Asset Dynamics Research Articles

An analytical option pricing formula for mean-reverting asset with time-dependent parameter

We present an analytical option pricing formula for the European options, in which the price dynamics of a risky asset follows a mean-reverting process with a time-dependent parameter. The process can be adapted to describe a seasonal variation in price such as in agricultural commodity markets. An analytical solution is derived based on the solution of a partial differential equation, which shows that a European option price can be decomposed into two terms: the payoff of the option at the initial time and the time-integral over the lifetime of the option driven by a time-dependent parameter. Finally, results obtained from the formula have been compared with Monte Carlo simulations and a Black–Scholes-type formula under various kinds of long-run mean functions, and some examples of option price behaviours have been provided. doi:10.1017/S1446181121000262

The mutual predictability of Bitcoin and web search dynamics

AbstractEconomic theory predicts the price dynamics of an unbacked asset to be inherently unforecastable. The same applies to exchange rates of unbacked currencies. Albeit, empirically investors are found to be driven by online and offline news media. This study analyzes the Bitcoin cryptocurrency price series and web search queries with regard to their mutual predictability and cause‐effect delay structure. Chinese Baidu engine searches and compounded Baidu–Google search statistics predict Bitcoin price dynamics at relatively high frequencies ranging from 2 to 5 months. In the other direction, Granger‐causality runs from the cryptocurrency price to queries statistics across nearly all frequencies. In both directions, the reaction time computed from a phase delay measure for the relevant frequency bands with significant causality ranges from about 1 to 4 months. For either direction, out‐of‐sample forecasts are more accurate than forecasts of a benchmark stochastic process. Bivariate models including the Baidu Search Index slightly outperform competing models that include a Baidu–Google composite index. Predictive power seems less diluted if the September 2017 trade regulations by the Chinese government are controlled for.

Leverage

A frictionless general equilibrium model featuring heterogeneous time-varying risk tolerance explains the business cycle dynamics of intermediary leverage, aggregate credit, and other asset markets’ facts. In booms, when risk tolerance is high, households borrow more and aggregate credit increases funded by higher intermediary debt. In recessions, credit contracts and intermediaries delever. Yet, their debt-to-equity ratios increase as equity drops when risk aversion increases. Because households borrow more or less as their risk tolerance increases or decreases, the intermediary’s balance sheet forecasts stock returns both in the time series and the cross section. Moreover, credit expansions correlate with negatively skewed stock returns, low credit spreads, and predict lower future returns.

Deep reinforcement learning for option pricing and hedging under dynamic expectile risk measures

Recently equal risk pricing, a framework for fair derivative pricing, was extended to consider dynamic risk measures. However, all current implementations either employ a static risk measure that violates time consistency, or are based on traditional dynamic programing solution schemes that are impracticable in problems with a large number of underlying assets (due to the curse of dimensionality) or with incomplete asset dynamics information. In this paper, we extend for the first time a famous off-policy deterministic actor-critic deep reinforcement learning (ACRL) algorithm to the problem of solving a risk averse Markov decision process that models risk using a time consistent recursive expectile risk measure. This new ACRL algorithm allows us to identify high quality time consistent hedging policies (and equal risk prices) for options, such as basket options, that cannot be handled using traditional methods, or in context where only historical trajectories of the underlying assets are available. Our numerical experiments, which involve both a simple vanilla option and a more exotic basket option, confirm that the new ACRL algorithm can produce (1) in simple environments, nearly optimal hedging policies, and highly accurate prices, simultaneously for a range of maturities (2) in complex environments, good quality policies and prices using reasonable amount of computing resources; and (3) overall, hedging strategies that actually outperform the strategies produced using static risk measures when the risk is evaluated at later points of time.

Markov model of option pricing

In the article is proposed the algorithm of modeling the dynamics of asset prices by Markov process with continuous time and countable set of states and numerical option pricing.

Rethinking Commodities

Commodities have long been viewed as the poor cousin in the investment universe, and often for a good reason. Unlike equities, commodities do not offer a so-called market beta with prices drifting higher over time in line with economic activity. In contrast, they present a collection of unique price returns that reflect the underlying supply and demand dynamics of physical assets that serve as the global economy’s building blocks. This article takes a new look at commodities as an asset class and at their uses in a portfolio, which historically have been diversification and inflation protection. The authors analyze different commodity beta allocations and identify alternative investment uses of commodities. Such uses include building blocks to express particular investment themes, tactical trading tools, and multiasset risk premia allocation components. <b>TOPICS:</b>Commodities, portfolio construction, financial crises and financial market history <b>Key Findings</b> ▪ Although investors have rightly questioned the benefits of commodities in a diversified portfolio over the past decade, there may still be some validity to the diversification and inflation protection arguments touted by long-only commodity advocates. ▪ Evidence suggests a positive relationship between the level of inflation and returns of a broad basket of commodities. The contemporaneous nature of this relationship can make it difficult to capture unless exposure is held continuously, which may be an unjustifiable drag on the performance of a diversified multiasset portfolio. ▪ The commodities market is well suited to risk premia strategies. It is a unique market in which participants with different objectives interact on a futures curve, thereby creating persistent and harvestable risk premia.

