April  2006, 2(2): 177-197. doi: 10.3934/jimo.2006.2.177

Option pricing under threshold autoregressive models by threshold Esscher transform

1. 

Department of Actuarial Mathematics and Statistics, Heriot-Watt University, Edinburgh, United Kingdom

2. 

London School of Economics, United Kingdom

3. 

Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong, China

Received  September 2005 Revised  January 2006 Published  April 2006

This paper develops a valuation model for options under the class of self-exciting threshold autoregressive (SETAR) models and their variants for the price dynamics of the underlying asset using the self-exciting threshold autoregressive Esscher transform (SETARET). In particular, we focus on the first generation SETAR models first proposed by Tong (1977, 1978) and later developed in Tong (1980, 1983) and Tong and Lim (1980), and the second generation models, including the SETAR-GARCH model proposed in Tong (1990) and the double-threshold autoregressive heteroskedastic time series model (DTARCH) proposed by Li and Li (1996). The class of SETAR-GARCH models has the advantage of modelling the non-linearity of the conditional first moment and the varying conditional second moment of the financial time series. We adopt the SETARET to identify an equivalent martingale measure for option valuation in the incomplete market described by the discrete-time SETAR models. We are able to justify our choice of probability measure by the SETARET by considering the self-exciting threshold dynamic utility maximization. Simulation studies will be conducted to investigate the impacts of the threshold effect in the conditional mean described by the first generation model and that in the conditional variance described by the second generation model on the qualitative behaviors of the option prices as the strike price varies.
Citation: Tak Kuen Siu, Howell Tong, Hailiang Yang. Option pricing under threshold autoregressive models by threshold Esscher transform. Journal of Industrial & Management Optimization, 2006, 2 (2) : 177-197. doi: 10.3934/jimo.2006.2.177
[1]

P. K. Jha, R. Lipton. Finite element approximation of nonlocal dynamic fracture models. Discrete & Continuous Dynamical Systems - B, 2021, 26 (3) : 1675-1710. doi: 10.3934/dcdsb.2020178

[2]

Zhimin Li, Tailei Zhang, Xiuqing Li. Threshold dynamics of stochastic models with time delays: A case study for Yunnan, China. Electronic Research Archive, 2021, 29 (1) : 1661-1679. doi: 10.3934/era.2020085

[3]

Anna Abbatiello, Eduard Feireisl, Antoní Novotný. Generalized solutions to models of compressible viscous fluids. Discrete & Continuous Dynamical Systems - A, 2021, 41 (1) : 1-28. doi: 10.3934/dcds.2020345

[4]

Xin Guo, Lexin Li, Qiang Wu. Modeling interactive components by coordinate kernel polynomial models. Mathematical Foundations of Computing, 2020, 3 (4) : 263-277. doi: 10.3934/mfc.2020010

[5]

Urszula Ledzewicz, Heinz Schättler. On the role of pharmacometrics in mathematical models for cancer treatments. Discrete & Continuous Dynamical Systems - B, 2021, 26 (1) : 483-499. doi: 10.3934/dcdsb.2020213

[6]

Wei Feng, Michael Freeze, Xin Lu. On competition models under allee effect: Asymptotic behavior and traveling waves. Communications on Pure & Applied Analysis, 2020, 19 (12) : 5609-5626. doi: 10.3934/cpaa.2020256

[7]

Evelyn Sander, Thomas Wanner. Equilibrium validation in models for pattern formation based on Sobolev embeddings. Discrete & Continuous Dynamical Systems - B, 2021, 26 (1) : 603-632. doi: 10.3934/dcdsb.2020260

[8]

Shigui Ruan. Nonlinear dynamics in tumor-immune system interaction models with delays. Discrete & Continuous Dynamical Systems - B, 2021, 26 (1) : 541-602. doi: 10.3934/dcdsb.2020282

[9]

Eric Foxall. Boundary dynamics of the replicator equations for neutral models of cyclic dominance. Discrete & Continuous Dynamical Systems - B, 2021, 26 (2) : 1061-1082. doi: 10.3934/dcdsb.2020153

[10]

Yanan Li, Zhijian Yang, Na Feng. Uniform attractors and their continuity for the non-autonomous Kirchhoff wave models. Discrete & Continuous Dynamical Systems - B, 2021  doi: 10.3934/dcdsb.2021018

[11]

Yongge Tian, Pengyang Xie. Simultaneous optimal predictions under two seemingly unrelated linear random-effects models. Journal of Industrial & Management Optimization, 2020  doi: 10.3934/jimo.2020168

[12]

Annegret Glitzky, Matthias Liero, Grigor Nika. Dimension reduction of thermistor models for large-area organic light-emitting diodes. Discrete & Continuous Dynamical Systems - S, 2020  doi: 10.3934/dcdss.2020460

[13]

Yen-Luan Chen, Chin-Chih Chang, Zhe George Zhang, Xiaofeng Chen. Optimal preventive "maintenance-first or -last" policies with generalized imperfect maintenance models. Journal of Industrial & Management Optimization, 2021, 17 (1) : 501-516. doi: 10.3934/jimo.2020149

[14]

Xueli Bai, Fang Li. Global dynamics of competition models with nonsymmetric nonlocal dispersals when one diffusion rate is small. Discrete & Continuous Dynamical Systems - A, 2020, 40 (6) : 3075-3092. doi: 10.3934/dcds.2020035

[15]

Wenbin Lv, Qingyuan Wang. Global existence for a class of Keller-Segel models with signal-dependent motility and general logistic term. Evolution Equations & Control Theory, 2021, 10 (1) : 25-36. doi: 10.3934/eect.2020040

[16]

Ching-Hui Wang, Sheng-Chen Fu. Traveling wave solutions to diffusive Holling-Tanner predator-prey models. Discrete & Continuous Dynamical Systems - B, 2020  doi: 10.3934/dcdsb.2021007

[17]

Yu-Jhe Huang, Zhong-Fu Huang, Jonq Juang, Yu-Hao Liang. Flocking of non-identical Cucker-Smale models on general coupling network. Discrete & Continuous Dynamical Systems - B, 2021, 26 (2) : 1111-1127. doi: 10.3934/dcdsb.2020155

[18]

Divine Wanduku. Finite- and multi-dimensional state representations and some fundamental asymptotic properties of a family of nonlinear multi-population models for HIV/AIDS with ART treatment and distributed delays. Discrete & Continuous Dynamical Systems - S, 2021  doi: 10.3934/dcdss.2021005

[19]

Nan Zhang, Linyi Qian, Zhuo Jin, Wei Wang. Optimal stop-loss reinsurance with joint utility constraints. Journal of Industrial & Management Optimization, 2021, 17 (2) : 841-868. doi: 10.3934/jimo.2020001

[20]

Laura Aquilanti, Simone Cacace, Fabio Camilli, Raul De Maio. A Mean Field Games model for finite mixtures of Bernoulli and categorical distributions. Journal of Dynamics & Games, 2020  doi: 10.3934/jdg.2020033

2019 Impact Factor: 1.366

Metrics

  • PDF downloads (26)
  • HTML views (0)
  • Cited by (9)

Other articles
by authors

[Back to Top]