Volatility is a significant parameter both in financial and real options valuation. However, in the case of several real option projects there is no historical data available. In such cases, one alternative is to use Monte Carlo simulation on projects’ cash flows for volatility estimation. An important issue that has not been taken into account with most of these volatility simulation procedure...

In this paper, we develop and apply Bayesian inference for an extended NelsonSiegel (1987) term structure model capturing interest rate risk. The so-called Stochastic Volatility Nelson-Siegel (SVNS) model allows for stochastic volatility in the underlying yield factors. We propose a Markov chain Monte Carlo (MCMC) algorithm to efficiently estimate the SVNS model using simulation-based inference...

The main consequence of the launch, in 2005, of the European Union Emission Trading Scheme (EU ETS) has been the establishment of a price for carbon emissions. Thus, major energy producers in Europe are now aware of the impact of their polluting activities. The interest in analysing the carbon markets from a financial point of view has exponentially increased since the launch of the EU ETS. How...

An understanding of volatility in stock markets is important for determining the cost of capital and for assessing investment and leverage decisions as volatility is synonymous with risk. Substantial changes in volatility of financial markets are capable of having significant negative effects on risk averse investors. Using daily returns from 1992 to 2002, we investigate volatility co-movement ...

As renewable energy increasingly penetrates into power grid systems, new challenges arise for system operators to keep the systems reliable under uncertain circumstances, while ensuring high utilization of renewable energy. This paper presents unit commitment (UC) which takes into account the volatility of wind power generation. The UC problem is solved with the forecasted intermittent wind pow...

Terrorism, political system instability and currency rate fluctuations are the three most evident issues of 21st century. In this study, comparative analysis is performed to check the impact of all these issues on PSX Volatility. EGARCH (1,1) approach is used on four different kinds of data collected from 1st January 2000 to 31st December 2015. Terrorist events, FX return fluctuations with rest...

Concerning price processes, the fact that the volatility is not constant has been observed for a long time. So we deal with models as dXt = μtdt + σtdWt where σ is a stochastic process. Recent works on volatility modeling suggest that we should incorporate jumps in the volatility process. Empirical observations suggest that simultaneous jumps on the price and the volatility [8, 9] exist. The hy...

Abstract We consider the pricing of a range of volatility derivatives, including volatility and variance swaps and swaptions. Under risk-neutral valuation we provide closed-form formulae for volatility-average and variance swaps for a variety of diffusion and jump-diffusion models for volatility. We describe a general partial differential equation framework for derivatives that have an extra de...

A better understanding of the empirical dynamics of Black-Scholes implied volatility surface has long been of considerable interest to both practitioners and academics. Basing on some findings about the ad hoc Black-Scholes valuation approach suggested in Dumas, Flemming and Whaley (1998), this essay studies the empirical performance of various volatility function forms that characterize the re...