Deep hedging of long-term financial derivatives

This study presents a deep reinforcement learning approach for global hedging of long-term financial derivatives. A similar setup as in Coleman et al. (2007) is considered with the risk management of lookback options embedded in guarantees of variable annuities with ratchet features. The deep hedging algorithm of Buehler et al. (2019a) is applied to optimize neural networks representing global hedging policies with both quadratic and non-quadratic penalties. To the best of the author’s knowledge, this is the first paper that presents an extensive benchmarking of global policies for long-term contingent claims with the use of various hedging instruments (e.g. underlying and standard options) and with the presence of jump risk for equity. Monte Carlo experiments demonstrate the vast superiority of non-quadratic global hedging as it results simultaneously in downside risk metrics two to three times smaller than best benchmarks and in significant hedging gains. Analyses show that the neural networks are able to effectively adapt their hedging decisions to different penalties and stylized facts of risky asset dynamics only by experiencing simulations of the financial market exhibiting these features. Numerical results also indicate that non-quadratic global policies are significantly more geared towards being long equity risk which entails earning the equity risk premium.

RENEWABLE ENERGY TRANSITION: EVIDENCE FROM SPILLOVER EFFECTS IN EXCHANGE-TRADED FUNDS

The article examines the spillover effect of the transition to renewable energy on different financial markets: specifically, the stock market. The research paper analyzes the prices and dynamics of oil-related assets and renewable funds, as well as reviews literature on the topic in order to evaluate the most important factors of development in these industries. The article utilizes methods of correlation analysis, analysis of variance, regression analysis and standards of deviation and error with the intention to test null hypotheses from previous research. The study uses empirical data spanning the majority of the last decade, in which a decline in the oil market can be observed. This is juxtaposed by the rapid and intense development of renewable energy – solar energy in particular. As concluded in the article, there is a strong spillover effect of this growth onto other markets, emphasizing the investments flowing into renewable energy. Moreover, the ambitious prospects of renewable energy development and it being a strong competitor to fossil fuels and, specifically, oil is drawn as a result of the conducted research.

Mean-Variance Asset-Liability Management in a Non-Markovian Regime-Switching Jump-Diffusion Market with Random Horizon

This paper investigates the problem of mean-variance asset-liability management (ALM) in a market where the dynamics of assets are non-Markovian regime-switching models driven by a Brownian motion, a Poisson random measure and a continuous time finite-state Markov chain. It is assumed that the time horizon is uncertain relying not only on asset prices and liability values, but also on other factors. The insurer aims to minimize the variance of the terminal surplus given an expected terminal surplus subject to the risk of paying out random liabilities of an extensive Cramer-Lundberg model. By further developing the solvability of a linear backward stochastic differential equation (BSDE) with two types of jumps, namely jumps modelled by a Poisson random measure and by basic martingales related to a Markov chain, closed-form expressions for both the efficient strategy and the efficient frontier are obtained and represented by unique solutions to several relevant BSDEs.

Pandemic Versus Financial Shocks: Comparison of Two Episodes on the Bitcoin Market

With its rising popularity, the Bitcoin has also become increasingly independent from global financial markets. Recently, it has joined the class of alternative assets. We use the newly developed wavelet methodology to analyze daily data to compare the COVID-19 pandemic at the beginning of 2020 with the bear market episode at the end of 2018. In both cases, attention signals and a general panic are the main drivers of the Bitcoin fluctuations. We show that the Bitcoin’s dynamic is more complex than the dynamics of standard financial assets. The Bitcoin is, on the one hand, subject to pandemic shocks but also represents an important source of attention signals. On the other hand, because the Bitcoin additionally reacts on an emotional basis, it might react faster than other assets and thus creates a market signal itself. Moreover, we identify short cycles (of several days), which may possibly be related to demand factors, while long cycles (of several weeks) seem to mirror supply factors and might be related to Bitcoin mining in China. Finally, the analysis underlines the importance of continuous financial education and communication by the supervisory authorities about new, alternative financial assets.

