Portfolio Of Options Research Articles

An anatomy of the market return

This paper introduces a model free decomposition of S&P 500 forward market index returns in terms of realized and implied dispersion, downside, and tail risk using option portfolios. The decomposition lends itself by construction to learn about the different sources of risk in the market return and subsequently to visual and formal diagnosing of asset pricing models. It utilizes a novel conditional frequency analysis on the basis of available options rather than the times series of the S&P 500. Empirically, downside risk accounts for most of the forward market return, while symmetric tail risk is not prominently featured. The predictable, persistent part of the realized return is small. Nevertheless, signals revealed by this risk anatomy provide predictive out of sample power for realized returns, in particular for longer maturities. Furthermore, it indicates that models with identically and independently distributed state variables are generally misspecified in this market, and that care must be taken when calibrating disaster risk models. A formal test based on the risk anatomy rejects a model with time-varying disaster intensity.

Thinning Can Reduce Losses in Carbon Use Efficiency and Carbon Stocks in Managed Forests Under Warmer Climate.

Forest carbon use efficiency (CUE, the ratio of net to gross primary productivity) represents the fraction of photosynthesis that is not used for plant respiration. Although important, it is often neglected in climate change impact analyses. Here we assess the potential impact of thinning on projected carbon cycle dynamics and implications for forest CUE and its components (i.e., gross and net primary productivity and plant respiration), as well as on forest biomass production. Using a detailed process‐based forest ecosystem model forced by climate outputs of five Earth System Models under four representative climate scenarios, we investigate the sensitivity of the projected future changes in the autotrophic carbon budget of three representative European forests. We focus on changes in CUE and carbon stocks as a result of warming, rising atmospheric CO2 concentration, and forest thinning. Results show that autotrophic carbon sequestration decreases with forest development, and the decrease is faster with warming and in unthinned forests. This suggests that the combined impacts of climate change and changing CO2 concentrations lead the forests to grow faster, mature earlier, and also die younger. In addition, we show that under future climate conditions, forest thinning could mitigate the decrease in CUE, increase carbon allocation into more recalcitrant woody pools, and reduce physiological‐climate‐induced mortality risks. Altogether, our results show that thinning can improve the efficacy of forest‐based mitigation strategies and should be carefully considered within a portfolio of mitigation options.

Valuing portfolios of interdependent real options using influence diagrams and simulation-and-regression: A multi-stage stochastic integer programming approach

Although real options generally occur within portfolios, most valuation approaches based on either option pricing or decision analysis alone focus on single well-defined options. In this paper we present a new approach for modelling and approximating the value of portfolios of interdependent real options using both influence diagrams and simulation-and-regression. The key feature of this approach is that it translates the interdependencies between real options into a set of constraints and then directly models the dynamics of all underlying uncertainties using (Markovian) stochastic processes. These are then integrated in a portfolio optimisation problem which is formulated as a multi-stage stochastic integer program. Applying a simulation and parametric regression approach to approximate the value of this optimisation problem, we present a transparent valuation algorithm that explicitly takes into account vector-valued exercise decisions and the state variable’s multidimensional resource component. The approach is therefore applicable to a wide range of complex investment projects with both inherent interdependent flexibilities and many underlying uncertainties. The approach is illustrated by evaluating a complex natural resource investment that features both a large portfolio of interdependent real options and four stochastic factors. We analyse the way in which the approximated value of the portfolio and its individual options are affected by the initial copper price as well as by the degrees of production cost and copper price uncertainty.

