Some interesting articles have been added to the forthcoming list at Quantitative Finance. Cites and abstracts are below, with links to preprints where available. I don’t have time to add commentary at the moment, but am happy to answer questions in the comments section.
Abel Rodriguez & Enrique Ter Horst, “Measuring expectations in options markets: an application to the S&P500 index.”
Extracting market expectations has always been an important issue when making national policies and investment decisions in financial markets. In options…
M. Levy, “Loss aversion and the price of risk,” Quantitative Finance (forthcoming):
Abstract: This paper derives a simple theoretical relationship between the degree of loss aversion, the concavity/convexity of the value function, and the equilibrium market price of risk. We show that while the degree of loss aversion is key in determining the market price of risk, the convexity/concavity of the value function is much less important in this respect. The theoretical relationship obtained is tested empirically by using international data from…
Hayne E. Leland, “Options and Expectations,” UC-Berkeley Research Program in Finance Working Paper RPF-267, October 1996.
Abstract: Who should buy options (ordinary or “exotic”), and who should sell? Buyers and sellers must differ from the average investor, who will not undertake options positions. We develop a simple binomial model to characterize the expectations (relative to the average or consensus) which must be held by investors to justify buying or selling various types of derivatives, or following dynamic strategies which generate similar…
Felix Goltz and Wan Ni Lai, “Empirical Properties of Straddle Returns,” The Journal of Derivatives 17:1 (Fall 2009), 38-48.
Abstract: An at-the-money (ATM) straddle, i.e., going long an ATM call and an ATM put with the same maturity, is generally thought of as a volatility trade. It is essentially delta-neutral, but a large price move in either direction or an increase in implied volatility will produce a profit. A delta-neutral straddle position also has zero beta, so under the CAPMit should…
Dider Sornette, “Dragon-Kings, Black Swans and the Prediction of Crises,” http://arxiv.org/abs/0907.4290.
Abstract: We develop the concept of “dragon-kings” corresponding to meaningful outliers, which are found to coexist with power laws in the distributions of event sizes under a broad range of conditions in a large variety of systems. These dragon-kings reveal the existence of mechanisms of self-organization that are not apparent otherwise from the distribution of their smaller siblings. We present a generic phase diagram to explain the generation of dragon-kings…
Wednesday, January 6, 2010
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