using real option analysis for highly uncertain technology investments the case of wind energy technology this study examines the feasibility of using a theoretical model and empirical analysis methods to value renewable energy re investment from perspective of real option analysis roa based on use of a roa approach the re value is evaluated with respect to its ability to conform to the main sensitivity analysis of re investment as well as an empirical method devised to value re investment by using actual data the economic intuitiveness underlying the decision making process for re investment is elucidated while empirical analysis is performed to demonstrate the effectiveness of the options value embedded in current development planning in taiwan for wind energy in addition to revealing the advantages of re development when considering real option analytical results indicate that roa is a highly effective means of quantifying how investment planning uncertainty including managerial flexibility influences re development besides evaluating the value of current re investment this study demonstrates that results of the theoretical model empirical analysis and sensitivity analysis correlate well with each other restated the value of developing re increases when increasing the underlying price time to maturity risk free rate and volatility conversely the value of developing re decreases when increasing the exercise price

moment matching machine learning methods for risk management of large variable annuity portfolios abstract variable annuity va with embedded guarantees have rapidly grown in popularity around the world in recent years valuation of vas has been studied extensively in past decades however most of the studies focus on a single contract these methods can be extended neither to valuate nor to manage the risk of a large variable annuity portfolio due to the computational complexity in this paper we propose an efficient moment matching machine learning method to solve this problem this method is proved to be a good candidate for risk management in terms of the speed of and the complexity of computing the annual dollar deltas vars and cvars for a large variable annuity portfolio whose contracts are over a period of 25 years there are two stages for our method first we select a small number of contracts and propose a moment matching monte carlo method based on the johnson curve rather than the well known nested simulations to compute the annual dollar deltas vars and cvars for each selected contract then these computed results are used as a training set for well known machine learning methods such as regression tree neural network and so on afterwards the annual dollar deltas vars and cvars for the entire portfolio are predicted through the trained machine learning method compared to other existing methods bauer et al 2008 gan 2013 gan and lin 2015 our method is very efficient and accurate finally our test results support our claims

model complexity and out of sample performance evidence from s p 500 index returns abstract we apply a range of out of sample specification tests to more than forty competing stochastic volatility models to address how model complexity affects out of sample performance using daily s p 500 index returns model confidence set estimations provide strong evidence that the most important model feature is the non affinity of the variance process despite testing alternative specifications during the turbulent market regime of the global financial crisis of 2008 we find no evidence that either finite or infinite activity jump models or other previously proposed model extensions improve the out of sample performance further applications to value at risk demonstrate the economic significance of our results furthermore the out of sample results suggest that standard jump diffusion models are misspecified

a tale of two regimes theory and empirical evidence for a markov modulated jump diffusion model of equity returns and derivative pricing implications abstract we provide closed form solutions for a continuous time markov modulated jump diffusion model in a general equilibrium framework for options prices under a variety of jump diffusion specifications we further demonstrate that the two state model provides the leptokurtic return features volatility smile and volatility clustering observed empirically for the dow jones industrial average djia and its component stocks using 10 years of stock return data we confirm the existence of jump intensity switching and clustering illustrate transition probabilities and verify superior empirical fit over competing poisson style models

the behavior of risk and market prices of risk over the nasdaq bubble period we exploit the information in the options market to study the variations of return risk and market prices of different sources of risk during the rise and fall of the nasdaq market we specify a model that accommodates fluctuations in both risk levels and market prices of different sources of risk and we estimate the model using the time series returns and option prices on the nasdaq 100 tracking stock our analysis reveals three key variations during the period from march 1999 to march 2001 first return volatility increased together with the rising nasdaq index level even though the two tend to move in opposite directions second although the market price of diffusion return risk averages around 1 82 over the whole sample the estimates reached negative territory at the end of 1999 the estimates reverted back to highly positive values after the collapse of the nasdaq market third the market price of jump risk increased with the rising nasdaq valuation and this increase in market price coincided with an increased imbalance in open interest between put and call options

the variance gamma v g model for share market returns a new stochastic process termed the variance gamma process is proposed as a model for the uncertainty underlying security prices the unit period distribution is normal conditional on a variance that is distributed as a gamma variate its advantages include long tailedness continuous time specification finite moments of all orders elliptical multivariate unit period distributions and good empirical fit the process is pure jump approximable by a compound poisson process with high jump frequency and low jump magnitudes applications to option pricing show differential effects for options on the money compared to in or out of the money copyright 1990 by the university of chicago

optimizing the level of renewable electric r d expenditures using real options analysis abstract one of the primary objectives of the united states federal non hydro renewable electric r d program is to promote the development of technologies that have the potential to provide consumers with stable and secure energy supplies in order to quantify the benefits provided by continued federal renewable electric r d this paper uses real option pricing techniques to estimate the value of renewable electric technologies in the face of uncertain fossil fuel prices within the real options analysis framework the current value of expected future supply from renewable electric technologies net of federal r d expenditures is estimated to be 30 6 billion of this value 86 can be attributed to past federal r d efforts and 14 can be attributed to future federal r d efforts assuming continued federal r d funding at 300 million yr in addition real options analysis shows that the value of renewable electric technologies increases as current and future r d funding levels increase this indicates that the current level of federal renewable electric r d funding is sub optimal

