Long-Term Capital Management

About: Long-Term Capital Management is a based out in . It is known for research contribution in the topics: Singular control & Portfolio. The organization has 8 authors who have published 15 publications receiving 930 citations. The organization is also known as: Long-Term Capital Management L.P. & LTCM.

Numerical Valuation of High Dimensional Multivariate American Securities

Abstract: We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Several efficient numerical lattice-based techniques exist for pricing American securities depending on one or few (up to three) risk sources. However, these methods cannot be used for high dimensional problems, since their memory requirement is exponential in the number of risk sources. We present an efficient numerical technique that combines Monte Carlo simulation with a particular partitioning method of the underlying assets space, which we call Stratified State Aggregation (SSA). Using this technique, we can compute accurate approximations of prices of American securities with an arbitrary number of underlying assets. Our numerical experiments show that the method is practical for pricing American claims depending on up to 400 risk sources.

Pricing of american path‐dependent contingent claims

Abstract: We consider the problem of pricing path-dependent contingent claims. Classically, this problem can be cast into the Black-Scholes valuation framework through inclusion of the path-dependent variables into the state space. This leads to solving a degenerate advection-diffusion partial differential equation (PDE). We first estabilish necessary and sufficient conditions under which degenerate diffusions can be reduced to lower-dimensional nondegenerate diffusions. We apply these results to path-dependent options. Then, we describe a new numerical technique, called forward shooting grid (FSG) method, that efficiently copes with degenerate diffusion PDEs. Finally, we show that the FSG method is unconditionally stable and convergent. the FSG method is the first capable of dealing with the early exercise condition of American options. Several numerical examples are presented and discussed.2

The Strategic Timing of Corporate Disclosures

Abstract: An important element of a firm's disclosure strategy is the timing of its mandatory public announcements. In this article, two aspects of disclosure timing are examined. The first is the intraday timing of earnings accouncements. It is demonstrated here that, under reasonable conditions, market prices reflect better the valuation implications of an earnings announcement when it is made during trading hours rather than after the market has closed. This implies that managers should prefer to release earnings with positive (negative) implications for firm value during (after) trading hours. The second issue examined is the sequencing of multiple corporate disclosures. It is shown that if the announcements have positive (negative) implications for firm value, managers should prefer to make them separately (simultaneously), as market prices better reflect the valuation implications of multiple announcements when they are made at different times. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities

Abstract: The stability of the EMS depends crucially on the realignment expectations of market participants In this paper we discuss how to measure such expectations and how to relate them to economic fundamentals, central bank reputation, and the institutional arrangements of the EMS We find the following empirical regularities for FF/DM and IL/DM exchange rates: (1) expected devaluations are positively related to the current exchange rate deviation from the central parity; (2) expected devaluations are negatively related to the length of time since last realignment in the short and medium run; (3) the Basle-Nyborg agreements seem to have a stabilizing effect for both currencies examined, albeit through different channels; (4) large revaluation expectations occur immediately after devaluations (1) and (4) are not inconsistent with the hypothesis of `over-speculation' or market inefficiency

Optimal consumption and portfolio rules with durability and habit formation

Abstract: We study a model of consumption choice and portfolio allocation that captures, in two different interpretations, the combined effect of local substitution and habit formation and the combined effect of durability of consumption goods and habit formation over service flows from those goods. In a third interpretation, the model captures the idea of a dual-purpose commodity. The optimal allocation problem is from the class of free-boundary singular control problems. We discuss, formally, necessary and sufficient conditions for a consumption and portfolio policy to be optimal. We use a numerical technique based on approximating the original program by a sequence of discrete parameter Markov chain control problems. A companion paper provides convergence results of the value function, the optimal investment policy, and the optimal consumption regions in the approximating discrete control problems to those in the original continuous time dynamic program. We construct numerically the consumption boundary that divides the state space into two regions — one of immediate consumption and the other of abstinence. We show that both the wealth required to start consuming and the optimal fraction of wealth invested in the risky asset are cyclic functions in both the stock of the durable good and the standard of living. This is due to the interaction between the durability and habit formation effects. We also study the effect of the cyclicy investment behavior on the equilibrium risk premium in a representative consumer economy.