Journal•ISSN: 0219-0249
International Journal of Theoretical and Applied Finance
World Scientific
About: International Journal of Theoretical and Applied Finance is an academic journal published by World Scientific. The journal publishes majorly in the area(s): Stochastic volatility & Valuation of options. It has an ISSN identifier of 0219-0249. Over the lifetime, 1245 publications have been published receiving 21785 citations. The journal is also known as: IJTAF.
Topics: Stochastic volatility, Valuation of options, Volatility (finance), Implied volatility, Portfolio
Papers published on a yearly basis
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TL;DR: In this paper, both chartist and fundamentalist strategies are considered with agents switching between both behavioural variants according to observed differences in pay-offs. But, the authors do not consider the effect of market makers on price changes.
Abstract: The finding of clustered volatility and ARCH effects is ubiquitous in financial data. This paper presents a possible explanation for this phenomenon within a multi-agent framework of speculative activity. In the model, both chartist and fundamentalist strategies are considered with agents switching between both behavioural variants according to observed differences in pay-offs. Price changes are brought about by a market maker reacting to imbalances between demand and supply. Most of the time, a stable and efficient market results. However, its usual tranquil performance is interspersed by sudden transient phases of destabilisation. An outbreak of volatility occurs if the fraction of agents using chartist techniques surpasses a certain threshold value, but such phases are quickly brought to an end by stabilising tendencies. Formally, this pattern can be understood as an example of a new type of dynamic behaviour known as "on-off intermittency" in physics literature. Statistical analysis of simulated time ...
740 citations
TL;DR: In this paper, a Black-Scholes market is considered in which the underlying economy, as modeled by the parameters and volatility of the processes, switches between a finite number of states.
Abstract: A Black-Scholes market is considered in which the underlying economy, as modeled by the parameters and volatility of the processes, switches between a finite number of states The switching is modeled by a hidden Markov chain European options are priced and a Black-Scholes equation obtained The approximate valuation of American options due to Barone-Adesi and Whaley is extended to this setting
491 citations
TL;DR: In this article, the authors show that results from the theory of random matrices are potentially of great interest when trying to understand the statistical structure of the empirical correlation matrices appearing in the study of multivariate financial time series.
Abstract: We show that results from the theory of random matrices are potentially of great interest when trying to understand the statistical structure of the empirical correlation matrices appearing in the study of multivariate financial time series. We find a remarkable agreement between the theoretical prediction (based on the assumption that the correlation matrix is random) and empirical data concerning the density of eigenvalues associated to the time series of the different stocks of the S&P500 (or other major markets). Finally, we give a specific example to show how this idea can be sucessfully implemented for improving risk management.
459 citations
TL;DR: In this article, a rational expectation model of bubbles and crashes is proposed, which is based on the assumption that a crash may be caused by local self-reinforcing imitation between noise traders, i.e., if the tendency for noise traders to imitate their nearest neighbors increases up to a certain point called the critical point, all noise traders may place the same order at the same time, thus causing a crash.
Abstract: We study a rational expectation model of bubbles and crashes. The model has two components: (1) our key assumption is that a crash may be caused by local self-reinforcing imitation between noise traders. If the tendency for noise traders to imitate their nearest neighbors increases up to a certain point called the "critical" point, all noise traders may place the same order (sell) at the same time, thus causing a crash. The interplay between the progressive strengthening of imitation and the ubiquity of noise is characterized by the hazard rate, i.e. the probability per unit time that the crash will happen in the next instant if it has not happened yet. (2) Since the crash is not a certain deterministic outcome of the bubble, it remains rational for traders to remain invested provided they are compensated by a higher rate of growth of the bubble for taking the risk of a crash. Our model distinguishes between the end of the bubble and the time of the crash: the rational expectation constraint has the speci...
386 citations
TL;DR: In this paper, a general class of truncated Levy processes is introduced, and possible ways of fitting parameters of the constructed family of TLP-analogs of the Black-Scholes equation to data are discussed.
Abstract: A general class of truncated Levy processes is introduced, and possible ways of fitting parameters of the constructed family of truncated Levy processes to data are discussed. For a market of a riskless bond and a stock whose log-price follows a truncated Levy process, TLP-analogs of the Black–Scholes equation, the Black–Scholes formula, the Dynkin derivative and the Leland's model are obtained, a locally risk-minimizing portfolio is constructed, and an optimal exercise price for a perpetual American put is computed.
294 citations