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

omega performance measure and portfolio insurance abstract we analyze the performance of the two main portfolio insurance methods the obpi and cppi strategies using downside risk measures for this purpose we introduce kappa performance measures and especially the omega measure these measures take account of the entire return distribution we show that the cppi method performs better than the obpi as a by product we determine the set of threshold values for these risk reward performance measures

option pricing for a jump diffusion model with general discrete jump size distributions we obtain a closed form solution for pricing european options under a general jump diffusion model that can incorporate arbitrary discrete jump size distributions including nonparametric distributions such as an empirical distribution the flexibility in the jump size distribution allows the model to better capture leptokurtic features found in real world data the model uses a discrete time framework and leads to a pricing formula that is provably convergent to the continuous time price as the discretization is increased the solution is easy to implement with fast convergence properties numerical results illustrate the efficiency and accuracy of the proposed model and highlight its robustness and flexibility this paper was accepted by noah gans stochastic models and simulation

a unified approach to bermudan and barrier options under stochastic volatility models with jumps abstract many financial assets such as currencies commodities and equity stocks exhibit both jumps and stochastic volatility which are especially prominent in the market after the financial crisis some strategic decision making problems also involve american style options in this paper we develop a novel fast and accurate method for pricing american and barrier options in regime switching jump diffusion models by blending regime switching models and markov chain approximation techniques in the fourier domain we provide a unified approach to price bermudan american options and barrier options under general stochastic volatility models with jumps the models considered include heston hull white stein stein scott the 3 2 model and the recently proposed 4 2 model and the hypergeometric model with general jump amplitude distributions in the return process applications include the valuation of discretely monitored contracts as well as continuously monitored contracts common in the foreign exchange markets numerical results are provided to demonstrate the accuracy and efficiency of the proposed method

pricing asian options under a hyper exponential jump diffusion model we obtain a closed form solution for the double laplace transform of asian options under the hyper exponential jump diffusion model similar results were available previously only in the special case of the black scholes model bsm even in the case of the bsm our approach is simpler as we essentially use only ito s formula and do not need more advanced results such as those of bessel processes and lamperti s representation as a by product we also show that a well known recursion relating to asian options has a unique solution in a probabilistic sense the double laplace transform can be inverted numerically via a two sided euler inversion algorithm numerical results indicate that our pricing method is fast stable and accurate and it performs well even in the case of low volatilities

the risk premium that never was a fair value explanation of the volatility spread abstract we present a new framework to investigate the profitability of trading the volatility spread the upward bias on implied volatility as an estimator of future realized volatility the scheme incorporates the first four option implied moments in a growth optimal payoff that is statically replicated using a portfolio of options removing the upward bias on implied volatility worsens the likelihood score of risk neutral densities obtained from s p 500 index options when they are used as forecasts of the underlying index return distribution it also results in negative expected capital growth when they are used in a volatility arbitrage scheme our empirical finding is that the upward bias on implied volatility does not represent a long term return premium rather it is required to mitigate the large losses associated with tail events when trading volatility in options markets

renewable energy policy evaluation using real option model the case of taiwan abstract this study presents a policy benefit evaluation model that integrates cost efficiency curve information on renewable power generation technologies into real options analysis roa methods the proposed model evaluates quantitatively the policy value provided by developing renewable energy re in the face of uncertain fossil fuel prices and re policy related factors the economic intuition underlying the policy making process is elucidated while empirical analysis illustrates the option value embedded in the current development policy in taiwan for wind power in addition to revealing the benefits that re development provides when considering real options analytical results indicate that roa is a highly effective means of quantifying how policy planning uncertainty including managerial flexibility influences re development in addition to assessing the policy value of current re development policy this study also compares policy values in terms of internalized external costs and varying feed in tariff fit simulation results demonstrate that the re development policy with internalized co2 emission costs is appropriate policy planning from sustainability point of view furthermore relationship between varying fit and policy values can be shown quantitatively and appropriate fit level could be determined accordingly

leverage effect volatility feedback and self exciting market disruptions equity index volatility variation and its interaction with the index return can come from three distinct channels first index volatility increases with the market s aggregate financial leverage second positive shocks to systematic risk increase the cost of capital and reduce the valuation of future cash flows generating a negative correlation between the index return and its volatility regardless of financial leverage finally large negative market disruptions show self exciting behaviors this article proposes a model that incorporates all three channels and examines their relative contribution to index option pricing and stock option pricing for different types of companies

monte carlo methods for security pricing the monte carlo approach has proved to be a valuable and flexible computational tool in modern finance this paper discusses some of the recent applications of the monte carlo method to security pricing problems with emphasis on improvements in efficiency we first review some variance reduction methods that have proved useful in finance then we describe the use of deterministic low discrepancy sequences also known as quasi monte carlo methods for the valuation of complex derivative securities we summarize some recent applications of the monte carlo method to the estimation of partial derivatives or risk sensitivities and to the valuation of american options we conclude by mentioning other applications

