scholarly journals A Theory of Equivalent Expectation Measures for Expected Prices of Contingent Claims

2020 ◽  
Author(s):  
Sanjay K Nawalkha ◽  
Xiaoyang Zhuo

This paper introduces a theory of equivalent expectation measures, such as the R measure and the RT1 measure, generalizing the martingale pricing theory of Harrison and Kreps (1979) for deriving analytical solutions of expected prices - both the expected current price and the expected future price - of contingent claims. We also present new R-transforms which extend the Q-transforms of Bakshi and Madan (2000) and Duffie et al. (2000), for computing the expected prices of a variety of standard and exotic claims under a broad range of stochastic processes. Finally, as a generalization of Breeden and Litzenberger (1978), we propose a new concept of the expected future state price density which allows the estimation of the expected future prices of complex European contingent claims as well as the physical density of the underlying asset's future price, using the current prices and only the first return moment of standard European OTM call and put options.

Author(s):  
Peter Christoffersen ◽  
Kris Jacobs ◽  
Xuhui (Nick) Pan

Abstract Both large oil price increases and decreases are associated with deteriorating economic conditions. The projection of the state price density (SPD) onto oil returns estimated from oil futures and option prices displays a U-shaped pattern. Because investors assign high state prices to large negative and large positive oil returns, the U-shaped SPD may steepen in either tail when economic conditions deteriorate. The positive return region of the SPD is more closely related to economic conditions. The oil SPD contains information about economic conditions and future security returns that is distinct from the information in the stock index SPD.


2020 ◽  
Vol 2020 ◽  
pp. 1-8
Author(s):  
Qing Li ◽  
Songlin Liu ◽  
Misi Zhou

The establishment of the fractional Black–Scholes option pricing model is under a major condition with the normal distribution for the state price density (SPD) function. However, the fractional Brownian motion is deemed to not be martingale with a long memory effect of the underlying asset, so that the estimation of the state price density (SPD) function is far from simple. This paper proposes a convenient approach to get the fractional option pricing model by changing variables. Further, the option price is transformed as the integral function of the cumulative density function (CDF), so it is not necessary to estimate the distribution function individually by complex approaches. Finally, it encourages to estimate the fractional option pricing model by the way of nonparametric regression and makes empirical analysis with the traded 50 ETF option data in Shanghai Stock Exchange (SSE).


2014 ◽  
Vol 54 (2) ◽  
pp. 493
Author(s):  
Craig Langford

Price reviews in long-term gas contracts have been part of the commercial landscape in the Australian gas market. Any industry senior executive who has been heavily involved in a gas price review, in particular a review involving a gas arbitration, usually asks themselves at the end of the process if a better way exists. How can gas price reviews be improved is the basis of this extended abstract. Analysis of the past, present and future gas price reviews assists this objective. The past considers the historical nature and the commercial philosophy of price reviews addresses questions such as: Why do we need them? What price is a price review trying to establish? What is a market price in the Australian gas market context? Do price reviews determine present or future prices ? The present considers current price reviews, covering topics such as what’s good and bad practice in today’s price reviews, including the arbitration process. The future looks issues such as the role and importance of price reviews in the next 10 years, what’s needed to make gas price reviews obsolete, how do price reviews work in a transitional market with both Australian and US oil-linked-contract prices under review and better commercial and legal concepts for future price reviews.


2016 ◽  
Vol 8 (1) ◽  
pp. 42-97 ◽  
Author(s):  
Gaetano Gaballo

This paper studies the social value of information about the future. In a stylized OLG model, agents need to forecast the future price level, they observe the current price and perceive with idiosyncratic noise the expectation announced by a more informed authority. When forward guidance communication is loose, the market becomes a main source of information about the future. Reliance on market information amplifies the impact of shocks on prices, which increases ex ante uncertainty and worsens agents' forecasting ability, harming social welfare. However, an appropriate policy can convert the perils of the announcement in opportunities. (JEL D83, E13, E52, E62, H63)


2018 ◽  
Vol 54 (4) ◽  
pp. 1791-1819 ◽  
Author(s):  
Bing Han ◽  
Lei Lu ◽  
Yi Zhou

In a model where investors disagree about the fundamentals of two stocks, the state-price density depends on investor disagreements for both stocks, especially the larger stock. This implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors. The pricing effects of investor disagreements crucially depend on the average belief biases. Empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature.


