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Modelling Derivatives Pricing Mechanisms with Their Generating Functions  [PDF]
Shige Peng
Mathematics , 2006,
Abstract: In this paper we study dynamic pricing mechanisms of financial derivatives. A typical model of such pricing mechanism is the so-called g--expectation defined by solutions of a backward stochastic differential equation with g as its generating function. Black-Scholes pricing model is a special linear case of this pricing mechanism. We are mainly concerned with two types of pricing mechanisms in an option market: the market pricing mechanism through which the market prices of options are produced, and the ask-bid pricing mechanism operated through the system of market makers. The later one is a typical nonlinear pricing mechanism. Data of prices produced by these two pricing mechanisms are usually quoted in an option market. We introduce a criteria, i.e., the domination condition (A5) in (2.5) to test if a dynamic pricing mechanism under investigation is a g--pricing mechanism. This domination condition was statistically tested using CME data documents. The result of test is significantly positive. We also provide some useful characterizations of a pricing mechanism by its generating function.
Market Segmentation, Price Disparity, and Transmission of Pricing Information: Evidence from Class A and H Shares of Chinese Dual-Listed Companies  [PDF]
Kyung-Won Kim, Yong Hyeon Kim, Chul W. Park, Hong-Ghi Min
Journal of Financial Risk Management (JFRM) , 2015, DOI: 10.4236/jfrm.2015.43011
Abstract: This paper examines the transmission of pricing information and the volatility of dual-listed stocks between class A and H shares of Chinese companies. First, using firm level data, we show that there is a large price discount for H shares relative to the A shares. Second, when we divide the firms into a high price disparity group and a low price disparity group, we find that the high price disparity group’s pricing information transmission is stronger than the low price disparity group during the pre-liberalization period (in terms of significant mean coefficients). Third, when we divide the entire sample period into a pre-liberalization period and a post-liberalization, we find that the mean value spillover is stronger during the post-liberalization period for the low price disparity group. Finally, we report that during the post-liberalization period, the volatility spillover increases from A shares to H shares while it decreases from H shares to A shares. This implies that there is an information advantage of H shares, disappearing with the liberalization of A shares.
Information Asymmetry in Pricing of Credit Derivatives  [PDF]
Caroline Hillairet,Ying Jiao
Quantitative Finance , 2010,
Abstract: We study the pricing of credit derivatives with asymmetric information. The managers have complete information on the value process of the firm and on the default threshold, while the investors on the market have only partial observations, especially about the default threshold. Different information structures are distinguished using the framework of enlargement of filtrations. We specify risk neutral probabilities and we evaluate default sensitive contingent claims in these cases.
Market Distortion and the Tuition Pricing Mechanism of Higher Education in China
Wei Huang,Haiquan Wu
International Education Studies , 2008, DOI: 10.5539/ies.v1n4p37
Abstract: Higher education in the market economy is inevitable affected by the higher education market. The tuition of higher education in china had become the personal price performance of higher education in certain degrees and exerts some certain functions of price mechanism. Because the higher education market distortion that tuition pricing cannot completely become market behaviour.Tuition pricing had been affected by some factors such as the externality of higher education, the monopoly of higher education resources, the demand of higher education had lack elasticity, the information among the market main part are asymmetric and the price regulation of government. Therefore it is a practical choose for the tuition pricing at present stage that government should effectively intervene the higher education market and supervise the tuition of higher education.
On the Pricing of Storable Commodities  [PDF]
Dorje C. Brody,Lane P. Hughston,Xun Yang
Quantitative Finance , 2013,
Abstract: This paper introduces an information-based model for the pricing of storable commodities such as crude oil and natural gas. The model makes use of the concept of market information about future supply and demand as a basis for valuation. Physical ownership of a commodity is regarded as providing a stream of "convenience dividends" equivalent to a continuous cash flow. The market filtration is assumed to be generated jointly by (i) current and past levels of the dividend rate, and (ii) partial information concerning the future of the dividend flow. The price of a commodity is given by the expectation of the totality of the discounted risk-adjusted future convenience dividend, conditional on the information provided by the market filtration. In the situation where the dividend rate is modelled by an Ornstein-Uhlenbeck process, the prices of options on commodities can be derived in closed form, both in the case when underlying is the spot price, and in the case when underlying is a futures price. The approach presented can be applied to other assets that can yield potentially negative effective cash flows, such as real estate, factories, refineries, mines, and power generating plants.