a review on global wind energy policy with the increasing negative effects of fossil fuel combustion on the environment in addition to limited stock of fossil fuel have forced many countries to inquire into and change to environmentally friendly alternatives that are renewable to sustain the increasing energy demand energy policy plays a vital role to mitigate the impacts of global warming and crisis of energy availability this paper explores the wind energy industry from the point of view of the wind energy policy it is noticed that energy policy could help increasing wind power generation as well as stimulating the energy industry it may be stated that without specific energy policy a country would not be able to solve the acute problems like reducing greenhouse gases ghgs emission scarcity of energy etc this paper discussed the existing successful energy policies for few selected countries based on literatures it has been found that fit rps incentives pricing law and quota system are the most useful energy policies practiced by many countries around the world then status of wind energy policy for malaysia was investigated and compared with few selected countries around the world

policies and legislation driving taiwan s development of renewable energy abstract under the current wave of international responses to the growing threat of climate change taiwan cannot afford to step back from its goal of advancing its renewable energy strengthening its energy self sufficiency and energy security this paper will first analyze the high level dependency structure of taiwan s energy demands then we will explore taiwan current situation in terms of renewable energy development furthermore from an overview of the course of changes and development in taiwan s energy policy highlight the commitment to and aims of taiwan s renewable energy development made by the government at the annual national energy conference fourth we shall analyse technological r d incentives taxes market reforms and other related policy tools fifth in light of public announcements and budgets set in recent years for taiwan s renewable energy research plan highlight main strategies being given impetus by the government sixth the author will discuss the implications of recent significant legal reforms to the development of renewable energy in taiwan and from the correlating aspects of industrial structures and energy consumption take the first steps in emphasizing the urgent need for adjustments to be made to taiwan s industrial structure finally this paper will conclude by examining current policies legislation and strategies which are in place to promote this area in taiwan and discuss the potential competitiveness and future scenarios which the development of renewable energy could mean for taiwan

considering the investment decisions with real options games approach abstract the mix of games theory with the real options has been a dynamic range of exploration in the most recent decade the engaging quality of the specialists for displaying aggressive speculation choices by blending ideas from both hypotheses is on account of a venture choice in a focused business sector can be seen in its substance as a game between firms in this paper we expand a model to consider finite horizon real option games under incomplete information with various parameters in incomplete information games firms actions express significant information about profitability to contestants the encapsulation of this information proposed original blocks in models with strategic interactions this is because of circularity where best exercise decisions are based on previous decisions taken which at a given time are quiet to be mentioned because about the dynamic programming principle we expand an extended version of the least squares monte carlo algorithm to confront these results the model can aid in understanding the relation between strategic optionality and information besides how this influences the best decision policy and its value results we find the informational feature is of great significance for firms best decision policy and optimization of project values

compound real options valuation of renewable energy projects the case of a wind farm in serbia abstract renewable energy sources have become a very important issue due to environmental and sustainability concerns in addition most renewable energy electricity generation res e projects are characterized by considerable uncertainty and sequential decision making these projects net present value npv is very often close to zero which renders them a good candidate for the application of real options valuation methodology of investment project appraisal this paper examines the real options valuation of a potential onshore wind farm project in serbia the binomial tree model spans a 15 year period consisting of a 2 year investment period and a 13 year operating period the first 12 years of which are protected by feed in tariffs according to local renewable energy regulations the authors examine a multi phased compound nested path dependent real option consisting of mutually exclusive options a sequential option to invest as well as expand repower contract and abandon options volatility which is calculated by means of a monte carlo simulation according to the logarithmic present value returns approach shows predominant sensitivity to the capacity factor simulated with the rescaled weibull s probability distribution the final binomial tree results show that the proposed sequence of options increases project value by transforming higher risk and lower return in the initial discounted cash flow model to lower risk and higher return in the ro model this paper contributes to the existing literature in at least two ways it presents in depth analysis of the real option application to the res e project and provides decision makers with sophisticated tool for improving strategic thinking capital budgeting and decision making processes

investment timing and optimal capacity choice for small hydropower projects this paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices we present a real options based method with continuous scaling and we find that there is a unique price limit for initiating the project if the current electricity price is below this limit it is never optimal to invest but above this limit investment is made according to the function for optimal size the connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant based on all the important choices for such a plant the main results of the spreadsheet are simulated production size and the investment costs which are in turn used for finding the value of the real option and the price limit the method is illustrated on three different norwegian small hydropower projects

the reality of stock market jumps diversification abstract we propose a non parametric procedure for estimating systemic co jumps and independent idiosyncratic jumps for 35 stock markets and study news associated with these jumps as reported in factiva and bloomberg from 1988 to 2014 our results suggest that it is important to distinguish between systemic co jumps and idiosyncratic jumps we find both types of jumps have important implications for home bias investors while idiosyncratic jumps have economically significant impact on portfolio weights for emerging markets our news analysis suggests systemic jumps are typically caused by currency crises sectoral failure liquidity issues and deteriorating economic climate while idiosyncratic jumps are usually caused by political unrest currency instability and large firm effects on small economies in fact many of the idiosyncratic jumps share the same origin although different stock markets experienced the impact differently at different times