AN ANALYTICAL OPTION PRICING FORMULA FOR MEAN-REVERTING ASSET WITH TIME-DEPENDENT PARAMETER

AbstractWe present an analytical option pricing formula for the European options, in which the price dynamics of a risky asset follows a mean-reverting process with a time-dependent parameter. The process can be adapted to describe a seasonal variation in price such as in agricultural commodity markets. An analytical solution is derived based on the solution of a partial differential equation, which shows that a European option price can be decomposed into two terms: the payoff of the option at the initial time and the time-integral over the lifetime of the option driven by a time-dependent parameter. Finally, results obtained from the formula have been compared with Monte Carlo simulations and a Black–Scholes-type formula under various kinds of long-run mean functions, and some examples of option price behaviours have been provided.

Трансформація організаційно-правових форм сільського господарства: від багатоукладності до латифундації

The purpose of the article is to analyze the post-reform state of the organizational and legal structure of agriculture and outline the possible risks of latifundation with the introduction of a market turnover of rights to land plots. Research methods. The research was based on general scientific and economic research methods, the work of Ukrainian scientists on terminology, regulations, data from the State Statistics Committee of Ukraine and Internet resources. The principle of historicism helped to elucidate the root causes of the origin of the term "multistructural nature" of the organizational and legal structure of agriculture in the 1920s of the last century and the prerequisites for the possible spread of latifundia in the context of the proposed model of the market turnover of rights to land plots. Analytical and statistical tools and an empirical approach made it possible to compare the dynamics of agricultural assets, the productivity of economic entities and use the method of grouping by their number, absolute and relative land area in cultivation (including rural households) for 2010-2019. Abstract-logical techniques made it possible to reveal the archaic nature of the term "multi-structuredness" to characterize the post-reform functioning of agriculture, conceptually characterize its main features, formulate appropriate conclusions and determine the prospects for further research in line with the designated topic. Research results. It has been proved that “multistructurality” is historically conditioned, that is, transitory, since it was used in another socio-political formation and had a purely party-ideological justification for measures aimed at eliminating private forms of farming in the countryside in the 1920s. Hence, the "multistructure" does not carry a positive-meaningful definition when characterizing the agricultural production of Ukraine, and even more incorrectly when defining it as one of the indicators of the strategic development of the industry. In our opinion, taking into account the main features of the transitional state of the agricultural sector, it is advisable to define it as a mixed agrarian economy with various organizational and legal forms of activity and organizational and production structure, but with real prerequisites for a creeping process of latifundation and monopoly and the displacement of small and medium-sized enterprises in the future. enterprises. The basis for this is lobbying by agricultural holdings, companies with foreign investments, international lenders and foreign technical projects of their interests on the introduction in Ukraine of a neoliberal model of the market turnover of rights to agricultural land. Scientific novelty. The incorrectness of the use of the term "multistructure" in scientific works and regulatory legal acts to characterize the current transitive state of the organizational and legal structure of agriculture in Ukraine has been proved. Practical significance. Compliance with the terminological culture of agroeconomic science in general and the use of the concept of "multistructure", in particular, can be useful in the study of the post-reform state of the agricultural sector of the Ukrainian economy and in the development of draft legislative and other normative acts on sustainable development. Tabl.: 1. Figs.: 1. Refs.: 25.

Optimization modelling of engineering enterprises financial security improvement

The article's purpose is to develop a methodical approach to improving financial security, which takes into account the acceleration of reproducing processes on Ukraine's device of engineering enterprises. This approach is based on multi-cellular vector optimization. It allows us to determine the optimal values of current assets' manifestations and net profit dynamics and set the optimal correlation between them. Approbation of a methodical approach to improving financial security and acceleration of reproducing processes on the example of Ukraine's four engineering enterprises was performed. Financial statement data for eight periods were used to build optimization vectors. To improve financial security and accelerate the reproducing processes of Ukraine's engineering enterprises, certain volumes of working assets, periods of their turnover, their marginal value taking into account different financing sources, and maximum net profit at certain manifestations of the dynamics of current assets are established. In implementing the methodical approach to improving financial security and accelerating the reproducing processes in engineering enterprises' practical activities, highly qualified personnel occupy a significant role and place. The powerful toolkit of their provision is material stimulation (an increase of wages, provision of premiums) and establishment of relations in the team (social justice in the department); the opportunity to advance on the career ladder; respect for employees by management; frank and friendly relationships at all levels of management; participation in corporate holidays of all employees. Therefore, the study's further direction is developing a methodical approach to improving the financial security of engineering enterprises, taking into account personnel support.

