Early exercise decision in american options with dividends, stochastic volatility, and jumps

in Journal of Financial and Quantitative Analysis (2020), 55(1), 331-356

Using a fast numerical technique, we investigate a large database of investors' suboptimal nonexercise of short-maturity American call options on dividend-paying stocks listed on the Dow Jones. The ... [more ▼]

Using a fast numerical technique, we investigate a large database of investors' suboptimal nonexercise of short-maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modeling of the discrete dividend is essential for a correct calculation of the early exercise boundary, as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black--Scholes--Merton benchmark cuts the amount lost by investors through suboptimal exercise by one-quarter. The remaining three-quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise. [less ▲]

Inference in Conditional Moment Restriction Models When there is Selection Due to Stratification

in Huynh, Kim P.; Jacho-Chávez, David T.; Tripathi, Gautam (Eds.) The Econometrics of Complex Survey Data (2019)

We show how to use a smoothed empirical likelihood approach to conduct efficient semiparametric inference in models characterized as conditional moment equalities when data is collected by variable ... [more ▼]

We show how to use a smoothed empirical likelihood approach to conduct efficient semiparametric inference in models characterized as conditional moment equalities when data is collected by variable probability sampling. Results from a simulation experiment suggest that the smoothed empirical likelihood based estimator can estimate the model parameters very well in small to moderately sized stratified samples. [less ▲]

Valuing American options using fast recursive projections

Scientific Conference (2016, December)

Indirect inference for nonlinear panel data

Scientific Conference (2016, June)

Valuing American options using fast recursive projections

E-print/Working paper (2015)

We introduce a fast and widely applicable numerical pricing method that uses recursive projections. We characterize its convergence speed. We find that the early exercise boundary of an American call ... [more ▼]

We introduce a fast and widely applicable numerical pricing method that uses recursive projections. We characterize its convergence speed. We find that the early exercise boundary of an American call option on a discrete dividend paying stock is higher under the Merton and Heston models than under the Black-Scholes model, as opposed to the continuous dividend case. A large database of call options on stocks with quarterly dividends shows that adding stochastic volatility and jumps to the Black-Scholes benchmark reduces the amount foregone by call holders failing to optimally exercise by 25%. Transaction fees cannot fully explain the suboptimal behavior. [less ▲]

Algorithmes et marchés d'options

Article for general public (2014)

The Dark side of global integration: increasing tail dependance

in Journal of Banking and Finance (2010), 34(1), 184-192

We measure stock market coexceedances using the methodology of Cappiello, Gerard and Manganelli <br />(2005, ECB Working Paper 501). This method enables us to measure comovement at each point of the <br ... [more ▼]

We measure stock market coexceedances using the methodology of Cappiello, Gerard and Manganelli <br />(2005, ECB Working Paper 501). This method enables us to measure comovement at each point of the <br />return distribution. First, we construct annual coexceedance probabilities for both lower and upper tail <br />return quantiles using daily data from 1974–2006. Next, we explain these probabilities in a panel gravity <br />model framework. Results show that macroeconomic variables asymmetrically impact stock market <br />comovement across the return distribution. Financial liberalization significantly increases left tail comovement, <br />whereas trade integration significantly increases comovement across all quantiles. Decreasing <br />exchange rate volatility results in increasing lower tail comovement. The introduction of the euro <br />increases comovement across the entire return distribution, thereby significantly reducing the benefits <br />of portfolio diversification within the euro area. [less ▲]