target volatility strategy (TVS), a portfolio of risky assets and a risk-free one dynamically rebalanced in order to keep the realized volatility of the portfolio on a certain level. The uncertainty in the TVS risky portfolio composition along with the difference in hedging costs for each component requires to solve a co…
Roberto Daluiso, Emanuele Nastasi, Andrea Pallavicini, Stefano Polo
arXiv · arXiv q-fin · 2020
We analyze the phenomena of spontaneous symmetry breaking in Quantum Finance by using as a starting point the Black-Scholes (BS) and the Merton-Garman (MG) equations expressed in the Hamiltonian form. In this scenario the martingale condition (state) corresponds to the vacuum state which becomes degenerate when the symmetry of the system is spontaneously broken. We then analyze the broken symmetries of the system and…
Ivan Arraut, Alan Au, Alan Ching-biu Tse
arXiv · arXiv q-fin · 2020
Trading option strangles is a highly popular strategy often used by market participants to mitigate volatility risks in their portfolios. In this paper we propose a measure of the relative value of a delta-Symmetric Strangle and compute it under the standard Black-Scholes option pricing model. This new measure accounts for the price of the strangle, relative to the Present Value of the spread between the two strikes,…
Ben Boukai
arXiv · arXiv q-fin · 2020
The purpose of this paper is to improve the accuracy of dynamic hedging using implied volatilities generated by genetic programming. Using real data from S&P500 index options, the genetic programming's ability to forecast Black and Scholes implied volatility is compared between static and dynamic training-subset selection methods. The performance of the best generated GP implied volatilities is tested in dynamic hedg…
Fathi Abid, Wafa Abdelmalek, Sana Ben Hamida
arXiv · arXiv q-fin · 2019
This study presents new analytic approximations of the stochastic-alpha-beta-rho (SABR) model. Unlike existing studies that focus on the equivalent Black-Scholes (BS) volatility, we instead derive the equivalent constant-elasticity-of-variance (CEV) volatility. Our approach effectively reduces the approximation error in a way similar to the control variate method because the CEV model is the zero vol-of-vol limit of …
Jaehyuk Choi, Lixin Wu
arXiv · arXiv q-fin · 2017
Black-Scholes (BS) is the standard mathematical model for option pricing in financial markets. Option prices are calculated using an analytical formula whose main inputs are strike (at which price to exercise) and volatility. The BS framework assumes that volatility remains constant across all strikes, however, in practice it varies. How do traders come to learn these parameters? We introduce natural models of learni…
Tushar Vaidya, Carlos Murguia, Georgios Piliouras
arXiv · arXiv q-fin · 2016
We consider arbitrage free valuation of European options in Black-Scholes and Merton markets, where the general structure of the market is known, however the specific parameters are not known. In order to reflect this subjective uncertainty of a market participant, we follow a Bayesian approach to option pricing. Here we use historic discrete or continuous observations of the market to set up posterior distributions …
Hanno Gottschalk, Elpida Nizami, Marius Schubert
arXiv · arXiv q-fin · 2014
We study partial hedging for game options in markets with transaction costs bounded from below. More precisely, we assume that the investor's transaction costs for each trade are the maximum between proportional transaction costs and a fixed transaction costs. We prove that in the continuous time Black--Scholes (BS) model, there exists a trading strategy which minimizes the shortfall risk. Furthermore, we use binomia…
Yan Dolinsky, Yuri Kifer
arXiv · arXiv q-fin · 2010
It is known that Heston's stochastic volatility model exhibits moment explosion, and that the critical moment $s_+$ can be obtained by solving (numerically) a simple equation. This yields a leading order expansion for the implied volatility at large strikes: $σ_{BS}( k,T)^{2}T\sim Ψ(s_+-1) \times k$ (Roger Lee's moment formula). Motivated by recent "tail-wing" refinements of this moment formula, we first derive a nov…
P. Friz, S. Gerhold, A. Gulisashvili, S. Sturm
arXiv · arXiv q-fin · 2010
Our derivation of the distribution function for future returns is based on the risk neutral approach which gives a functional dependence for the European call (put) option price, C(K), given the strike price, K, and the distribution function of the returns. We derive this distribution function using for C(K) a Black-Scholes (BS) expression with volatility in the form of a volatility smile. We show that this approach …
L. Spadafora, G. P. Berman, F. Borgonovi
arXiv · arXiv q-fin · 2016
We propose a finite difference scheme to simulate solutions to a certain type of hyperbolic stochastic partial differential equation (HSPDE). These solutions can in turn estimate so called volatility modulated Volterra (VMV) processes and Lévy semistationary (LSS) processes, which is a class of processes that have been employed to model turbulence, tumor growth and electricity forward and spot prices. We will see tha…
Fred Espen Benth, Heidar Eyjolfsson
arXiv · arXiv q-fin · 2013
In the past decades, advanced probabilistic methods have had significant impact on the field of finance, both in academia and in the financial industry. Conversely, financial questions have stimulated new research directions in probability. In this survey paper, we review some of these developments and point to some areas that might deserve further investigation. We start by reviewing the basics of arbitrage pricing …
Hans Föllmer, Alexander Schied
arXiv · arXiv q-fin · 2013
We present two different approaches to stochastic integration in frictionless model free financial mathematics. The first one is in the spirit of Itô's integral and based on a certain topology which is induced by the outer measure corresponding to the minimal superhedging price. The second one is based on the controlled rough path integral. We prove that every "typical price path" has a naturally associated Itô rough…
Nicolas Perkowski, David J. Prömel
arXiv · arXiv q-fin · 2009
It is widely recognized that when classical optimal strategies are applied with parameters estimated from data, the resulting portfolio weights are remarkably volatile and unstable over time. The predominant explanation for this is the difficulty of estimating expected returns accurately. In this paper, we modify the $n$ stock Black--Scholes model by introducing a new parametrization of the drift rates. We solve Mark…
Carl Lindberg
arXiv · arXiv q-fin · 2007
We introduce a new formulation of asset trading games in continuous time in the framework of the game-theoretic probability established by Shafer and Vovk (Probability and Finance: It's Only a Game! (2001) Wiley). In our formulation, the market moves continuously, but an investor trades in discrete times, which can depend on the past path of the market. We prove that an investor can essentially force that the asset p…
Kei Takeuchi, Masayuki Kumon, Akimichi Takemura