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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...

Università della Svizzera italiana

Requisiti patrimoniali, adeguatezza del capitale e gestione del rischio

Barone, Emilio ; Barone-Adesi, Giovanni ; Masera, Rainer

Il Comitato di Basilea ha deciso di introdurre un nuovo schema sull’adeguatezza dei mezzi patrimoniali degli istituti bancari, in sostituzione dell’Accordo del 1988. Le proposte avanzate in uno studio pubblicato nel giugno di quest’anno (A New Capital Adequacy Framework) sono state sottoposte all’esame della comunità finanziaria internazionale. La fase di consultazione del mercato...

Università della Svizzera italiana

Does volatility pay?

Barone-Adesi, Giovanni

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...

Università della Svizzera italiana

Homogeneity hypothesis in the context of asset pricing models : the quadratic market model

Barone-Adesi, Giovanni ; Gagliardini, Patrick ; Urga, Giovanni

This paper proposes a two factor model for asset pricing. We formulate a model of asset returns that in addition to the traditional market return term includes also the square of the market return to account for risk originating from coskewness with the market portofolio. The quadratic term is able to account for heterogeneities across portfolios. We conclude that the extra term is significant...

Università della Svizzera italiana

Electricity derivatives

Barone-Adesi, Giovanni ; Gigli, Andrea

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.

Università della Svizzera italiana

Interest rate barrier options

Barone-Adesi, Giovanni ; Sorwar, Ghulam

Less expensive than standard options, barrier options have become very popular in recent years as useful hedging instruments for risk management strategies. Thus far valuation approaches have largely focused on equity barrier options, where in certain instances analytical expressions may be available. In this paper we use Monte Carlo procedure to value barrier options based on the Chan, Karolyi,...

Università della Svizzera italiana

Implied volatility surfaces for inverse gamma models

Barone-Adesi, Giovanni ; Rasmussen, Henrik Obbekaer ; Ravanelli, Claudia

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...

Università della Svizzera italiana

A multivariate FGD technique to improve VaR computation in equity markets

Audrino, Francesco ; Barone-Adesi, Giovanni

We present a multivariate, non-parametric technique for constructing reliable daily VaR predictions for individual assets belonging to a common equity market segment, which takes also into account the possible dependence structure between the assets and is still computationally feasible in large dimensions. The procedure is based on functional gradient descent (FGD) estimation for the volatility...