АНАЛІЗ СУЧАСНОГО СТАНУ ТРАНСФОРМАЦІЙНИХ ЗМІН НА СТРАХОВОМУ РИНКУ УКРАЇНИ

Among the financial markets of any country, the insurance market should occupy one of the leading positions, because it provides protection against adverse financial and economic events and situations that have arisen around the world in recent years due to pandemics, various natural disasters, significant fluctuations world energy prices. Ukraine seeking accession to the European Community should not be an exception. But, unfortunately, the insurance market in Ukraine has not been developed for many years, it is in decline, it exists mainly at the expense of compulsory types of insurance. This state of the market led to changes, the first of which was a change in the regulator. The National Bank of Ukraine, as a new regulator, has begun market transformation changes. Of course, this situation requires careful analysis, which was done in this study. In the course of the research, the article identifies and analyzes the regulator's proposals concerning changes in legislation and those that determine the rules of interaction of insurers with policyholders, reporting, internal and external control over the use of new technologies, strategic requirements and risk management. It was noted that the regulator started innovations very quickly and does not consider the complexity of the general economic situation in the country, the unwillingness of insurers in this period to such drastic changes, because such conditions significantly increase the risk of loss of bankruptcy. In addition, it has been investigated how the proposed changes actually affected the main financial and economic indicators of the insurance market of Ukraine. The dynamics of the number of insurers, the number of concluded contracts, the dynamics of insurance premiums in relation to insurance payments, the dynamics of total assets and paid-up share capital and formed insurance reserves from III – IV quarters 2020 to I – III quarters 2021 were analyzed. It was determined that, in general, the market showed a positive dynamics in the vast majority of indicators. Thus, in the analyzed period recorded a stable situation. According to some indicators, there was an increase. But they also identified the main shortcoming that currently exists in the insurance market of Ukraine and needs to be addressed by the regulator – the adjustment of the timing of changes and cooperation on market transformation with insurers, because it is a joint movement that requires coordinated positions and actions.

Концепція вдосконалення оцінки якості кредитного портфеля в управлінні кредитною діяльністю банку

The article defines the quality of the loan portfolio as a favorable state of its structure, in which the banking institution will be able to ensure maximum profitability with a minimum level of credit risk and optimal liquidity of the bank's balance sheet. The dynamics of non-performing assets was studied and the banks with the largest share in the loan portfolio were identified. The necessity of more effective credit risk management and the expediency of assessing the quality of the bank's loan portfolio are substantiated. The concept of improving the assessment of the quality of the loan portfolio in the management of the bank's credit activities has been developed, the implementation of which will increase the efficiency of its activities and contribute to the development of the country's banking system.The article emphasizes that the concept of improving the quality of the loan portfolio in the management of credit activities of the bank - a holistic system of theoretical and methodological views on the nature, purpose, objectives and principles of assessing the quality of the loan portfolio in the management of credit activities, as well as organizational and practical approaches to the formation of the mechanism of its implementation in specific conditions. Factors that affect the level of quality of the loan portfolio are identified. Substantiation of the stages of formation of the bank's lending activity, which will allow the banking institution to implement the concept of improving the assessment of the quality of the loan portfolio in the management of the bank's lending activities in full.

Влияние деятельности градообразующего предприятия на развитие моногорода

Subject/topic. The article deals with the interaction and influence of the city-forming enterprise JSC «Alexandrovsky Machine-building Plant» on the single-industry city of Alexandrovsk and the Alexandrovsky district as a whole. Goals and objectives of the work. The purpose of this work is to assess the financial, economic, and production activities of JSC «AMZ» for the period 2016-2020, as well as the socio-economic development of the single-industry town of Alexandrovsk and the Alexandrovsky district for the same period. Methodology. To analyse the financial, economic, and production activities of JSC «AMZ», an assessment was made of such indicators as the dynamics of net, non-current, and current assets, accounts payable, profit (gross, from sales, before tax, and net), business expenses, and production costs. To analyse the socio-economic development of the single-industry town of Alexandrovsk and the Alexandrovsky district, an assessment of the demographic situation, the investment climate, and the development of small and medium-sized businesses was carried out. Results. It is concluded that the development and financial and economic condition of the city-forming enterprise JSC «Alexandrovsky Machine-Building Plant» directly affects the socio-economic development of the single-industry town of Alexandrovsk and the Alexandrovsky district as a whole. The city-forming enterprise is on the verge of bankruptcy. If this procedure takes place, the issue of the existence of the single-industry town of Alexandrovsk will become much more acute, since at the moment there is a significant outflow of the working-age population, especially young people. Conclusions/significance. The practical significance of this study consists in the proposed recommendations for improving the efficiency of the city-forming enterprise JSC «Alexandrovsky Machine-Building Plant». Application. The problems of the development of a city-forming enterprise, a single-industry town and the proposed recommendations can be used to improve the development strategy of both the city-forming enterprise itself (JSC «Alexandrovsky Machine-Building Plant») and the single-industry town of Alexandrovsk and the Alexandrovsky district as a whole.

