Course details
Contingent Claims in Incomplete Markets
FINA 80222A
Examples include jump-diffusion models, models with priced correlation risk and the corresponding innovations in the modeling of the pricing kernel. We will also discuss the backtesting of risk management strategies in the context of incomplete markets. Development of the ability to implement the methods studied and critically read the current and forthcoming literature in the field.
Themes covered
1. Brief review of contingent claims and of the notion of market (in)completeness. The hypotheses underlying to the Black-Merton-Scholes model and the associated pricing kernel. 2. The volatility smile model-free volatility measures (RV and VIX) and option-implied distributions. We will revisit the Black-Scholes implied volatility smile and some of its potential explanations. We will then consider different model-free volatility measures and see how variance swaps and/or option data can be used to extract information about the risk-adjusted distribution of returns. Finally we will introduce the notion of variance risk premia a concept that we will further revisit when we study dynamic volatility models.
Selected papers: Andersen Bollerslev Christoffersen and Diebold (2006); The CBOE Volatility Index - VIX (2009); Demeterfi Derman Kamal and Zou (1999); Martin (2013); Bollerslev and Todorov (2011) . 3.Stochastic volatility models and the pricing kernel. Conditionally normal GARCH models and the pricing kernel in discrete time. Component models.
We will introduce stochastic volatility and GARCH models highlighting the pricing kernel used or implied by the different models. We will review some stylized facts on volatility and see how the different models accommodate these (or not). In particular we will discuss volatility models in which volatility process is separat
Course code
FINA 80222A
Subject
Finance
Program
PhD
Location
Côte-des-Neiges
Instruction mode
On-site learning
Credits
3