the development of renewable energy in resource rich region a case in china abstract with the largest population living in rural areas the lack of clean energy supply is an important problem in china and the utilization of renewable energy not only meets the demand of energy but also provides a basis for environmental protection and sustainable development this paper reviews use of clean energy in a resource rich region including the basic principle of the development of recycling agriculture the potential the present status and the future of renewable energy in the region rural areas if the project will be finished there will be 300 000 families benefiting from it and it can bring at least 2 2 108 us dollars revenue increase directly the indirect revenue increase will be 0 15 billion us dollars the environment will be improved and the living standard in jincheng s rural areas is also be greatly improved because of developing biogas project based on the developing status and constraint conditions the solutions to further promote renewable energy projects in this region are also proposed

the impact of chinese carbon emission trading scheme ets on low carbon energy lce investment china is planning to introduce emission trading scheme ets to decrease co2 emission as low carbon energy lce will play a pivotal role in reducing co2 emissions our paper is to assess the extent and the conditions under which a carbon ets can deliver lce investment in china we chose wind technology as a case study and a real option based model was built to explore the impact of a number of variables and design features on investment decisions e g carbon and electricity price carbon market risk carbon price floor and ceiling and on grid ratio we compute critical values of these variables and features and explore trade offs among them according to our work a carbon ets has a significant effect on wind power plant investment although it cannot support investment in wind power on its own carbon price stabilization mechanisms such as carbon price floor can significantly improve the effect of carbon ets but the critical floor to support investment is still much higher than the carbon price in china pilot etss our results show that other policy measures will be needed to promote low carbon energy development in china

a real options model for renewable energy investment with application to solar photovoltaic power generation in china this paper proposes a real options model for evaluating renewable energy investment by considering uncertain factors such as co2 price non renewable energy cost investment cost and market price of electricity a phase out mechanism is built into the model to reflect the long term changes of subsidy policy we apply the proposed model to empirically evaluate the investment value and optimal timing for solar photovoltaic power generation in china our empirical results show that the current investment environment in china may not be able to attract immediate investment while the development of carbon market helps advance the optimal investment time a sensitivity analysis is conducted to investigate the dynamics of investment value and optimal timing under the changes of unit generating capacity subsidy level market price of electricity co2 price and investment cost it is found that the high investment cost and the volatility of electricity and co2 prices are not conducive to attract immediate investment instead increasing the level of subsidy promoting technological progress and maintaining the stability of market are useful to stimulate investment

pricing methods and hedging strategies for volatility derivatives abstract we explore the valuation and hedging of discretely observed volatility derivatives using three different models for the price of the underlying asset geometric brownian motion with constant volatility a local volatility surface and jump diffusion we begin by comparing the effects on valuation of variations in contract design such as the differences between specifying log returns or actual returns and incorporating caps on the level of realized volatility we then focus on the difficulties associated with hedging these products delta hedging strategies are ineffective for hedging volatility derivatives since they require very frequent rebalancing moreover they provide limited protection in the jump diffusion context we study the performance of a hedging strategy for volatility swaps that establishes small fixed positions in vanilla options at each volatility observation

evaluation of r d investments in wind power in korea using real option abstract in recent years many countries put an emphasis on the development and deployment of renewable energy to cope with the global environmental crisis such as depletion of fossil energy climate convention to control emissions of greenhouse gases among the various new and renewable energy sources the korean government selected wind power energy as one of the core areas for r d investments in this paper we evaluate the economic value of the investment in wind power energy r d in korea and optimal deployment timing of wind power technology by using the real option approach the real option model adopted in this paper assumes that a decision maker has a compound option to abandon deployment or continue the r d as a result by using empirical data of korea it is found that there exists a considerable amount of positive economic value of investments in wind power energy r d

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

considering risks in early stage investment planning for emission abatement technologies in large combustion plants fossil fuels will continue to be the most important energy source for electricity generation in most parts of the world for the next decades therefore emission abatement technologies in large combustion plants are an important measure to reduce the emission of pollutants and to lower the negative effects thereof for humans animals and the environment investment decisions for emission reduction measures are however facing various kinds of risks and uncertainties caused by political technological economic and legal influences the consideration of these risks in early stage investment planning is often complex yet important for investors this paper investigates the possibilities to consider risks and uncertainties in early stage investment and cost calculation methodologies of different complexity the real options analysis is presented as well as less complex methods such as monte carlo or sensitivity analyses that lower the calculation effort the application of a specifically developed risk portfolio is recommended before quantitatively investigating risks this portfolio helps to identify the most critical risks and to focus on them reducing again the calculation effort the presented approach is not only of interest for investors but also for policies especially if data is scarce or uncertainties exist regarding specific plant parameters or cost and price components the content of this paper is presented using the example of nitrogen oxide emission reduction measures it is however possible to transfer the results to other pollutants or technologies in a related context

pricing and exercising american options an asymptotic expansion approach abstract this paper proposes and implements a novel asymptotic expansion approach for pricing discretely monitored american options and approximating their optimal early exercise boundaries under a generic class of multivariate derivative pricing models incorporating both stochastic volatility and levy driven jumps in asset return the price and the critical value can be expanded up to any arbitrary order around those under a simple constant volatility jump diffusion model the expansion terms are then efficiently implemented by exactly solving some backward inductions via closed form fourier transforms where a substantial extension of the hilbert transform method of feng and linetsky 2008a 2009 plays an important role the efficiency of our method is illustrated through some representative examples as applications we analyze the impacts of various model parameters on the optimal early exercise boundary compare the optimal early exercise boundaries under different models and propose a derivative proxy based method for practically exercising american options under models with stochastic volatility and jumps

