Showing papers in "Asia-pacific Financial Markets in 2002"
TL;DR: In this paper, the arbitrage free option pricing problem for the constant elasticity of variance (CEV) model was studied and the existence of a unique equivalent Martingale measure was derived.
Abstract: We study the arbitrage free optionpricing problem for the constant elasticity of variance (CEV) model. To treatthestochastic aspect of the CEV model, we direct attention to the relationship between the CEV modeland squared Bessel processes. Then we show the existence of a unique equivalentmartingale measure and derive the Cox's arbitrage free option pricing formulathrough the properties of squared Bessel processes. Finally we show that the CEVmodel admits arbitrage opportunities when it is conditioned to be strictlypositive.
98 citations
TL;DR: In this article, the authors proposed a new interest rate dynamics model where the interest rates fluctuate in a bounded region and the model is characterized by five parameters which are sufficiently flexible to reflect theprediction of the future interest rates distribution.
Abstract: We propose a new interest rate dynamicsmodel where the interest rates fluctuate in a bounded region. The model ischaracterised by five parameters which are sufficiently flexible to reflect theprediction of the future interest rates distribution. The interest rate convergesin law to a Beta distribution and has transition probabilities which arerepresented by a series of Jacobi polynomials. We derive the moment evaluationformula of the interest rate. We also derive the arbitrage free pure discountbond price formula by a weighted series of Jacobi polynomials. Furthermore wegive simple lower and upper bounds for the arbitrage free discount bond pricewhich are tight for the narrow interest rates region case. Finally we show thatthe numerical evaluation procedure converges to the exact value in the limitand evaluate the accuracy of the approximation formulas for the discount bondprices.
89 citations
TL;DR: In this article, the Ray-Knight theorem is used to give necessary and sufficient conditions for nonnegative diffusion to have equivalent local martingale measures, and the results are applied to non-negative diffusion without drift to reach zero or not.
Abstract: Using the Ray-Knight theorem we give conditions for anonnegative diffusion without drift to reach zero or not. These results also givenecessary and sufficient conditions for such a diffusion process to be a martingale (and notjust a local martinagle). We apply these results in order to give necessary and sufficientconditions for nonnegative diffusion to have equivalent local martingale measures.
86 citations
TL;DR: In this article, the authors review important characteristics of these risk measures and conduct simulation using four alternative measures, lower semi-variance, lower Semi-absolute deviation, first order below target risk and conditional value-at-risk.
Abstract: Portfolio management using lower partial risk (downside risk) measures is attracting more attention of practitioners in recent years The purpose of this paper is to review important characteristics of these riskmeasures and conduct simulation using four alternative measures, lower semi-variance, lower semi-absolute deviation, first order below targetrisk and conditional value-at-riskWe will show that these risk measures are useful to control downside risk whenthe distribution of assets is non-symmetric Further, we will propose a computational scheme to resolve the difficultyassociated with solving a large dense linear programming problems resulting from these models We will demonstrate that this method can in fact solve problems consisting of104 assets and 105 scenarios within a practical amount of CPU time
74 citations
TL;DR: In this article, the Bessel process with time-varying dimension is generalized to the extended Cox-Ingersoll-Ross model with time varying parameters, and a special class of extended CIR models is studied.
Abstract: We study the Bessel processes withtime-varying dimension and their applications to the extended Cox-Ingersoll-Rossmodel with time-varying parameters. It is known that the classical CIR model is amodified Bessel process with deterministic time and scale change. We show thatthis relation can be generalized for the extended CIR model with time-varyingparameters, if we consider Bessel process with time-varying dimension. Thisenables us to evaluate the arbitrage free prices of discounted bonds and theircontingent claims applying the basic properties of Bessel processes. Furthermorewe study a special class of extended CIR models which not only enables us to fitevery arbitrage free initial term structure, but also to give the extended CIRcall option pricing formula.
49 citations
TL;DR: In this article, the authors examined the predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules and found that there is no evidence at all supporting technical forecast power by these trading rules in U.S. markets.
