This paper presents a tractable model of non-linear dynamics of market returns using a Langevin approach.Due to non-linearity of an interaction potential, the model admits regimes of both small and large return fluctuations. Langevin dynamics are mapped onto an equivalent quantum mechanical (QM)...

A new acceptable price approach to stochastic endpoint determination at given horizon accounting for the marginal investor beliefs and behaviour was proposed. Two-sided filtration with FBSDE defined stochastic dynamics was formulated for acceptable asset price under the risk-neutral probability...

We consider fundamental questions of arbitrage pricing arising when the uncertainty model incorporates volatility uncertainty. With a standard probabilistic model, essential equivalence between the absence of arbitrage and the existence of an equivalent martingale measure is a folk theorem, see...

To analyze the economic significance of pricing errors of stock index options, a system of linear inequalities is developed which completely characterizes all risk arbitrage opportunities which arise if a well-behaved pricing kernel does not exist. The Stochastic Arbitrage system can account for...

Classical quantitative finance models such as the Geometric Brownian Motion or its later extensions such as local or stochastic volatility models do not make sense when seen from a physics-based perspective, as they are all equivalent to a negative mass oscillator with a noise. This paper...

Contrary to the common view that exact pricing is prohibitive owing to the curse of dimensionality, this study proposes an efficient and unified method for pricing options under multivariate Black-Scholes-Merton (BSM) models, such as the basket, spread, and Asian options. The option price is...

We analyze the joint cross-section of monthly S&P500 stock index options and monthly CBOE Volatility Index options by constructing and evaluating option combinations that appear undervalued for all permissible values of the latent parameters of the unifying option pricing model and the joint...

The owner of a real option does not have the necessary expertise to manage the investment project and needs to contract with an expert in order to exercise the real option. The potential managers (the experts) have private information about their respective cost of investing in the project. The...

We derive risk-neutral option price formulas for plain-vanilla and exotic electricity futures derivatives on the basis of diverse arithmetic multi-factor Ornstein-Uhlenbeck spot price models admitting seasonality. In these setups, we take additional forward-looking knowledge on future price...

We derive risk-neutral option price formulas for plain-vanilla temperature futures derivatives on the basis of several multi-factor Ornstein-Uhlenbeck temperature models which allow for seasonality in the mean level and volatility. Our main innovation consists in an incorporation of omnipresent...