time changed levy processes and option pricing abstract the classic black scholes option pricing model assumes that returns follow brownian motion but return processes differ from this benchmark in at least three important ways first asset prices jump leading to non normal return innovations second return volatilities vary stochastically over time third returns and their volatilities are correlated often negatively for equities time changed levy processes can simultaneously address these three issues we show that our framework encompasses almost all of the models proposed in the option pricing literature and it is straightforward to select and test a particular option pricing model through the use of characteristic function technology

enhancing renewable and sustainable energy development based on an options based policy evaluation framework case study of wind energy technology in taiwan global warming and climate change have shifted the focus of industrial development towards low carbon renewable energy re as evidence by global efforts to develop re based sustainable energy policies however the generally cost ineffective nature of re investments explains continued governmental subsidies and draft assistance measures to encourage related industrial development reduce research and development r d costs and increase innovativeness besides measures to accelerate supply and reduced demand for energy sustainable energy policies must enact thoroughly planned legal and regulatory mechanisms notable examples of establishing a legal basis for a low carbon society in taiwan include the energy management act renewable energy development bill greenhouse gas reduction act draft and energy tax act draft however such legislative efforts occasionally conflict or compete with each other warranting further integration additionally re technologies are characterized by high r d costs long term planning and high investment risks therefore based on global trends in wind power development and related policy planning this study analyzes the feasibility of implementing management strategies in the development process and the correlations between such strategies additionally the achievements polices functions mechanisms promotion measures and future plans for related renewable and sustainable energy laws in taiwan is thoroughly reviewed an options based policy evaluation framework is also constructed based on governmental administrative considerations moreover the characteristics of options that lead to unforeseen circumstances during the planning of re development policies are discussed allowing us to derive real time response measures with a decision making value results of this study provide a valuable reference for governmental efforts to evaluate the merits and limitations of related policies concisely ultimately facilitating the formulation of re development policies

pricing and hedging path dependent options under the cev process much of the work on path dependent options assumes that the underlying asset price follows geometric brownian motion with constant volatility this paper uses a more general assumption for the asset price process that provides a better fit to the empirical observations we use the so called constant elasticity of variance cev diffusion model where the volatility is a function of the underlying asset price we derive analytical formulae for the prices of important types of path dependent options under this assumption we demonstrate that the prices of options which depend on extrema such as barrier and lookback options can be much more sensitive to the specification of the underlying price process than standard call and put options and show that a financial institution that uses the standard geometric brownian motion assumption is exposed to significant pricing and hedging errors when dealing in path dependent options

a real option analysis of investments in hydropower the case of norway abstract this paper presents a valuation study of hydropower investment opportunities in the norwegian context according to nve norwegian water resources and energy directorate the regulator there is a potential of 39 twh not yet developed generation in a normal year is approximately 120 twh by using the conceptual real option framework of dixit and pindyck 1994 investment under uncertainty princeton university press princeton nj one can estimate the value of investment opportunities to nok 11 million gwh eur 1 4 million gwh furthermore the optimal trigger price for initiating an investment based on electricity forward prices is calculated to nok 0 32 kwh eur 0 04 kwh the analysis shows consistency between real option theory and aggregate investment behaviour in norwegian hydropower

optimal over installation of wind generation facilities abstract this paper evaluates the economic benefits to over installing turbines on capacity constrained wind farm sites in order to capture more energy at low wind speeds although this implies curtailment at high wind speeds we show that over installing generation facilities can increase returns to investors and reduce system costs a detailed model based analysis is developed using british data with variations in the range of over installation the renewable policy support systems fixed feed in tariffs or green certificate premia to wholesale energy prices and the extent of replacement of fossil generation in the technology mix with wind in the cases of premia to market prices we use agent based computational learning and risk simulation to model market prices not only is over installation beneficial under fixed feed in tariffs but is more so under premia to market prices and increasingly so as wind replaces fossil generation

a real options evaluation model for the diffusion prospects of new renewable power generation technologies this study presents a policy planning model that integrates learning curve information on renewable power generation technologies into a dynamic programming formulation featuring real options analysis the model recursively evaluates a set of investment alternatives on a year by year basis thereby taking into account that the flexibility to delay an irreversible investment expenditure can profoundly affect the diffusion prospects of renewable power generation technologies price uncertainty is introduced through stochastic processes for the average wholesale price of electricity and for input fuel prices demand for electricity is assumed to be increasingly price sensitive as the electricity market deregulation proceeds reflecting new options of consumers to react to electricity price changes such as time of use pricing unbundled electricity services and choice of supplier the empirical analysis is based on data for the turkish electricity supply industry apart from general implications for policy making it provides some interesting insights about the impact of uncertainty and technical change on the diffusion of various emerging renewable energy technologies