Interaction between precious metals price and Islamic stock markets

PurposeThis study aims to analyze the presence of a long-term relationship between precious metal prices, such as for gold, silver, platinum and palladium, and Islamic stock markets of 32 different countries – 21 developed and 11 developing. In this study, the long-term relationship between the precious metal prices and the Islamic stock markets of countries grouped by the Morgan Stanley Capital Index (MSCI) according to their level of development was examined. In the economies included in the study, it is necessary that the Islamic stock index be created by MSCI. It is not a constraint as a Muslim country.Design/methodology/approachThis study used the Pedroni panel cointegration analysis and full modified ordinary least square method. All analyses in this study were performed using monthly data from 2002 to 2015.FindingsAccording to the Pedroni panel cointegration analysis applied in this study, all four precious metals – gold, silver, platinum and palladium – are effective portfolio diversification tools for developed Islamic stock markets within the analyzed period. However, in developing countries, although gold and palladium are effective portfolio diversification tools, silver and platinum are not.Practical implicationsThese results provide practical implications for academicians, practitioners as portfolio managers, policymakers. These implications are related in portfolio risk management, the diversification benefits and to propose new investment tools among developed and developing Islamic markets.Social implicationsThis study is important for investors who assemble portfolios under the restriction of selecting investment tools suitable for Islamic rules. These investors are important in terms of using precious metals that they prefer as an alternative to stock markets to protect against the risks related to their suitable portfolio options. Governments, individuals and institutional investors that use capital stock according to Islamic rules in developed countries can effectively use gold, silver, platinum and palladium as hedging tools. However, this choice is limited to only gold and palladium in developing country markets. Gold continues to be an effective diversification tool in Islamic share markets, as in traditional stock markets.Originality/valueThe author would like to emphasize that this article is second to examine precious metals and Islamic stock markets in literature.

Divergence and the Price of Uncertainty*

Abstract Realized divergence measures the distinct realized moments associated with time-varying uncertainty. It is tradeable with divergence swaps engineered from delta-hedged option portfolios. Implied divergence decomposes the price of uncertainty into distinct implied moments, in a way that is consistent with established notions of a deviation from put-call symmetry in option markets. Empirically, market implied divergence and divergence risk premia vary substantially, in the time series, cross-sectionally and as a function of the investment horizon. Such variations can help to make the potential shortcomings of a model more directly visible.

Renewable integration through transmission network expansion planning under uncertainty

In this paper we bring together a stochastic mixed integer programming model for transmission network expansion planning, incorporating portfolios of real options to address the evolution in time of uncertain parameters, with the adjusted generalized log-transformed model, to expand the number of correlated parameters that can be modeled. We apply these methods to evaluate the potential contribution of underwater transmission investments to increase renewables penetration in the Azores archipelago. The approach also includes expansion lead times, due to the large timespans involved in the construction of new transmission lines. Our analysis focuses on a set of the four closest islands in the archipelago, Pico, Faial, S. Jorge and Terceira, and shows that even though investments are delayed and the future network configuration varies according to the evolution of renewable generation scenarios, an investment in underwater transmission, if technically feasible, within the assumptions of our model, could in fact contribute to increase renewables penetration, by enabling islands with an excess in generation from renewable sources to supply other islands in a deficit situation.

Pricing and hedging options with GARCH-stable proxy volatilities

ABSTRACTThis article considers modelling nonnormality in return with stable Paretian (SP) innovations in generalized autoregressive conditional heteroskedasticity (GARCH), exponential generalized autoregressive conditional heteroskedasticity (EGARCH) and Glosten-Jagannathan-Runkle generalized autoregressive conditional heteroskedasticity (GJR-GARCH) volatility dynamics. The forecasted volatilities from these dynamics have been used as a proxy to the volatility parameter of the Black–Scholes (BS) model. The performance of these proxy-BS models has been compared with the performance of the BS model of constant volatility. Using a cross section of S&P500 options data, we find that EGARCH volatility forecast with SP innovations is an excellent proxy to BS constant volatility in terms of pricing. We find improved performance of hedging for an illustrative option portfolio. We also find better performance of spectral risk measure (SRM) than value-at-risk (VaR) and expected shortfall (ES) in estimating option portfolio risk in case of the proxy-BS models under SP innovations.Abbreviation: generalized autoregressive conditional heteroskedasticity (GARCH), exponential generalized autoregressive conditional heteroskedasticity (EGARCH) and Glosten-Jagannathan-Runkle generalized autoregressive conditional heteroskedasticity (GJR-GARCH)

Term Structure Forecasts of Volatility and Option Portfolio Returns

I examine the predictability of equity implied volatility from the term structure, and find that forward volatility levels are biased predictors of future spot implied volatility. I construct options structures which proxy for forward volatility assets, and show that a long-short portfolio of forward volatility assets produce significantly profitable returns. As the construction of the trade is borne from a violation of an expectations hypothesis, the strategy is similar to the carry trade effected in foreign exchange and other assets. Unlike the returns to carry in foreign exchange and other assets, the forward volatility assets are not exposed to liquidity or volatility risks and negatively loads on market risk.

