arXiv subjects

Stoyan V. Stoyanov

Publications and source records attributed to Stoyan V. Stoyanov.

6 recordsLinked to original sources

arXiv2020

Equity Premium Puzzle or Faulty Economic Modelling?

In this paper, we revisit the equity premium puzzle reported in 1985 by Mehra and Prescott. We show that the large equity premium that they report can be explained by choosing a more appropriate distribution for the return data. We demonstrate that the high-risk aversion value observed by Mehra and Prescott may be attributable to the problem of fitting a proper distribution to the historical returns and partly caused by poorly fitting the tail of the return distribution. We describe a new distribution that better fits the return distribution and when used to describe historical returns can explain the large equity risk premium and thereby explains the puzzle.

econ.GN↗

arXiv2020

Option Pricing in an Investment Risk-Return Setting

In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the contract's maturity the contract is perfectly hedged. We derive both the optimal holdings in the underlying assets for the trader's optimal mean-variance portfolio and the amount of unhedged risk prior to maturity. Solutions assuming the cases where the price dynamics in the underlying assets follow discrete binomial price dynamics, continuous diffusions, stochastic volatility, volatility-of-volatility, and Merton-jump diffusion are derived.

q-fin.MF↗

arXiv2019

A New Set of Financial Instruments

In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for hedging derivatives assuming that a hedger should not always rely on trading existing assets that are used to form a linear portfolio comprised of the risky asset, the riskless asset, and standard derivatives, but rather should design a set of specific, most-suited financial instruments for the hedging problem. We introduce a sequence of new financial instruments best suited for hedging jump-diffusion and stochastic volatility market models. The new instruments we introduce are perpetual derivatives. More specifically, they are options with perpetual maturities. In a financial market where perpetual derivatives are introduced, there is a new set of partial and partial-integro differential equations for pricing derivatives. Our analysis demonstrates that the set of new financial instruments together with a risk measure called the tail-loss ratio measure defined by the new instrument's return series can be potentially used as an early warning system for a market crash.

q-fin.PR↗

arXiv2017

Option pricing for Informed Traders

In this paper we extend the theory of option pricing to take into account and explain the empirical evidence for asset prices such as non-Gaussian returns, long-range dependence, volatility clustering, non-Gaussian copula dependence, as well as theoretical issues such as asymmetric information and the presence of limited arbitrage opportunities

q-fin.MF↗

arXiv2017

Pricing derivatives in Hermite markets

We present a new framework for Hermite fractional financial markets, generalizing the fractional Brownian motion and fractional Rosenblatt markets. Considering pure and mixed Hermite markets, we introduce a strategy-specific arbitrage tax on the rate of transaction volume acceleration of the hedging portfolio as the prices of risky assets change, allowing us to transform Hermite markets with arbitrage opportunities to markets with no arbitrage opportunities within the class of Markov trading strategies.

q-fin.MF↗

arXiv2008

Price dynamics in a strategic model of trade between two regions

This paper develops a strategic model of trade between two regions in which, depending on the relation among output, financial resources and transportation costs, the adjustment of prices towards an equilibrium is studied. We derive conditions on the relations among output and financial resources which produce different types of Nash equilibria. The paths obtained in the process of converging toward a steady state for prices under discrete-time and continuous-time dynamics are derived and compared. It turns out that the results in the two cases differ substantially. Some of the effects of random disturbances on the price dynamics in continuous time are also studied.

math.OC↗