pricing discrete path dependent options under a double exponential jump diffusion model abstract we provide methodologies to price discretely monitored exotic options when the underlying evolves according to a double exponential jump diffusion process we show that discrete barrier or lookback options can be approximately priced by their continuous counterparts pricing formulae with a simple continuity correction the correction is justified theoretically via extending the corrected diffusion method of siegmund 1985 we also discuss the jump effects on the performance of this continuity correction method numerical results show that this continuity correction performs very well especially when the proportion of jump volatility to total volatility is small therefore our method is sufficiently of use for most of time

u s stock market crash risk 1926 2010 abstract this paper examines how well alternate time changed levy processes capture stochastic volatility and the substantial outliers observed in u s stock market returns over the past 85 years the autocorrelation of daily stock market returns varies substantially over time necessitating an additional state variable when analyzing historical data i estimate various one and two factor stochastic volatility levy models with time varying autocorrelation via extensions of the bates 2006 methodology that provide filtered daily estimates of volatility and autocorrelation the paper explores option pricing implications including for the volatility index vix during the recent financial crisis

a dynamic autoregressive expectile for time invariant portfolio protection strategies constant proportion portfolio insurance cppi is nowadays one of the most popular techniques for portfolio insurance strategies it simply consists of reallocating the risky part of a portfolio with respect to market conditions via a leverage parameter called the multiple guaranteeing a predetermined floor we propose to introduce a conditional time varying multiple as an alternative to the standard unconditional cppi method directly linked to actual risk management problematics this ex ante approach for the conditional multiple aims to diversify the risk model associated for example with the expected shortfall es or extreme risk measure estimations first we recall the portfolio insurance principles and main properties of the cppi strategy including the time invariant portfolio protection tipp strategy as introduced by estep and kritzman 1988 we emphasize the existence of an upper bound on the multiple for example to hedge against sudden drops in the market then we provide the main properties of the conditional multiples for well known financial models including the discrete time portfolio rebalancing case and levy processes to describe the risky asset dynamics for this purpose we precisely define and evaluate different gap risks in both conditional and unconditional frameworks as a by product the introduction of discrete or random time portfolio rebalancing allows us to determine and or estimate the density of durations between rebalancements finally from a more practical and statistical point of view due to trading restrictions we present the class of dynamic autoregressive expectile dare models for estimating the conditional multiple this latter approach provides useful complementary information about the risk and performance associated with probabilistic approaches to the conditional multiple

do illiquid stocks jump more frequently we study the influence of stock liquidity on the stock price jump frequency using intraday data of 175 us stocks during 2007 11 grouping these stocks according to their average liquidity we find l

on pricing and hedging options in regime switching models with feedback effect abstract we study the pricing and hedging of european style derivative securities in a markov regime switching model with a feedback effect depending on the economic condition we adopt a pricing kernel which prices both financial and economic risks explicitly in a dynamically incomplete market and we provide an equilibrium analysis a martingale representation for a european style index option s price is established based on the price kernel the martingale representation is then used to construct the local risk minimizing strategy explicitly and to characterize the corresponding pricing measure

numerical approximations of optimal portfolios in mispriced asymmetric levy markets abstract we present numerical approximations of optimal portfolios in mispriced levy markets under asymmetric information for informed and uninformed investors having logarithmic preference we apply our numerical scheme to kou 2002 jump diffusion markets by deriving analytic formulas for the first two derivatives of the underlying portfolio objective function which depend only on the levy measure of the jump generating process optimal portfolios are then simulated using the box muller algorithm newton s method and incomplete beta functions convergence dynamics and trajectories of sample paths of optimal portfolios for both investors are presented at different levels of information asymmetry mispricing horizon asymmetry in the kou density jump intensity volatility mean reversion speed and sharpe ratios we also apply the proposed newton s algorithm to compute optimal portfolios for investors in variance gamma markets via instantaneous centralized moments of returns

short term generation asset valuation a real options approach this paper discusses using real options to value power plants with unit commitment constraints over a short term period we formulate the problem as a multistage stochastic problem and propose a solution procedure that integrates forward moving monte carlo simulation with backward moving dynamic programming we assume that the power plant operator maximizes expected profit by deciding in each hour whether or not to run the unit that a certain lead time for commitment and decommitment decisions is necessary to start up and shut down a unit and that these commitment decisions once made are subject to physical constraints such as minimum uptime and downtime we also account for the costs associated with starting up and shutting down a unit last we assume that there are hourly markets for both electricity and the fuel used by the generator and that their prices follow ito processes using numerical simulation we show that failure to consider physical constraints may significantly overvalue a power plant