A Markowitz Portfolio Approach to Options Trading

In this paper, we study the problem of option portfolio design under the Markowitz mean-variance framework. We extend the common practice of a pure-stock portfolio and include options in the design. The options returns are modeled statistically with first- and second-order moments, enriching the conventional delta-gamma approximation. The naive mean-variance formulation allows for a zero-risk design that, in a practical scenario with parameter estimation errors, is totally misleading and leads to bad results. This zero-risk fallacy can be circumvented with a more realistic robust formulation. Transaction cost is also considered in the formulation for a proper practical design. We propose an efficient BSUM-M-based algorithm to solve the optimization problem. The proposed algorithm can perform as well as the off-the-shelf solvers but with a much lower computational time—up to one order of magnitude lower. Numerical results based on real data are conducted and the performance is presented in terms of Sharpe ratio, cumulative profit and loss, drawdown, overall return over turnover, value at risk, expected shortfall, and certainty equivalent.

Generation of sanitation system options for urban planning considering novel technologies

The identification of appropriate sanitation systems is particularly challenging in developing urban areas where local needs are not met by conventional solutions. While structured decision-making frameworks such as Community-Led Urban Environmental Sanitation (CLUES) can help facilitate this process, they require a set of sanitation system options as input. Given the large number of possible combinations of sanitation technologies, the generation of a good set of sanitation system options is far from trivial.This paper presents a procedure for generating a set of locally appropriate sanitation system options, which can then be used in a structured decision-making process. The systematic and partly automated procedure was designed (i) to enhance the reproducibility of option generation; (ii) to consider all types of conventional and novel technologies; (iii) to provide a set of sanitation systems that is technologically diverse; and (iv) to formally account for uncertainties linked to technology specifications and local conditions.We applied the procedure to an emerging small town in Nepal. We assessed the appropriateness of 40 technologies and generated 17,955 appropriate system options. These were classified into 16 system templates including on-site, urine-diverting, biogas, and blackwater templates. From these, a subset of 36 most appropriate sanitation system options were selected, which included both conventional and novel options.We performed a sensitivity analysis to evaluate the impact of different elements on the diversity and appropriateness of the set of selected sanitation system options. We found that the use of system templates is most important, followed by the use of a weighted multiplicative aggregation function to quantify local appropriateness. We also show that the optimal size of the set of selected sanitation system options is equal to or slightly greater than the number of system templates.As novel technologies are developed and added to the already large portfolio of technology options, the procedure presented in this work may become an essential tool for generating and exploring appropriate sanitation system options.

Institutional Diversity’s Moderating Role in the Multinationality-Downside Risk Relationship

Real options theory is widely applied to the study of MNEs’ international operations. Such studies view the MNE as a network that incorporates a portfolio of options to maximize return in changing ...

The financial market: not as big as you think

In a general multiperiod financial market, we show that the market trading prices at intermediate dates of some securities with simple specifications, either compound call option or portfolios of index options, reveal sufficient information from the terminal date to intermediate dates; therefore, these simple securities dynamically span and complete the entire space of all state-contingent claims. We further demonstrate that those specifications of state-contingent claims are the simplest ones to dynamically span all state-contingent claims. Our results do not depend on agents’ risk-preference and basic asset’s stochastic price process. Therefore, the financial market might be not as big as we think.

