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This paper presents the willow tree algorithms for pricing variable annuities with Guaranteed Minimum Withdrawal Benefits (GMWB), where the underlying fund dynamics evolve under the Merton jump-diffusion process or constant-elasticity-of-variance (CEV) process. The GMWB rider gives the...
Persistent link: https://www.econbiz.de/10012898983
Exact simulation schemes under the Heston stochastic volatility model (e.g., Broadie-Kaya and Glasserman-Kim) suffer from computationally expensive Bessel function evaluations. We propose a new exact simulation scheme without the Bessel function, based on the observation that the conditional...
Persistent link: https://www.econbiz.de/10014239004
Using real options game models, we consider the characterization of strategic equilibria associated with an asymmetric R&D race between an incumbent firm and an entrant firm in the development of a new innovative product under market and technological uncertainties. The random arrival time of...
Persistent link: https://www.econbiz.de/10013008394
Most of the existing pricing models of variance derivative products assume continuous sampling of the realized variance processes, though actual contractual specifications compute the realized variance based on sampling at discrete times. We present a general analytic approach for pricing...
Persistent link: https://www.econbiz.de/10013115236
We consider the stochastic control model with finite time horizon for a mixed duopoly R&D (Research and Development) race between the profit-maximizing private firm and welfare maximizing public firm. In our two-firm stochastic control R&D race model, the stochastic control variable is taken to...
Persistent link: https://www.econbiz.de/10013050977
Assuming the absence of market frictions, deterministic interest rates, and certainty in dividend payouts from the stocks in the index basket, an arbitrageur can lock in the profit of a positive (negative) arbitrage basis in a stock index futures by adopting a short (long) futures strategy. In...
Persistent link: https://www.econbiz.de/10013149201
Convexity correction arises when one computes the expected value of an interest rate index under a probability measure other than its own natural martingale measure. As a typical example, the natural martingale measure of the swap rate is the swap measure with annuity as the numeraire. However,...
Persistent link: https://www.econbiz.de/10013152479
We analyze the counterparty risk for credit default swaps using the Markov chain model of portfolio credit risk of multiple obligors with interacting default intensity processes. The default correlation between the protection seller and underlying entity is modeled by an increment in default...
Persistent link: https://www.econbiz.de/10013158690
We consider the saddlepoint approximation methods for pricing derivatives whose payoffs depend on the discrete realized variance of the underlying price process of a risky asset. Most of the earlier pricing models of variance products and volatility derivatives use the quadratic variation...
Persistent link: https://www.econbiz.de/10013089213
We propose robust numerical algorithms for pricing discrete variance options and volatility swaps under general time-changed Lèvy processes. Since analytic pricing formulas of these derivatives are not available, some of the earlier pricing methods use the quadratic variation approximation for...
Persistent link: https://www.econbiz.de/10012973000