Value-at-Risk and Expected Shortfall approaches for option premiums and the probability of default estimation based on ARMA models

The need to address the issue of risk management has given rise to a number of models for estimation the probability of default, as well as a special tool that allows to sell credit risk – a credit default swap (CDS). From the moment it appeared in 1994 until the crisis of 2008, that the CDS market was actively growing, and then sharply contracted. Currently, there is practically no CDS market in emerging economies (including Russia). This article is to improve the existing CDS valuation models by using discrete-time models that allow for more accurate assessment and forecasting of the selected asset dynamics, as well as new option pricing models that take into account the degree of risk acceptance by the option seller. This article is devoted to parametric discrete-time option pricing models that provide more accurate results than the traditional Black-Scholes continuous-time model. Improvement in the quality of assessment is achieved due to three factors: a more detailed consideration of the properties of the time series of the underlying asset (in particular, autocorrelation and heavy tails), the choice of the optimal number of parameters and the use of Value-at-Risk approach. As a result of the study, expressions were obtained for the premiums of European put and call options for a given level of risk under the assumption that the return on the underlying asset follows a stationary ARMA process with normal or Student&amp;apos;s errors, as well as an expression for the credit spread under similar assumptions. The simplicity of the ARMA process underlying the model is a compromise between the complexity of model calibration and the quality of describing the dynamics of assets in the stock market. This approach allows to take into account both discreteness in asset pricing and take into account the current structure and the presence of interconnections for the time series of the asset under consideration (as opposed to the Black–Scholes model), which potentially allows better portfolio management in the stock market.

Business Planning and Assessment of Its Impact on the Enterprise Financial Stability

At the present stage of the company development as an open social and economic system the question of how existing methods of financial analysis meet the needs of users considering the dynamism and complexity of business processes remains relevant. The purpose of the article is study relationships between static and dynamic indicators of financial condition, to reflect its characteristics such as business activity and financial stability. The article defines the functional relationship between dynamic business activity indicators and static indicators of financial stability, grounds technique of factor analysis of financial stability. The economic content ratio of the assets turnover and equity is defined. The nature of its relationships with the dynamics of assets is considered. Both theoretically and practically it is determined that if the correlation of ratio of asset turnover and equity is bigger than the ratio of financial independence at the beginning of the period under study, the positive dynamics of the property will affect the company’s final financial stability and vice versa, if the ratio is less than the rate of financial independence at the beginning of the period under study, the impact of positive dynamics of property on the final financial stability will be positive. It is proposed to consider this dependence both for factor retrospective analysis and for financial stability forecasting.

Medical Spending, Bequests, and Asset Dynamics around the Time of Death

Using data from the Health and Retirement Survey, we document the changes in assets that occur before a person's death. Applying an event study approach, we find that during the 6 years preceding their deaths, the assets of single decedents decline, relative to those of similar single survivors, by an additional $20,000 on average. Over the same time span, the assets of couples who lose a spouse fall, relative to those of similar surviving couples, by an additional $90,000 on average. Households experiencing a death also incur higher out-of-pocket medical spending and other end-of-life expenses. This elevated spending is sufficient to explain (in accounting terms) the asset declines observed for singles but falls short of explaining the declines observed for couples. Bequests from the dying spouse to non-spousal heirs such as children are more than sufficient to explain the remainder.

Generalised Geometric Brownian Motion: Theory and Applications to Option Pricing.

Classical option pricing schemes assume that the value of a financial asset follows a geometric Brownian motion (GBM). However, a growing body of studies suggest that a simple GBM trajectory is not an adequate representation for asset dynamics, due to irregularities found when comparing its properties with empirical distributions. As a solution, we investigate a generalisation of GBM where the introduction of a memory kernel critically determines the behaviour of the stochastic process. We find the general expressions for the moments, log-moments, and the expectation of the periodic log returns, and then obtain the corresponding probability density functions using the subordination approach. Particularly, we consider subdiffusive GBM (sGBM), tempered sGBM, a mix of GBM and sGBM, and a mix of sGBMs. We utilise the resulting generalised GBM (gGBM) in order to examine the empirical performance of a selected group of kernels in the pricing of European call options. Our results indicate that the performance of a kernel ultimately depends on the maturity of the option and its moneyness.