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

short term market risks implied by weekly options we study short maturity weekly s p 500 index options which provide a direct way to analyze volatility and jump risks unlike longer dated options they are largely insensitive to the risk of intertemporal shifts in the economic environment adopting a novel seminonparametric approach we uncover variation in the negative jump tail risk which is not spanned by market volatility and helps predict future equity returns as such our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always signaled by the level of market volatility and elude standard asset pricing models

real options analysis for renewable energy investment decisions in developing countries abstract renewable energy projects in developing countries should provide clean energy supply as well as support sustainable economic development to this end risks arising from uncertainties such as rapidly changing technologies and host government conditions should be carefully addressed however traditional methods for economic assessment are not adequate to support decision making regarding investments in renewable energy this paper proposes a real options analysis framework as a tool to assess renewable energy investment in developing countries a case study involving a hydropower project in indonesia was conducted to validate and verify the proposed framework this framework is expected to help host countries and investors assess renewable energy projects with high volatility and risk

valuing investment decisions of renewable energy projects considering changing volatility abstract volatility is an important parameter when evaluating investments using the real options method for renewable energy investments the volatility of cash flow continuously changes because as new information and knowledge are gathered there is less foreseen variation this paper proposes an extended recombining trinomial tree model where the changing volatility is used to generate transition probabilities the changing volatility is generated using a consolidation process where multiple random variables including the market price of electricity carbon price and lending rate are integrated into a low dimension stochastic process a two factor learning curve is used to model the changes of investment cost we apply the proposed model to analyze solar photovoltaic pv power generation investment in china the results show volatility with changing feature compared with constant volatility changing volatility may advance investment decisions and change the project value complete grid parity policy in the solar pv industry is infeasible because the opportunity cost brought by the option of delaying cannot be offset the changing volatility may produce a lower and equally effective subsidy level compared with constant volatility a carbon emission trading scheme is helpful in advancing investments in renewable energy which is reflected in improvements in project value advancements in investment decisions and reductions in the required subsidy level

willingness to pay for renewable energy investment in korea a choice experiment study abstract renewable energy sources are considered as alternatives for coping with the high price of oil and global warming the korean government has set a target that 11 of the total primary energy supply should be obtained through renewable energy sources until 2030 in order to develop proper policies for renewable energy investment it is necessary to analyze the benefits of renewable energy investment based on households willingness to pay this study attempts to apply a choice experiment ce for assessing renewable energy investment in korea moreover we employ a multinomial probit mnp model to relax the assumption that all respondents have the same preferences for the attributes being valued which is usually required in empirical ce studies an mnp model allows the most flexible pattern of error correlation structure the results reveal that the korean public puts a value on the protection of wildlife reduction of pollution and increased employment opportunities on the other hand respondents do not derive significant values from the improvement of landscapes this study is expected to provide policy makers with useful information for evaluating and planning policies related to renewable energy investment

dampened power law reconciling the tail behavior of financial security returns this article proposes a stylized model that reconciles several seemingly conflicting findings on financial security returns and option prices the model is based on a pure jump levy process wherein the jump arrival rate obeys a power law dampened by an exponential function the model allows for different degrees of dampening for positive and negative jumps and also for different pricing for upside and downside market risks calibration of the model to the s p 500 index shows that the market charges only a moderate premium on upward index movements but the maximally allowable premium on downward index movements

optimal trading strategies for levy driven ornstein uhlenbeck processes this study derives an optimal pairs trading strategy based on a levy driven ornstein uhlenbeck process and applies it to high frequency data of the s p 500 constituents from 1998 to 2015 our model

an empirical comparison of continuous time models of implied volatility indices abstract we explore the ability of alternative popular continuous time diffusion and jump diffusion processes to capture the dynamics of implied volatility indices over time the performance of the various models is assessed under both econometric and financial metrics to this end data are employed from major european and american implied volatility indices and the rapidly growing cboe volatility futures market we find that the addition of jumps is necessary to capture the evolution of implied volatility indices under both metrics mean reversion is of second order importance though the results are consistent across the various metrics markets and construction methodologies

risk factors and their associated risk premia an empirical analysis of the crude oil market abstract this paper sheds new light on higher order price risks in crude oil markets a model free analysis reveals that crude oil variance risk behaves fundamentally different from variance risk in equity markets most importantly a skewness swap is no valid hedge for a variance swap and investors fear large price jumps in both directions a model based assessment confirms this and reveals that while stochastic volatility is important to capture the statistical properties such as volatility clusters and time varying variance swap rates only jump risk seems to be priced with a premium empirical evidence from a pricing and hedging exercise confirms these findings

the pricing of tail risk and the equity premium evidence from international option markets we explore the pricing of tail risk as manifest in index options across international equity markets the risk premium associated with negative tail events displays persistent shifts unrelated to

vix derivatives hedging and vol of vol risk we study the empirical hedging performance of alternative vix option pricing models recent advances in the literature find evidence of asymmetric volatility of volatility similar to the leverage effect in equity markets stochastic mean reversion and jumps using such findings in our model framework we show that while sophisticated models have superior pricing performance and can explain a range of stylized facts in the vix derivatives market their hedging performance is inferior to a simple black model hedge we also study the empirical performance of regime dependent hedge ratio adjustments commonly applied in equity markets

asymmetry in the jump size distribution of the s p 500 evidence from equity and option markets this paper studies alternative distributions for the size of price jumps in the s p 500 index we introduce a range of new jump diffusion models and extend popular double jump specifications that have become ubiquitous in the finance literature the dynamic properties of these models are tested on both a long time series of s p 500 returns and a large sample of european vanilla option prices we discuss the in and out of sample option pricing performance and provide detailed evidence of jump risk premia models with double gamma jump size distributions are found to outperform benchmark models with normally distributed jump sizes

