We provide a comprehensive treatement of option pricing with particular emphasis on the valuation of American options on dividend-paying assets. We begin by reviewing valuation principles for European contingent claims in a financial market in which the underlying asset price follows an Itô process and the interest rate is stochastic. Then this analysis is extended to the valuation of American ...

We analyze the valuation partial differential equation for European contingent claims in a general framework of stochastic volatility models where the diffusion coefficients may grow faster than linearly and degenerate on the boundaries of the state space. We allow for various types of model behavior: the volatility process in our model can potentially reach zero and either stay there or instan...

2 Basic Theory 4 2.1 Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Arbitrage, State Prices, and Martingales . . . . . . . . . . . . 5 2.3 Individual Agent Optimality . . . . . . . . . . . . . . . . . . . 8 2.4 Habit and Recursive Utilities . . . . . . . . . . . . . . . . . . . 9 2.5 Equilibrium and Pareto Optimality . . . . . . . . . . . . . . . 12 2.6 Equilibrium ...

We describe a stochastic dynamic programming approach for “real option” based valuation of electricity generation capacity incorporating operational constraints and startup costs. Stochastic prices of electricity and fuel are represented by recombining multinomial trees. Generators are modeled as a strip of cross commodity call options with a delay and a cost imposed on each option exercise. We...

The disposition effect is a phenomenon in which investors hold onto losing assets longer than they hold onto gaining assets. In this study, we used functional magnetic resonance imaging (fMRI) to measure the response of valuation regions in the brain during the decision to keep or to sell an asset that followed a random walk in price. The most common explanation for the disposition effect is pr...

Although theoretically necessary, social capital is not considered within the process of asset allocation for private investors. Both the lack of appropriate practical valuation concepts and the effort of providing and processing the required information as input for a valuation were obstacles to include social capital in this process. However, first theoretical financial models for the evaluat...

This paper develops a nonparametric option pricing theory and numerical method for European, American and path-dependent derivatives. In contrast to the nonparametric curve fitting techniques commonly seen in the literature, this nonparametric pricing theory is more in line with the canonical valuation method developed Stutzer (1996) for pricing options with only a sample of asset returns. Unli...

GASB 34 Compliance Using GIS and Asset Management Systems Track: State and Local Government Author(s): Brian Long, Brent Wilson GASB 34 requires state and local governments to establish a mechanism that reports infrastructure value, depreciation, and management practices. This paper illustrates the use of GIS in this accounting process. GIS processes include asset inventory and valuation models...