The object of this study was to investigate some implications of the tenets of behavioral finance on the pricing of financial derivatives. In particular, based on the work by Wolff et al (2009) we have investigated how prospect theory (Kahneman and Tversky, 1979) can be intregrated into the Black and Scholes (1973) option pricing framework. We have then used the resulting " behavioral version "...

The Black-Scholes model is the standard approach used for pricing financial options. However, although being theoretically strong, option prices valued by the model often differ from the prices observed in the financial markets. This paper applies a hybrid neural network which preprocesses financial input data for improving the estimation of option market prices. This model is comprised of two ...

It is widely held that insurance discourages people from taking diagnostic tests since such tests can turn up information that leads to uninsurability. We develop a model in which some consumers are initially informed of their risk type and others are uninformed, and there is a treatment option. People decide whether to be tested, uninformed insurers offer contracts, and consumers select their ...

The standard Black-Scholes theory of option pricing is extended to cope with underlying return fluctuations described by general probability distributions. A Langevin process and its related Fokker-Planck equation are devised to model the market stochastic dynamics, allowing us to write and formally solve the generalized Black-Scholes equation implied by dynamical hedging. A systematic expansio...

This paper examines KOSPI200 index option prices in order to investigate whether index option implied volatilities foreshadowed the 1997 economic crisis in Korea. Results indicate the absence of strong fears of an impending market downturn prior to the crisis. Put option implied volatilities rose sharply as the crisis intensified, however, and the difference between put and call implied volatil...

In this work, we extend the applicability of regret minimization to pricing financial instruments, following the work of [10]. More specifically, we consider pricing a type of exotic option called a fixed-strike lookback call option. A fixed-strike lookback call option has a known expiration time, at which the option holder has the right to receive the difference between the maximal price of a ...

I n this paper, we study a single-product periodic-review inventory system that faces random and price-dependent demand. The firm can purchase the product either from option contracts or from the spot market. Different option contracts are offered by a set of suppliers with a two-part fee structure: a unit reservation cost and a unit exercising cost. The spot market price is random and its real...

Maximum Relative Drawdown measures the largest percentage drop of the price process on a given time interval. More recently, Maximum Relative Drawdown has become more popular as an alternative measure of risk. In contrast to the Value at Risk measure, it captures the path property of the price process. In this article, we propose a partial differential equation approach to determine the theoret...

In this paper, we aim at developing a model for option pricing to reduce the risks associated with Ethiopian commodity prices fluctuations. We used the daily closed Unwashed Lekempti grade 5 (ULK5) coffee and Whitish Wollega Sesame Seed Grade3 (WWSS3) prices obtained from Ethiopia commodity exchange (ECX) market to analyse the prices fluctuations.The natures of log-returns of the prices exhibit a...