Heterogeneity-assisted carbon dioxide storage in marine sediments

Global climate change is a pressing problem caused by the accumulation of anthropogenic greenhouse gas emissions in the atmosphere. Carbon dioxide (CO2) capture and storage is a promising component of a portfolio of options to stabilize atmospheric CO2 concentrations. Meaningful capture and storage requires the permanent isolation of enormous amounts of CO2 away from the atmosphere. We investigate the effectiveness of heterogeneity-induced trapping mechanism, in potential synergy with a self-sealing gravitational trapping mechanism, for secure CO2 storage in marine sediments. We conduct the first comprehensive study on heterogeneous marine sediments with various thicknesses at various ocean depths. Prior studies of gravitational trapping have assumed homogeneous (deep-sea) sediments, but numerous studies suggest reservoir heterogeneity may enhance CO2 trapping. Heterogeneity can deter the upward migration of CO2 and prevent leakage through the seafloor into the seawater. Using geostatistically-based Monte Carlo simulations of CO2 transport in heterogeneous sediment, we show that strong spatial variability in permeability is a dominant physical mechanism for secure CO2 storage in marine sediments below 1.2 km water depth (less than half of the depth needed for the gravitational trapping). We identify thresholds for sediment thickness, mean permeability and porosity, and their relationships to meaningful injection rates. Our results for the U.S. Gulf of Mexico suggest that heterogeneity-assisted trapping has a greater areal extent with more than three times the CO2 storage capacity for secure offshore CO2 storage than with gravitational trapping. These characteristics offer CO2 storage opportunities that are closer to coasts, more accessible, and likely to be less costly.

The Fundamental, Speculative and Macroeconomic Determinants of Variance and Skew Risk Premia in Oil Market

Using the model-independent approaches of Trolle and Schwartz (2008) and Kozhan et al (2013), we estimate the Variance Risk Premium and Skew Risk Premium for oil market. After estimation, the contribution of the paper is twofold. First, we try to figure out which variables can describe the variation in variance and skew risk premium and the risk-neutral Skewness. The results show that we are able to describe a considerable portion of the variation in all three variables using speculative and macroeconomic factors and most of the variation is being described by by the latter group of variables. We also try to capture the effect of fundamentals of oil market on these variables. The results show that the fundamentals are able to describe big portion of variation in these three variables. Second, we try to predict the return of delta-hedged and delta-vega hedged option portfolios and also oil futures return. The results show that variance risk premium is a significant predictor of delta-hedged portfolio cumulative return with a positive sign while skew risk premium can describe the cumulative return of the delta-Vega Hedged portfolio with negative sign. The results also show that both variance and skew risk premia are significant predictors of cumulative futures return with different signs.

Efficient exposure computation by risk factor decomposition

The focus of this paper is the efficient computation of counterparty credit risk exposure on portfolio level. Here, the large number of risk factors rules out traditional PDE-based techniques and allows only a relatively small number of paths for nested Monte Carlo simulations, resulting in large variances of estimators in practice. We propose a novel approach based on Kolmogorov forward and backward PDEs, where we counter the high dimensionality by a generalization of anchored-ANOVA decompositions. By computing only the most significant terms in the decomposition, the dimensionality is reduced effectively, such that a significant computational speed-up arises from the high accuracy of PDE schemes in low dimensions compared to Monte Carlo estimation. Moreover, we show how this truncated decomposition can be used as control variate for the full high-dimensional model, such that any approximation errors can be corrected while a substantial variance reduction is achieved compared to the standard simulation approach. We investigate the accuracy for a realistic portfolio of exchange options, interest rate and cross-currency swaps under a fully calibrated 10-factor model.

The relation between corporate governance mechanisms, executive compensation and audit fees

PurposeThis paper aims to investigate the effects of some corporate governance mechanisms and executive compensation on audit fees in an emerging market.Design/methodology/approachThe study population consists of 540 observations and 90 listed companies on the Tehran Stock Exchange during the years 2009-2014. The statistical model used in this study is a multivariate regression model; besides, the statistical technique used to test the hypotheses proposed in this research is panel data.FindingsThe changes in the value of a CEO’s own firm stock option portfolio, in thousands of rials (Iran’s currency), for a 0.01 change in stock return volatility and stock price are defined as Vega and Delta, respectively. The results demonstrated that there is a positive association between audit fees and delta, but not Vega; this means that a fee premium is linked to CEO Delta incentives. The findings show that Iranian companies pay more audit fees when they give managers more rewards. In addition, the results show that there is not a significant relationship between fees resulting from audit risk and Delta and Vega incentives of the board. Inconsistent with agency theory, the authors found that the independence of board members did not have any effect on audit fees. As a final point, the outcomes of the paper demonstrate that managers who invest in companies under their own management do not have any impact on the amount of audit fee. To put it another way, there is not any significant connection between the board ownership and audit fees.Practical implicationsThis is one of the most important studies that simultaneously surveys the impacts of corporate governance mechanisms and executive compensation in the Iranian audit market. The results of this study will reveal more than the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation.Originality/valueThe present study has examined the relationship between two cases of corporate governance mechanisms named the board independence and the board ownership with audit fees in a country where, to the authors’ knowledge as in most other developing markets, such a relationship has not been a subject of empirical research. Moreover, the use of a two-dimensional measure of executive compensation, namely, Delta and Vega incentives, primarily considering research undertaken in an emerging market, as a valuable contribution may be observed.