real option valuation in renewable energy literature research focus trends and design abstract in light of intensive development of the renewable energy re sector a growing number of academic papers address the complexity of re investment planning and valuation to take account of the high risk profile and irreversibility of re investments researchers have resorted to sophisticated real options ro approaches that enable flexibility to be incorporated into project design in the face of an uncertain environment the variety of different frameworks and models adopted as well as a lack of aggregated analysis of the field suggest a need for a critical review of ro methodology and design in re assessment this study describes the research focus trends and design found in contemporary academic literature devoted to re valuation with a ro approach particular attention is given to ro in project and policy design the results give a comprehensive picture of existing research on the topic thus providing researchers with a solid foundation for further study and indications of directions for future development furthermore the findings provide policymakers and project planners with valuable insights into key aspects of re project and policy design

a jump model for fads in asset prices under asymmetric information abstract this paper addresses how asymmetric information fads and levy jumps in the price of an asset affect the optimal portfolio strategies and maximum expected utilities of two distinct classes of rational investors in a financial market we obtain the investors optimal portfolios and maximum expected logarithmic utilities and show that the optimal portfolio of each investor is more or less than its merton optimal our approximation results suggest that jumps reduce the excess asymptotic utility of the informed investor relative to that of uninformed investor and hence jump risk could be helpful for market efficiency as an indirect reducer of information asymmetry our study also suggests that investors should pay more attention to the overall variance of the asset pricing process when jumps exist in fads models moreover if there are very little or too much fads then the informed investor has no utility advantage in the long run

trait making for labour intensive technology in sub saharan africa abstract empirical evidence indicates that the use of labour intensive techniques in african industry would create not only more employment but also more value added relative to competing capital intensive alternatives the evidence also indicates however that it is the latter rather than the former techniques which tend to dominate much of the industrial sector in sub sahara we argue here that this apparently paradoxical situation can be understood once one takes into account the amount of institutional change or institutional trait making that would need to accompany the introduction of labour intensive techniques on a large scale using a number of concepts advanced by hirschman and drawing mainly on cases from the road construction industry in africa we describe exactly which traits need to be made and how this can best be accomplished

general equilibrium pricing of options on the market portfolio with discontinuous returns when the price process for a long lived asset is of a mixed jump diffusion type pricing of options on that asset by arbitrage is not possible if trading is allowed only in the underlaying asset and a risk less bond using a general equilibrium framework we derive and analyze option prices when the underlying asset is the market portfolio with discontinuous returns the premium for the risk of jumps and the diffusion risks forms a significant part of the prices of the options in this economy an attempted replication of call and put options by the black scholes type of trading strategies may require substantial infusion of funds when jumps occur we study the cost and risk implications of such dynamic hedging plans article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a discontinuous mispricing model under asymmetric information we study a discontinuous mispricing model of a risky asset under asymmetric information where jumps in the asset price and mispricing are modelled by levy processes by contracting the filtration of the informed investor we obtain optimal portfolios and maximum expected utilities for the informed and uninformed investors we also discuss their asymptotic properties which can be estimated using the instantaneous centralized moments of return we find that optimal and asymptotic utilities are increased due to jumps in mispricing for the uninformed investor but the informed investor still has excess utility provided there is not too little or too much mispricing

wind power reliability valuation in a hydro dominated power market the colombian case abstract the design of market mechanisms that remunerates the reliability provided by a generator in a power market is a task that aims to ensure the normal operation of the system for the case of a hydro dominated system when wind power is introduced and operated under the merit order effect it is possible to assess the effect of the displacement of hydro generation due to wind generation over the system s reliability in terms of firm energy taking this into account a model that valuates the firm energy provided by wind power in a hydro dominated system is proposed this model considers the effect of wind power over the system s reservoirs and the market price of electricity and valuates the firm energy as the net savings of the system related to the increase in the firm energy of the system when wind power is introduced the results show that wind power under merit order effect increases the firm energy of the system and decreases the market price of electricity being the net savings in comparison to the corresponding hydro only system the reliability income that should be perceived by the wind power generator

impact of climate policy uncertainty on the adoption of electricity generating technologies this paper presents a real options model where multiple options are evaluated simultaneously so that the effect of the individual options on each other is accounted for we apply this model to the electricity sector where we analyze three typical technologies based on fossil fuel fossil fuel with carbon capture and renewable energy respectively in this way we can analyze the transition from co2 intensive to co2 neutral electricity production in the face of rising and uncertain co2 prices in addition such a modelling approach enables us to estimate precisely the expected value of perfect information i e the willingness of investors and producers to pay for information about the correct co2 price path as can be expected the expected value of information rises with increasing co2 price uncertainty in addition the larger the price uncertainty the larger are the cumulative co2 emissions over the coming century the reason for this is that the transition to less co2 intensive technologies is increasingly postponed with rising co2 price uncertainty by testing different price processes geometric brownian motion versus jump processes with different jump frequencies we can also make useful recommendations concerning the importance of policy predictability we find that it is better to have climate change policies that are stable over a certain length of time and change abruptly than less abrupt but more frequently changing policies less frequent fluctuations reduce the expected value of information and result in smaller cumulative co2 emissions