An investor with quadratic utility invests amounts changing with his perceptions of risk and expected return in a market with changing risk. Optimal investment policies are derived under several hypotheses for expected returns. These policies are combined in a Bayesian framework to yield a policy that performs better than the ‘buy and hold’ policy in our tests, except in the case of the FTSE...
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In this paper we propose an algorithm for pricing derivatives written on electricity in an incomplete market setting. A discrete time model for price dynamics which embodies the main features of electricity price revealed by simple time series analysis is considered. We use jointly Binomial and Monte Carlo methods for pricing under a risk-neutral measure of which we prove the existence.
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We study implied volatility surfaces when the squared volatility is driven by an inverse gamma process. We derive the first two conditional moments of the integrated volatility over the time to maturity to study theoretical term structure volatility patterns. We find that these patterns are in accordance with the empirical ones. Finally, we discuss some probabilistic properties of the volatility...
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