Actively cautious

This article uses the case of a northern Vietnamese village to explore how rural households in Asia have negotiated both the opportunities and challenges of marketization and capitalist industrial modernity. I focus on the Vietnamese state’s push to marketize village livelihoods by means of mass establishment of industrial parks comprising largely Foreign Direct Investment factories in the countryside. The state expects young villagers to abandon low-value agricultural livelihoods and treat factory work as their only livelihood strategy and the lifetime warranty of their well-being. Yet while young villagers have been responsive to new opportunities of industrial employment, they have all treated factory work in ways very different from what the state expects: merely as one of their household’s diverse portfolio of livelihood options. I argue that villagers have handled the encounter with industrial modernity in ways rarely documented in the literature on marketization in rural Asia: as ‘actively cautious’ decision-makers, who actively pursue industrial employment to improve their family’s living standards, and carefully maintain a portfolio of livelihood strategies to protect the family’s well-being from the many insecurities of the industrial workplace.

A method for determining the optimal delivered hydrogen pressure for fuel cell electric vehicles

Fuel cell electric vehicles (FCEVs) are considered an important part of a portfolio of options to address challenges in the transportation sector, including energy security and pollution reduction. The market success of FCEVs depends on standardization of key vehicle and infrastructure parameters, including the delivered hydrogen pressure (DHP). This study developed and utilized the Hydrogen Optimal Pressure (HOP) model to systematically identify the optimal DHP among 350, 500, and 700 bar toward the lowest total consumer cost and analyze how the optimal DHP may be affected by attributes of drivers, vehicles, and hydrogen refueling stations. The DHP of 700 bar a robustly better choice than 350 bar or 500 bar for Region Strategy, regardless of fuel availability, FCEV adoption, driver types, time values, and fuel economies. A DHP of 300 or 500 bar can the winner in Cluster Strategy if combined with certain assumptions of driving patterns and time value. the optimal pressure is found to be very sensitive to fuel availability, fuel economy, driving pattern and time value. The appeal of a higher DHP such as 700 bar (or even higher) is more obvious during the early market stages, when the number of hydrogen stations is limited and early FCEV consumers likely have higher time value, and thus may be willing to pay more for the increased range with higher DHP. Future research on mixed DHPs within a station and across stations is suggested.

Stereotactic ablative radiotherapy for hepatocellular carcinoma: History, current status, and opportunities.

A variety of surgical and other local-regional approaches to the management of hepatocellular carcinoma (HCC) are in clinical use. External beam radiation therapy is a relative newcomer to the portfolio of treatment options. Advances in planning and delivery of radiation therapy, developing in parallel with and inspiring changing paradigms of tumor management in the field of radiation oncology, have led to growing interest in radiation therapy as a viable treatment option for HCC as well as other liver tumors. In this review, we discuss these advances, current trends in liver radiotherapy, as well as avenues of future clinical and basic research. Liver Transplantation 24 420-427 2018 AASLD.

Mapping Global Flows of Chemicals: From Fossil Fuel Feedstocks to Chemical Products.

Chemical products are ubiquitous in modern society. The chemical sector is the largest industrial energy consumer and the third largest industrial emitter of carbon dioxide. The current portfolio of mitigation options for the chemical sector emphasizes upstream "supply side" solutions, whereas downstream mitigation options, such as material efficiency, are given comparatively short shrift. Key reasons for this are the scarcity of data on the sector's material flows, and the highly intertwined nature of its complex supply chains. We provide the most up to date, comprehensive and transparent data set available publicly, on virgin production routes in the chemical sector: from fossil fuel feedstocks to chemical products. We map global mass flows for the year 2013 through a complex network of transformation processes, and by taking account of secondary reactants and by-products, we maintain a full mass balance throughout. The resulting data set partially addresses the dearth of publicly available information on the chemical sector's supply chain, and can be used to prioritise downstream mitigation options.