Market prices of corporate bond spreads and of credit default swap (CDS) rates do not match each other. In this paper, we argue that the liquidity premium, the cheapest-to-deliver (CTD) option and actual market segmentation explain the pricing differences. Using the European transaction data from Reuters and Bloomberg, we estimate the liquidity premium that is timevarying and firm-specific. We ...

Abstract: This paper develops a European option pricing formula for fractional market models. Although there exist option pricing results for a fractional Black-Scholes model, they are established without accounting for stochastic volatility. In this paper, a fractional version of the Constant Elasticity of Variance (CEV) model is developed. European option pricing formula similar to that of th...

The option pricing problem is one of central contents in modern finance. In this paper, European option pricing formula is formulated for fuzzy financial market and some mathematical properties of them are discussed. This formula may be regarded as the fuzzy counterpart of Black-Scholes option pricing formula. In addition, some illustrative examples are also documented with MATLAB codes. c ©200...

ABSTRACT. Extracting market expectations has always been an important issue when making national policies and investment decisions in financial markets. In option markets, the most popular way has been to extract implied volatilities to assess the future variability of the underlying with the use of the Black & Scholes formula. In this manuscript, we propose a novel way to extract the whole tim...

A balance sheet structure including fixed assets, net working capital and risky long-term debt leads to a model for option pricing of the firm’s equity. Each of the financial components constitutes a source of risk. A hedge based on three distinct options and the stock enables risk neutral valuation and avoids the problems of lack of tradability of the assets and market incompleteness reflected...

This paper is a study of continuously resettled contingent claims prices in a stochastic economy. As special cases, the relationship between futures and forward prices is analyzed, and a preference-free expression is derived for these prices, as well as the price of a continuously resettled futures option, whose formula differs from Black’s futures option pricing formula due to the effects of m...

A common problem is to choose a “risk neutral” measure in an incomplete market in asset pricing models. We show in this paper that in some circumstances it is possible to choose a unique “equivalent local martingale measure” by completing the market with option prices. We do this by modeling the behavior of the stock price X , together with the behavior of the option prices for a relevant famil...

We consider the problem of valuation of certain Asian options in the geometric jump-diffusion models with continuously dividend-paying assets. With the sources of diffusion risks and two primitive tradeable assets, the market in this model is, in general, incomplete, and so, there are more than one equivalent martingale measures and no-arbitrage prices. For this jump-diffusion model, we adopt t...

Starting a firm with expansive potential is an option for educated and high-skilled workers. This option serves as an insurance against unemployment caused by labor market frictions and hence increases the incentives for education. We show within a matching model that reducing the start-up costs for new firms results in higher take-up rates of education. It also leads, through a thick-market ex...

In this article, we analyze the impact of uncertainty on the hiring process. We show the connection between models of statistical discrimination where uncertainty can work against groups that have less reliable indicators of future productivity and models of option value where uncertainty about future productivity can be beneficial for these groups. These models generate hypotheses about the re...