Want to get experience? Want to get any ideas to create new things in your life? Read methods of numerical integration now! By reading this book as soon as possible, you can renew the situation to get the inspirations. Yeah, this way will lead you to always think more and more. In this case, this book will be always right for you. When you can observe more about the book, you will know why you need this.

Methods of Numerical Integration

This paper examines why unsolicited ratings tend to be lower than solicited ratings. Both self-selection among issuers and strategic conservatism of rating agencies may be reasonable explanations. Analyses of default incidences of non-U.S. borrowers between January 1996 and December 2006 show that rating conservatism may play a role for industrial firms, but self-selection cannot be fully rejected. Neither can it for insurance companies, though data restrictions impede further conclusions. For unsolicited bank ratings, however, we find strong evidence that rating conservatism is an important cause. The downward bias also appears to increase along with banks' opaqueness.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1472729_code352217.pdf?abstractid=1107070&mirid=2

Rating Opaque Borrowers: Why are Unsolicited Ratings Lower?

Economics is increasingly adopting the methodological standards and procedures of the natural sciences. The paper analyzes this 'naturalistic turn' from the philosophical perspective on naturalism, and I discuss the implications for the field of finance. The theory of finance is an interesting case in point for the methodological issues, as it manifests a paradigmatic tension between the pure theory of finance and Behavioral Finance. I distinguish between three kinds of naturalism: mark I, the reduction of behavior on psychoneural phenomena, mark II, the transfer of patterns of causal explanations from the natural sciences to the social sciences, mark III, the enrichment of the ontology from observer-independent to observer-relative facts. Building an integrated naturalistic paradigm from these three ingredients, I show that naturalism in economics will only be completed by a simultaneous linguistic turn, with language being analyzed from the naturalistic viewpoint. I relate this proposition with recent results of research into finance, especially connecting Behavioral Finance with the sociology of finance.

/pdf/the-naturalistic-turn-in-economics-implications-for-the-1tx2w4ijfb.pdf

The naturalistic turn in economics: implications for the theory of finance

What makes institutions "real" ? One central notion has been emerging recently in sociology, which is ‘performativity’, a term borrowed from the philosophy of language. The author proposes a neurolinguistic approach to performativity that is based on John Searle’s theory of institutions, especially his concept of a "status function" and his explanation of rule-following as a neurophysiological disposition. Positing a status function, the article shows, is a performative act. The author applies the concept of "conceptual blending" borrowed from cognitive science to the status function, and gives empirical applications from the research on performativity in financial markets. He also sketches the underlying neuroscience framework following the neural theory of metaphor, which is illustrated empirically with examples from behavioral finance and neuroeconomics.

/pdf/a-neurolinguistic-approach-to-performativity-in-economics-3lmsr79pb0.pdf

A Neurolinguistic Approach to Performativity in Economics

Contingent Convertibles (“CoCos”) are contingent capital instruments which convert into shares, or have a principal write down, if a trigger event takes place. CoCos exhibit the undesirable so-called death-spiral effect : by actively hedging the equity risk, investors can (unintentionally) force the conversion by making the share price deteriorate and eventually trigger the conversion. In this paper we introduce and analyse Coupon Cancellable CoCos (“CoCa CoCos”), a new type of CoCo where coupons can be cancelled during the lifetime of the note. We provide closed-form pricing formulas for CoCa CoCos, we study the impact of coupon cancellations in the price of the bond and we show that death-spiral effect is reduced.

Close form pricing formulas for Coupon Cancellable CoCos

In Foreign Exchange Markets Compound options (options on options) are traded frequently. Instalment options generalize the concept of Compound options as they allow the holder to prolong a Vanilla Call or Put option by paying instalments of a discrete payment plan. We derive a closed-form solution to the value of such an option in the Black-Scholes model and prove that the limiting case of an Instalment option with a continuous payment plan is equivalent to a portfolio consisting of a European Vanilla option and an American Put on this Vanilla option with a time-dependent strike.

/pdf/instalment-options-a-closed-form-solution-and-the-limiting-29wsvbn382.pdf

Instalment Options: A Closed-Form Solution and the Limiting Case

We focus on closed-form option pricing in Heston's stochastic volatility model, where closed-form formulas exist only for a few option types. Most of these closed-form solutions are constructed from characteristic functions. We follow this closed-form approach and derive multivariate characteristic functions depending on at least two spot values for different points in time. The derived characteristic functions are used as building blocks to set up (semi-) analytical pricing formulas for exotic options with payoffs depending on finitely many spot values such as fader options and discretely monitored barrier options. We compare our result with different numerical methods and examine the computational accuracy.

/pdf/on-the-valuation-of-fader-and-discrete-barrier-options-in-51odushfrb.pdf

On the valuation of fader and discrete barrier options in Heston's stochastic volatility model

In the valuation of continuous barrier options the distribution of the first hitting time plays a substantial role. In general, the derivation of a hitting time distribution poses a mathematically challenging problem for continuous but otherwise arbitrary boundary curves. When considering barrier options in the Heston model the non-linearity of the variance process leads to the problem of a non-linear hitting boundary. Here, we choose a stochastic approach to solve this problem in the reduced Heston framework, when the correlation is zero and foreign and domestic interest rates are equal. In this context one of our main findings involves the proof of the reflection principle for a driftless Ito process with a time-dependent variance. Combining the two results, we derive a closed-form formula for the value of continuous barrier options. Compared to an existing pricing formula, our solution provides further insight into how the barrier option value in the Heston model is constructed. Extending the results to the general Heston framework with arbitrary correlation and drift, we obtain approximations for the joint random variables of the Ito process and its maximum in a weak sense. As a consequence, an approximate formula for pricing barrier options is established. A numerical case study is also performed which illustrates the agreement in results of our developed formulas with standard finite difference methods.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2001148

A Stochastic Approach to the Valuation of Barrier Options in Heston’s Stochastic Volatility Model

Instalment options: a closed-form solution and the limiting case

In the valuation of continuous barrier options the distribution of the first hitting time plays a substantial role. In general, the derivation of a hitting time distribution poses a mathematically challenging problem for continuous but otherwise arbitrary boundary curves. When considering barrier options in the Heston model the non-linearity of the variance process leads to the problem of a non-linear hitting boundary. Here, we choose a stochastic approach to solve this problem in the reduced Heston framework, when the correlation is zero and foreign and domestic interest rates are equal. In this context one of our main findings involves the proof of the reection principle for a driftless Ito process with a time-dependent variance. Combining the two results, we derive a closed-form formula for the value of continuous barrier options. Compared to an existing pricing formula, our solution provides further insight into how the barrier option value in the Heston model is constructed. Extending the results to the general Heston framework with arbitrary correlation and drift, we obtain approximations for the joint random variables of the Ito process and its maximum in a weak sense. As a consequence, an approximate formula for pricing barrier options is established. A numerical case study is also performed which illustrates the agreement in results of our developed formulas with standard finite difference methods

Susanne Griebsch

Papers

Instalment Options: A Closed-Form Solution and the Limiting Case

On the valuation of fader and discrete barrier options in Heston's stochastic volatility model

A Stochastic Approach to the Valuation of Barrier Options in Heston’s Stochastic Volatility Model

Instalment options: a closed-form solution and the limiting case

A Stochastic Approach to the Valuation of Barrier Options in Heston's Stochastic Volatility Model