Derivatives and the price of risk

Bollen, Nicolas P. B.

doi:10.1002/(sici)1096-9934(199710)17:7<839::aid-fut6>3.0.co;2-o

Cited by 13 publications

(5 citation statements)

References 16 publications

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“…In the nonparametric jump-diffusion literature, the estimation of the market prices of risk problem has not been solved yet, but their values are arbitrary set, as in Johannes (2004). However, an incorrect specification of the market prices of risk can have dramatic consequences for derivatives valuation: see Bollen (1997) and Branger and Larsen (2013) for more details. In our approach, the market prices of risk of Wiener and Poisson processes do not have to be estimated.…”

Section: Introductionmentioning

confidence: 99%

Estimation of risk-neutral processes in single-factor jump-diffusion interest rate models

Gómez-Valle

Martínez-Rodríguez

2016

Journal of Computational and Applied Mathematics

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The estimation of the market price of risk is an open question in the jump-diffusion term structure literature when a closed-form solution is not known. Furthermore, the estimation of the physical drift has a high risk of misspecification. In this paper, we obtain some results that relate the risk-neutral drift and the risk-neutral jump intensity of interest rates with the prices and yields of zero-coupon bonds. These results open a way to estimate the drift and jump intensity of the risk-neutral interest rates directly from data in the markets. These two functions are unobservable but their estimations provide an original procedure for solving the pricing problem. Moreover, this new approach avoids the estimation of the physical drift as well as the market prices of risk. An application to US Treasury Bill data is illustrated. JEL classification: G12, G17.

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Section: Introductionmentioning

confidence: 99%

Estimation of risk-neutral processes in single-factor jump-diffusion interest rate models

Gómez-Valle

Martínez-Rodríguez

2016

Journal of Computational and Applied Mathematics

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“…Even though we have introduced a martingale measure, our estimation strategy will only rely on time-series returns rather than cross-section of options prices. There is a large literature on the use of joint data on the underlying asset and option prices for the joint estimation of the model, among others, we cite Bollen (1997), Eraker (2004, and Broadie, Chernov, and Johannes (2007).…”

Section: The Theoretical Model For Hard To Borrow Stocksmentioning

confidence: 99%

Does the Lending Rate Impact ETF's Prices?

Genaro¹,

Avellaneda

2019

Brazilian Review of Econometrics

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In this paper we developed an econometric model to empirically test the hard-to-borrow model of Avellaneda and Lipkin (2009) where asset prices jump as result of ``buy-in" procedures. The model is estimated using an extent version of simulated maximum likelihood (SML) for a selected group of Leveraged ETF, mainly short LETFs, because these instruments have been sporadically hard-to-borrow and are liquids. In general we do not find enough statistical evidence supporting that hard-to-borrow effect impacts LETFs prices. On the other hand, we did find statistical evidence supporting the jump-diffusion model for some Leveraged ETFs.

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“…Recently, Bollen (1997) has estimated the market price of risk under a number of model structures, concluding that each approach can provide different results. His analysis is based on measuring the market price of interest rate risk using discount bonds, and the market price of risk for Eurodollar futures contracts, and is similar to Gibson and Schwartz (1990) who calculated the market price of convenience yield risk for crude oil.…”

Section: Conceptual Frameworkmentioning

confidence: 99%

Martingale Restrictions and the Implied Market Price of Risk

Turvey¹,

Komar

2007

Canadian J Agri Economics

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"The market price of risk is conceptually one of the most critical artifacts of modern finance, since it provides the linkage between equilibrium and arbitrage models of derivatives pricing. In this paper, the market price of risk is derived for options on live cattle futures contracts. It provides a technique to extract the implied market price of risk (iMPR), which is conceptually similar to that used in extracting implied volatilities. It is shown that the iMPR is not linear across strike prices as theory suggests it should." Copyright 2007 Canadian Agricultural Economics Society.

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Derivatives and the price of risk

Cited by 13 publications

References 16 publications

Estimation of risk-neutral processes in single-factor jump-diffusion interest rate models

Estimation of risk-neutral processes in single-factor jump-diffusion interest rate models

Does the Lending Rate Impact ETF's Prices?

Martingale Restrictions and the Implied Market Price of Risk

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