Volume 2016, Issue 85. Pages 1–84
Every issue we bring you original material from some of the best columnists, educators and cutting-edge researchers. In this issue:
Bibliography
- “Contents,” Wilmott, vol. 2016, iss. 85, p. 1–1, 2016.
[Bibtex]@article {WILM:WILM10528, title = {Contents}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10528}, doi = {10.1002/wilm.10528}, pages = {1--1}, year = {2016}, } - D. Tudball, “Ed’s letter: when the jungle rhythms play,” Wilmott, vol. 2016, iss. 85, p. 2–3, 2016.
[Bibtex] [Abstract]
The discussion reveals a man who wears his knowledge and influence lightly, quick to assign credit to his collaborators and, tellingly, one who chose the name for his private vehicle, “Gorilla Science LLP,” because “it was about brute intellect.”
@article {WILM:WILM10529, author = {Tudball, Dan}, title = {Ed's Letter: When the Jungle Rhythms Play}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10529}, doi = {10.1002/wilm.10529}, pages = {2--3}, year = {2016}, abstract = {The discussion reveals a man who wears his knowledge and influence lightly, quick to assign credit to his collaborators and, tellingly, one who chose the name for his private vehicle, “Gorilla Science LLP,” because “it was about brute intellect.”}, } - “News,” Wilmott, vol. 2016, iss. 85, p. 4–9, 2016.
[Bibtex]@article {WILM:WILM10530, title = {News}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10530}, doi = {10.1002/wilm.10530}, pages = {4--9}, year = {2016}, } - A. Brown, “Kelly myths and heroes,” Wilmott, vol. 2016, iss. 85, p. 10–15, 2016.
[Bibtex] [Abstract]
A central concept in risk management, applying the Kelly criterion is in fact more of an art than a science.
@article {WILM:WILM10531, author = {Brown, Aaron}, title = {Kelly Myths and Heroes}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10531}, doi = {10.1002/wilm.10531}, pages = {10--15}, year = {2016}, abstract = {A central concept in risk management, applying the Kelly criterion is in fact more of an art than a science.}, } - S. Das, “What will history make of brexit?,” Wilmott, vol. 2016, iss. 85, p. 16–19, 2016.
[Bibtex] [Abstract]
All change, or no change at all?
@article {WILM:WILM10532, author = {Das, Satyajit}, title = {What Will History Make of Brexit?}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10532}, doi = {10.1002/wilm.10532}, pages = {16--19}, year = {2016}, abstract = {All change, or no change at all?}, } - E. Ayache, “From within,” Wilmott, vol. 2016, iss. 85, p. 20–25, 2016.
[Bibtex] [Abstract]
What is the smile problem? How can it be interpreted? Do people really understand it?
@article {WILM:WILM10533, author = {Ayache, Elie}, title = {From Within}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10533}, doi = {10.1002/wilm.10533}, pages = {20--25}, year = {2016}, abstract = {What is the smile problem? How can it be interpreted? Do people really understand it?}, } - B. Ziemba, “The 2016 triple crown,” Wilmott, vol. 2016, iss. 85, p. 26–31, 2016.
[Bibtex] [Abstract]
Bill’s annual look at the Triple Crown races.
@article {WILM:WILM10534, author = {Ziemba, Bill}, title = {The 2016 Triple Crown}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10534}, doi = {10.1002/wilm.10534}, pages = {26--31}, year = {2016}, abstract = {Bill's annual look at the Triple Crown races.}, } - D. Tudball, “Gorilla in our midst,” Wilmott, vol. 2016, iss. 85, p. 32–41, 2016.
[Bibtex] [Abstract]
Patrick S. Hagan: SABR model, the LGM model, auto-calibration, internal and external adjustors, and MC spline-based stripping methods. Brute intellect in the Western lowlands of quant finance.
@article {WILM:WILM10535, author = {Tudball, Dan}, title = {Gorilla In Our Midst}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10535}, doi = {10.1002/wilm.10535}, pages = {32--41}, year = {2016}, abstract = {Patrick S. Hagan: SABR model, the LGM model, auto-calibration, internal and external adjustors, and MC spline-based stripping methods. Brute intellect in the Western lowlands of quant finance.}, } - A. Karlová and P. S. Hagan, “On beyond black,” Wilmott, vol. 2016, iss. 85, p. 42–69, 2016.
[Bibtex] [Abstract]
Option markets, empirical price data, and theoretical arguments all indicate that asset prices in actively traded markets are driven by Lévy flights and/or tempered Lévy flights, not by Brownian motion. So here we model asset prices in the real world by where dZL is a Lévy or tempered Lévy flight. Derivatives based on such assets cannot be made risk free by dynamic hedging, so these derivatives cannot be priced using the standard Black–Scholes–Merton (BSM) arbitrage-free pricing criterion. Therefore, we develop a pricing theory based on a more general pricing criterion: that the expected return of all diversifiable portfolios is at the risk-free rate. We show that even though derivatives based on Lévy or tempered Lévy-driven assets cannot be hedged to make risk-free portfolios, they can be hedged to make diversifiable portfolios. This allows us to conclude that these option prices are given by where the expected value uses the “real-world” probability measure, but with the asset price X(t) replaced by the alternative “pricing process” which grows at the risk-free rate.We analyze these models to obtain explicit asymptotic formulas for European option prices. This analysis shows that as the time to expiry decreases, eventually all these Lévy and tempered Lévy-based models reduce to the same canonical model, and that European option prices and implied volatilities are given by similarity solutions under this canonical model. These similarity solutions are then examined to assess the mishedging that arises from Brownian-based models in a Lévy world.
