We extend the binomial option pricing model to allow for more accurate price dynamics while retaining computational simplicity. The asset price in each binomial period evolves according to two independent and successive Bernoulli trials on trade occurrence/nonoccurrence and up/down price...

We generalize the standard lattice approach of Cox, Ross, and Rubinstein (1976) from a fixed sum to a random sum in a subordinated process framework to accommodate pricing of derivatives with random-sum characteristics. The asset price change now is determined by two independent Bernoulli trials...

Empirical evidence has shown that subordinated processes represent well the price changes of stocks and futures. Using either transaction counts or trading volume as a proxy for information arrival, it supports the contention that volatility is stochastic in calendar-time because of random...

type="main" xml:lang="en" <title type="main">Abstract</title> <p>We develop an optimum risk–return hurricane hedge model in a doubly stochastic jump-diffusion economy. The model's concave risk–return trade-off dictates that a higher correlation between hurricane power and insurer's loss, a smaller variable hedging cost,...</p>

In a doubly stochastic jump‐diffusion economy with stochastic jump arrival intensity and proportional transaction costs, we develop a five‐factor risk‐return asset pricing inequality to model optimum futures hedge in the presence of clustered supply and demand shocks, stochastic basis, and...

This paper points out an error and implications of the error in the model of hedging effectiveness proposed by Howard and D'Antonio (1). The error would lead to ambiguous results if the model were used in practical applications to select the best hedging instrument. This paper proposes a new...