Abstract: Numerous studies in the finance literature have investigated technical analysis to determine its validity as an investment tool. This study is an attempt to explore whether some forms of technical analysis can predict stock price movement and make excess profits based on certain trading rules in markets with different efficiency level. To avoid using arbitrarily selected 26 trading rules as did by Brock, Lakonishok and LeBaron (1992) and later by Bessembinder and Chan (1998), this paper examines predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules. In order to find out the relationship between market efficiency and excess return by applying trading rules, we examine excess return over periods in U.S. markets and also compare the excess returns between U.S. market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in U.S. equity index after 1975. During the 1990s break-even costs turned to be negative, –0.06%, even failing to beat a buy-holding strategyin U.S. equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.
46 citations
TL;DR: In this paper, a comparison of the pricing performance of stock option pricing models under several stochastic interest rate processes proposed by the existing term structure literature was made using daily data of the Nikkei 225 index, call option prices and call money rates of the Japanese financial market.
Abstract: Using daily data of the Nikkei 225 index, call option prices and call money rates of the Japanese financial market,a comparison is made of the pricing performance of stock option pricing modelsunder several stochastic interest rate processes proposedby the existing term structure literature.The results show that (1) one option pricing modelunder a specific stochastic interest ratedoes not significantly outperformanother option pricing model under an alternative stochasticinterest rate, and (2) incorporating stochastic interest ratesinto stock option pricing does not contribute to the performanceimprovement of the original Black–Scholes pricing formula.
35 citations
TL;DR: In this article, the authors examined the impact of political risk on stock market volatility and found no evidence that Hong Kong stock market has become persistently more volatile since the start of Sino-British political negotiations in 1982.
Abstract: Despite its obvious importance, little empirical research has examined the impact of political risk on stock market volatility This paper uses data on the Hong Kong stock market over a long sample period to investigate whether political risk has induced regime shifts in stock market volatility Regime shifts are modelled via a Markov switching EGARCH model that allows for regime-dependent volatility asymmetry We find strong evidence of regime shifts in conditional volatility as well as significant volatility asymmetry in high volatility periods Major political uncertainties were reflected in a switch to the high-volatility regime However, contrary to popular perceptions, we find no evidence that the Hong Kong stock market has become persistently more volatile since the start of Sino-British political negotiations in 1982
20 citations
TL;DR: In this paper, the authors developed a model to value defaultable bonds in emerging markets and derived a closed-form solution of the defaultable bond price from the model as a function of a signaling variable and a short-term interest rate.
Abstract: This paper develops a model to value defaultable bonds in emerging markets. Default occurs when some signaling process hits a pre-defined default barrier. The signaling variable is considered to be some macro-economic variables such as foreign exchange rates. The dynamics of the default barrier depend on the volatility and the drift of the signaling variable. We derive a closed-form solution of the defaultable bond price from the model as a function of a signaling variable and a short-term interest rate. The numerical results show that the model values generated by using foreign exchange rates as the signaling variables can broadly track the market credit spreads of defaultable bonds in South Korea and Brazil. Given an expected level of the foreign exchange rate, defaultable bond values under a stressed market situation can be obtained.
16 citations
TL;DR: In this article, a new framework of barrier options to generalize the Parisian option and delayed barrier option is given, which is called Edokko option or Tokyo option. But this framework is not suitable for barrier options with a stopping time τ asthe caution time.
Abstract: In this paper, we will give a new framework of barrier options to generalize`Parisian Option' and `Delayed Barrier Option'. Take a stopping time τ asthe caution time. When τ occurs, derivatives are given `Caution'. Afterτ, if K.O. time σ=σ(τ) occurs, derivative contractsvanish. We simply say that first `Caution' second `K.O.'. Using thisframework, designs of barrier options become more flexible than before and newrisk management will be possible. New barrier options in this category arecalled Edokko Options or Tokyo Options.
15 citations
TL;DR: In this article, a framework for the construction of a prepayment model suited to the Japanese mortgage loan market is proposed, and the validity of this framework is assessed based on an empirical analysis using data from Japan.