@article {WILM:WILM10536, author = {Karlová, Andrea and Hagan, Patrick S.}, title = {On Beyond Black}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10536}, doi = {10.1002/wilm.10536}, pages = {42--69}, year = {2016}, abstract = {Option markets, empirical price data, and theoretical arguments all indicate that asset prices in actively traded markets are driven by Lévy flights and/or tempered Lévy flights, not by Brownian motion. So here we model asset prices in the real world by where dZL is a Lévy or tempered Lévy flight. Derivatives based on such assets cannot be made risk free by dynamic hedging, so these derivatives cannot be priced using the standard Black–Scholes–Merton (BSM) arbitrage-free pricing criterion. Therefore, we develop a pricing theory based on a more general pricing criterion: that the expected return of all diversifiable portfolios is at the risk-free rate. We show that even though derivatives based on Lévy or tempered Lévy-driven assets cannot be hedged to make risk-free portfolios, they can be hedged to make diversifiable portfolios. This allows us to conclude that these option prices are given by where the expected value uses the “real-world” probability measure, but with the asset price X(t) replaced by the alternative “pricing process” which grows at the risk-free rate.We analyze these models to obtain explicit asymptotic formulas for European option prices. This analysis shows that as the time to expiry decreases, eventually all these Lévy and tempered Lévy-based models reduce to the same canonical model, and that European option prices and implied volatilities are given by similarity solutions under this canonical model. These similarity solutions are then examined to assess the mishedging that arises from Brownian-based models in a Lévy world.}, } - B. Tóth, Z. Eisler, and J. -P. Bouchaud, “The square-root impace law also holds for option markets,” Wilmott, vol. 2016, iss. 85, p. 70–73, 2016.
[Bibtex] [Abstract]
Many independent studies on stocks and futures contracts have established that market impact is proportional to the square root of the executed volume. Is market impact quantitatively similar for option markets as well? In order to answer this question, we have analyzed the impact of a large proprietary data set of option trades. We find that the square-root law indeed holds in that case. This finding supports the argument for a universal underlying mechanism.
@article {WILM:WILM10537, author = {Tóth, Bence and Eisler, Zoltán and Bouchaud, J.-P.}, title = {The Square-Root Impace Law Also Holds for Option Markets}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10537}, doi = {10.1002/wilm.10537}, pages = {70--73}, keywords = {market impact, market microstructure, implied volatility}, year = {2016}, abstract = {Many independent studies on stocks and futures contracts have established that market impact is proportional to the square root of the executed volume. Is market impact quantitatively similar for option markets as well? In order to answer this question, we have analyzed the impact of a large proprietary data set of option trades. We find that the square-root law indeed holds in that case. This finding supports the argument for a universal underlying mechanism.}, } - A. Penaud, J. Selfe, and Y. El Otmani, “Maturity mismatch in drc: a modified gaussian copula model,” Wilmott, vol. 2016, iss. 85, p. 74–81, 2016.
[Bibtex] [Abstract]
We present a model for dealing with maturity mismatch in the DRC model. The model is a modified Gaussian copula model which – unlike the Gaussian copula – generates the same default time for assets with correlation 1 that default within the 1-year time horizon.
@article {WILM:WILM10538, author = {Penaud, Antony and Selfe, James and El Otmani, Youssef}, title = {Maturity Mismatch in DRC: A Modified Gaussian Copula Model}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10538}, doi = {10.1002/wilm.10538}, pages = {74--81}, keywords = {DRC maturity mismatch, Gaussian copula, default times}, year = {2016}, abstract = {We present a model for dealing with maturity mismatch in the DRC model. The model is a modified Gaussian copula model which – unlike the Gaussian copula – generates the same default time for assets with correlation 1 that default within the 1-year time horizon.}, } - M. Radley, “Cars,” Wilmott, vol. 2016, iss. 85, p. 82–83, 2016.
[Bibtex] [Abstract]
The hypercar builder from Valencia adds a couple of turbos to its hand-built exotic that’s all set to take a fight to Ferrari, McLaren, and Koenigsegg.
@article {WILM:WILM10539, author = {Radley, Milford}, title = {Cars}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10539}, doi = {10.1002/wilm.10539}, pages = {82--83}, year = {2016}, abstract = {The hypercar builder from Valencia adds a couple of turbos to its hand-built exotic that's all set to take a fight to Ferrari, McLaren, and Koenigsegg.}, } - J. Darasz, “The skewed world of jan darasz,” Wilmott, vol. 2016, iss. 85, p. 84–84, 2016.
[Bibtex]@article {WILM:WILM10540, author = {Darasz, Jan}, title = {The skewed world of Jan Darasz}, journal = {Wilmott}, volume = {2016}, number = {85}, publisher = {John Wiley & Sons, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.10540}, doi = {10.1002/wilm.10540}, pages = {84--84}, year = {2016}, }
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