Optimal Bidding Strategy of Power Generating Companies with Consideration of Load Forecast Uncertainty  [PDF]
S. Akbari,M. Kabiri,N. Amjady
Journal of Applied Sciences , 2009,
Abstract: This study presents a new method for calculating the optimal bidding strategies among Generating Companies (GENCOs) in the electricity markets with the assumptions of imperfect competition and complete information and with consideration of uncertainty in load forecast. The parameterized Supply Function Equilibrium (SFE) is employed for modeling the imperfect competition among GENCOs in which proportionate parameterization of the sole and the intercept is used. A pay-as-LMP pricing mechanism is assumed for settling the market and calculating the GENCOs’ profits. The fuzzy approach is utilized for modeling the uncertainty of load forecast and the result is compared with probabilistic approach. A nine GENCOs test system is used to show the efficiency of the proposed method.
Asset pricing with random information flow  [PDF]
Dorje C. Brody,Yan Tai Law
Quantitative Finance , 2010,
Abstract: In the information-based approach to asset pricing the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market then determines the overall magnitude of asset volatility. By letting this information flow rate random, we obtain an elementary stochastic volatility model within the information-based approach. Such an extension is economically justified on account of the fact that in real markets information flow rates are rarely measurable. Effects of having a random information flow rate is investigated in detail in the context of a simple model setup. Specifically, the price process of the asset is derived, and its characteristic behaviours are revealed via simulation studies. The price of a European-style option is worked out, showing that the model has a sufficient flexibility to fit volatility surface. As an extension of the random information flow model, price manipulation is considered. A simple model is used to show how the skewness of the manipulated and unmanipulated price processes take opposite signature.
Fixed and Market Pricing for Cloud Services  [PDF]
Vineet Abhishek,Ian A. Kash,Peter Key
Computer Science , 2012,
Abstract: This paper considers two simple pricing schemes for selling cloud instances and studies the trade-off between them. We characterize the equilibrium for the hybrid system where arriving jobs can choose between fixed or the market based pricing. We provide theoretical and simulation based evidence suggesting that fixed price generates a higher expected revenue than the hybrid system.
Security Pricing with Information-Sensitive Discounting  [PDF]
Andrea Macrina,Priyanka A. Parbhoo
Quantitative Finance , 2010,
Abstract: In this paper incomplete-information models are developed for the pricing of securities in a stochastic interest rate setting. In particular we consider credit-risky assets that may include random recovery upon default. The market filtration is generated by a collection of information processes associated with economic factors, on which interest rates depend, and information processes associated with market factors used to model the cash flows of the securities. We use information-sensitive pricing kernels to give rise to stochastic interest rates. Semi-analytical expressions for the price of credit-risky bonds are derived, and a number of recovery models are constructed which take into account the perceived state of the economy at the time of default. The price of European-style call bond options is deduced, and it is shown how examples of hybrid securities, like inflation-linked credit-risky bonds, can be valued. Finally, a cumulative information process is employed to develop pricing kernels that respond to the amount of aggregate debt of an economy.
On pricing kernels, information and risk  [PDF]
D. L. Wilcox,T. J. Gebbie
Quantitative Finance , 2013,
Abstract: We discuss the finding that cross-sectional characteristic based models have yielded portfolios with higher excess monthly returns but lower risk than their arbitrage pricing theory counterparts in an analysis of equity returns of stocks listed on the JSE. Under the assumption of general no-arbitrage conditions, we argue that evidence in favour of characteristic based pricing implies that information is more likely assimilated by means of nonlinear pricing kernels for the markets considered.
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