Author(s):  
Mahmoud Abdelhamid ◽  
Imtiaz Haque ◽  
Rajendra Singh ◽  
Srikanth Pilla ◽  
Zoran Filipi

The challenge of meeting the Corporate Average Fuel Economy (CAFE) standards of 2025 has resulted in the development of systems that utilize alternative energy propulsion technologies. To date, the use of solar energy as an auxiliary energy source of on-board fuel has not been extensively investigated, however. The authors investigated the design parameters and techno-economic impacts within a solar photovoltaic (PV) system for use as an on-board auxiliary power source for the internal combustion engine (ICE) vehicles and plug-in electric vehicles (EVs). The objective is to optimize, by hybridizing, the conventional energy propulsion systems via solar energy based electric propulsion system by means of the on-board PVs system. This study is novel in that the authors investigated the design parameters of the on-board PV system for optimum well-to-tank energy efficiency. The following design parameters were analyzed: the PV device, the geographical solar location, thermal and electrical performances, energy storage, angling on the vehicle surface, mounting configuration and the effect on aerodynamics. A general well-to-tank form was derived for use in any other PV type, PV efficiency value, or installation location. The authors also analyzed the techno-economic value of adding the on-board PVs for ICE vehicles and for plug-in EVs considering the entire Powertrain component lifetime of the current and the projected price scenarios per vehicle lifetime, and driving by solar energy cost ($ per mile). Different driving scenarios were used to represent the driving conditions in all the U.S states at any time, with different vehicles analyzed using different cost scenarios to derive a greater understanding of the usefulness and the challenges inherent in using on-board PV solar technologies. The addition of on-board PVs to cover only 1.0 m2 of vehicle surfaces was found to extend the daily driving range to up to 2 miles for typical 2016 model vehicles, depending upon on vehicle specifications and destination, however over 7.0 miles with the use of extremely lightweight and aerodynamically efficient vehicles in a sunny location. The authors also estimated the maximum possible PV installation area via a unique relationship between the vehicle footprint and the projected horizontal vehicle surface area for different vehicles of varying sizes. It was determined that up to 50% of total daily miles traveled by an average U.S. person could be driven by solar energy, with the simple addition of on-board PVs to cover less than 50% (3.25 m2) of the projected horizontal surface area of a typical mid-size vehicle (e.g., Nissan Leaf or Mitsubishi i-MiEV). Specifically, the addition of the proposed PV module to a 2016 Tesla Model S AWD-70D vehicle in San Diego, CA extended the average daily range to 5.2 miles in that city. Similarly, for the 2016 BMW i3 BEV in Texas, Phoenix, and North Carolina, the range was extended to more than 7.0 miles in those states. The cost of hybridizing a solar technology into a vehicle was also estimated for current and projected prices. The results show for current price scenario, the expense of powering an ICE vehicle within a certain range with only solar energy was between 4 to 23 cents per mile depending upon the vehicle specification and driving location. Future price scenarios determined the driving cost is an optimum of 17 cents per mile. However, the addition of a PV system to an EV improved the economics of the system because of the presence of the standard battery and electric motor components. For any vehicle in any assumed location, the driving cost was found to be less than 6.0 cents per mile even in the current price scenario. The results of this dynamic model are applicable for determining the on-board PV contribution for any vehicle size with different powertrain configurations. Specifically, the proposed work provides a method that designers may use during the conceptual design stage to facilitate the deployment of an alternative energy propulsion system toward future mobility.


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