Abstract: This paper proposes a framework for construction of a prepayment model suitedto the Japanese mortgage loan market and assesses the validity of thisframework based on an empirical analysis using data from Japan In thisframework, a model is constructed for each of three prepayment types, namely,`full prepayment', `partial prepayment', and `subrogation', using a parametricproportional hazards model, which was also employed by Schwartz and Torous(1989) Combining these three types of models allows one to take into accountthe effects of partial prepayments, which are frequently used in the Japanesemortgage market, and to simultaneously construct a model for both prepaymentand default Time-dependent (path-dependent) covariates are introduced intothe model, which are estimated by the maximum likelihood method based on thefull likelihood that takes into account the time-dependence of the covariatesResults of the empirical analysis indicate that the hazard functions differsubstantially depending on the prepayment type In addition, results indicatethat the fit of the model can be improved by the distinction of prepaymenttypes and the introduction of the market interest rates as path-dependentcovariates
TL;DR: In this paper, the authors first reveal the evidence of long-term memory in liquidity, volume, and volatility in financial markets, and then estimate the fractionally integrated autoregressive moving average ARFIMA models by both the exact-maximum likelihood (EML) and themodified-profile likelihood (MPL) methods.
Abstract: Exploiting the classical R/S and modified R/S analysis, we first reveal theevidence of long-term memory in liquidity, volume, and volatility. Thereafter,we estimate the fractionally integrated autoregressive movingaverage ARFIMA models by both the exact-maximum likelihood (EML) and themodified-profile likelihood (MPL) methods. Furthermore, based on the theoryof financial economics, we extend the simple ARFIMA models to the Multi-FactorARFIMA models by incorporating the mutual relationships among financial marketvariables and present the effectiveness of the Multi-Factor ARFIMA models infinancial markets.
TL;DR: In this article, a continuous stochastic model of American put options on defaultable bonds is developed, based on a new result of the optimal stopping problem for a diffusion process with a jump.
Abstract: In the last two decades, the market of credit derivativeshas expanded rapidly, and the importance of pricing problemsfor credit derivatives has been recognized especially in the last decade.Among these securities, the pricing problems of credit derivativeswith an early exercise, such as American put options,have not received enough attention. In view of this need, this paper develops a continuous stochastic modelof American put options on defaultable bonds.The method of obtaining a solution is based on a new result of the optimalstopping problem for a diffusion process with a jump.Some characterizations of American put options are providedusing partial differential equations.
TL;DR: In this paper, a new interest rate model with a zone as ageneralization of CIR model using a perturbation method was proposed, which can have an approximate price of interest derivatives in the model.
Abstract: In this paper, we propose a new interest rate model with a zone as ageneralization of CIR model Using a perturbation method, we can have anapproximation price of interest derivatives in our model
TL;DR: In this paper, the authors investigated the relation between price-to-book ratios and their determinants identified by Ohlson's (1995) accounting-based valuation model and found that any current ratio is significantly related to current and future accounting rates of return over the five subsequent years.
Abstract: Using a sample of Korean firms, this paper investigates the relations between price-to-book ratios and their determinants identified by Ohlson's (1995) accounting-based valuation model. A particular emphasis is placed on thequestion of whether and how the impact of future accounting rates-of-returns on current price-to-book ratios decays within a finite time horizon. Our results reveal that any current price-to-book ratio is significantly relatedto current and future accounting rates-of-returns over the five subsequent years.The relation between the two is stronger when accrual earnings are used for measuring accounting rates-of-returns than it is when cash flows or dividend flows are used. Further, the strength of this multi-period lead relation tends to decrease substantially in magnitude and significance with the time horizon, and becomes insignificant beyond a certain time horizon.
TL;DR: In this paper, a bankruptcy prediction model that determines fair interest rates for loans is developed. But the model is not suitable for the analysis of financial statements, and it is limited to a small number of companies.
Abstract: Many financial statements are currently stored in databases, and statistical research of them can yield valuable results. We have developed a bankruptcy prediction model that determines fair interest rates for loans. Furthermore, we estimate the present discount values of loans with fair interest rates that depend on the quality of companies. If economic conditions are stable, it is possible to get stable returns with diversification of investment.