This research develops an early warning system (EWS) for equity market crises based on multinomial logit models and variables relating to the information content of index futures and options. We show that the information impounded in S&P 500 futures and options are useful as leading indicators of financial crises. The current literature is absent of such studies. Results reveal that models esti...

This paper shows how the prices of option contracts traded in financial markets can be tracked sequentially by means of the Extended Kalman Filter algorithm. I consider call and put option pairs with identical strike price and time of maturity as a two output nonlinear system. The Black-Scholes approach popular in Finance literature and the Radial Basis Functions neural network are used in mode...

Given the price of a call or put option, the Black-Scholes implied volatility is the unique volatility parameter for which the Bulack-Scholes formula recovers the option price. This article surveys research activity relating to three theoretical questions: First, does implied volatility admit a probabilistic interpretation? Second, how does implied volatility behave as a function of strike and ...

We present an algorithm and its software implementation that computes implied volatilities for exchangetraded stock options. The LR (Leisen-Reimer) binomial tree is used for the underlying option pricing, which is adjusted for dollar cash dividends. The Brent’s method is used as the root-finding procedure. The option pricing procedure that is at the core of the root-finding is optimised to maxi...

This article offers an analysis of financial incentives for landowners, conservation bank managers, and land developers under habitat regulations for land use. A financial option theory approach is used with call and put options as contracts for habitat conservation and exchange. The market for habitat is modeled as a stochastic game to derive the option price on habitat that allows for arbitra...

We investigate the effect of martingale control as a smoother for MC/QMC methods. Numerical results of estimating low-biased solutions of the American put option price under the Black-Scholes model demonstrate the unreliability of using QMC methods. But it can be fixed by considering a martingale control variate estimator. In another example of estimating European option prices under stochastic...

For its theoretical interest and strong impact on financial markets, option valuation is considered one of the cornerstones of contemporary mathematical finance. This paper specifically studies the valuation of exotic options with digital payoff and flexible payment plan. By means of the Incomplete Fourier Transform, the pricing problem is solved in order to find integral representations of the...

We propose implied spreads (IS) and normalized (NIS) as simple measures to characterize option prices. IS is the credit spread of an option’s bond, portfolio long a risk-free bond short put option. NIS normalizes by risk-neutral default probability reflects tail risk. are countercyclical predict returns, while neither, like volatility, predicts returns. These opposite predictability results con...

One of the classic problems of mathematical finance is the pricing of American options and the behavior of the optimal exercise boundary close to expiry. For the uninitiated, financial derivatives are securities whose value is based on the value of some other underlying security, and options are an example of derivatives, carrying the right but not the obligation to enter into a specified trans...

We propose a new high-order alternating direction implicit (ADI) finite difference scheme for the solution of initial-boundary value problems of convection-diffusion type with mixed derivatives and non-constant coefficients, as they arise from stochastic volatility models in option pricing. Our approach combines different high-order spatial discretisations with Hundsdorfer and Verwer’s ADI time...