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Università della Svizzera italiana

Valuation of two-factor interest rate contingent claims using Green's theorem

Sorwar, Ghulam ; Barone-Adesi, Giovanni

In: Applied mathematical finance, 2011, vol. 18, no. 4, p. 277-289

Over the years a number of two-factor interest rate models have been proposed that have formed the basis for the valuation of interest rate contingent claims. This valuation equation often takes the form of a partial differential equation, that is solved using the finite difference approach. In the case of two factor models this has resulted in solving two second order partial derivatives...

Università della Svizzera italiana

A dynamic model of expected bond returns : a functional gradient descent approach

Audrino, Francesco ; Barone-Adesi, Giovanni

In: Computational statistics & data analysis, 2006, vol. 51, no. 4, p. 2267-2277

A multivariate methodology based on Functional Gradient Descent to estimate and forecast time-varying expected bond returns is presented and discussed. Backtesting this procedure on US monthly data, empirical evidence of its strong forecasting potential in terms of the accuracy of the predictions is collected. The proposed methodology clearly outperforms the classical univariate analysis used...

Università della Svizzera italiana

Average conditional correlation and tree structures for multivariate GARCH models

Audrino, Francesco ; Barone-Adesi, Giovanni

In: Journal of forecasting, 2006, vol. 25, no. 8, p. 579–600

We propose a simple class of multivariate GARCH models, allowing for time-varying conditional correlations. Estimates for time-varying conditional correlations are constructed by means of a convex combination of averaged correlations (across all series) and dynamic realized (historical) correlations. Our model is very parsimonious. Estimation is computationally feasible in very large dimensions...

Università della Svizzera italiana

Barrier option pricing using adjusted transition probabilities

Barone-Adesi, Giovanni ; Fusari, Nicola ; Theal, John

In: The journal of derivatives, 2008, vol. 16, no. 2, p. 36-53

In the existing literature on barrier options much effort has been exerted to ensure convergence through placing the barrier in close proximity to, or directly onto, the nodes of the tree lattice. For a variety of barrier option types we show that such a procedure may not be a necessary prerequisite to achieving accurate option price approximations. Using the Kamrad and Ritchken (1991)...

Università della Svizzera italiana

A multivariate FGD technique to improve VaR computation in equity markets

Audrino, Francesco ; Barone-Adesi, Giovanni

In: Computational management science, 2005, vol. 2, no. 2, p. 87-106

It is difficult to compute Value-at-Risk (VaR) using multivariate models able to take into account the dependence structure between large numbers of assets and being still computationally feasible. A possible procedure is based on functional gradient descent (FGD) estimation for the volatility matrix in connection with asset historical simulation. Backtest analysis on simulated and real data...

Università della Svizzera italiana

A GARCH option pricing model with filtered historical simulation

Barone-Adesi, Giovanni ; Engle, Robert F. ; Mancini, Loriano

In: The review of financial studies, 2008, vol. 21, no. 3, p. 1223-1258

We propose a new method for pricing options based on GARCH models with filtered historical innovaions. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model’s flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 Index options shows that our model outperforms other...

Università della Svizzera italiana

Cutting the hedge

Barone-Adesi, Giovanni ; Elliott, Robert J.

In: Computational economics, 2007, vol. 29, no. 2, p. 151-159

Hedging equations from a method suggested by Barone-Adesi, Engle and Mancini, are presented and discussed. This model assumes the option price is homogeneous and the calculation is model independent, providing delta hedge ratios immediately from market data.

Università della Svizzera italiana

Valuation of derivatives based on CKLS interest rate models

Barone-Adesi, Giovanni ; Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera ; Allegretto, Walter ; Dinenis, Elias ; Sorwar, Ghulam

The CKLS (1992) short-term risk-free interest rate process leads to valuation model for both default free bonds and contingent claims that can only be solved numerically for the general case. Valuation equations of this nature in the past have been solved using the Crank Nicholson scheme. In this paper, we introduce a new numerical scheme – the Box method, and compare it with the traditional...

Università della Svizzera italiana

Incomplete information and the closed-end fund discount

Barone-Adesi, Giovanni ; Kim, Youngsoo

We model the closed-end fund discount/premium in a version of Merton’s (1978) asset pricing model with incomplete information. In this economy, investors trade only assets which they “ know about” . The model generates a closed-end fund discount or premium, depending on risk-aversion parameters. The fund share price reverts to the net asset value on open-ending of the fund. The...

Università della Svizzera italiana

VaR without correlations for portfolio of derivative securities

Barone-Adesi, Giovanni ; Giannopoulos, Kostas ; Vosper, Les

We propose filtering historical simulation by GARCH processes to model the future distribution of assets and swap values. Options’ price changes are computed by full reevaluation on the changing prices of underlying assets. Our methodology takes implicitly into account assets’ correlations without restricting their values over time or computing them explicitly. VaR values for portfolios of...