Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and...

In the past decades, the amount of worldwide security transactions that was processed by electronic trading platforms increased significantly. In this paper we develop a theoretical framework for the pricing of limit orders of the Electronic Security Trading System Xetra operated by the German...

In the years following the publication of Black and Scholes [7], numerous alternative models have been proposed for pricing and hedging equity derivatives. Prominent examples include stochastic volatility models, jump diffusion models, and models based on Levy processes. These all have their own...

The paper discusses the problem of hedging not perfectly replicable contingent claims by using a benchmark, the numerraire portfolio, as reference unit. The proposed concept of benchmarked risk minimization generalizes classical risk minimization, pioneered by Follmer, Sondermann and Schweizer....

This paper investigates the sensitivity of asset and portfolio price volatility with respect to the minimum available trading interval that the price is quoted. The objective of the study is to find the theoretical impact of high frequency trading on asset and portfolio volatilities, using a...

This paper considers a new class of Monte Carlo methods that are combined with PDE expansions for the pricing and hedging of derivative securities for multidimensional diffusion models. The proposed method combines the advantages of both PDE and Monte Carlo methods and can be directly applied to...

Estimation theory has shown, due to the limited estimation window available for real asset data, the sample based Markowitz mean-variance approach produces unreliable weights which fluctuate substantially over time. This paper proposes an alternate approach to portfolio optimization, being the...

This paper introduces a general market modeling framework, the benchmark approach, which assumes the existence of the numeraire portfolio. This is the strictly positive portfolio that when used as benchmark makes all benchmarked nonnegative portfolios supermartingales, that is intuitively...

One aim of Viability Theory is to regulate evolutions under uncertainty in order not only to reach a target in finite time, but also to fulfill constraints (known as viability) until this time. Within the framework of finance, in the case of replicating portfolios, the target is defined by the...

We extend the vector autoregression (VAR) based expectations hypothesis (EH) test of term structure, considered in Bekaert & Hodrick (2001), B&H thereafter, using recent developments in bootstrap literature. Modifications include the use of wild bootstrap to allow for conditional...