April  2006, 2(2): 177-197. doi: 10.3934/jimo.2006.2.177

Option pricing under threshold autoregressive models by threshold Esscher transform


Department of Actuarial Mathematics and Statistics, Heriot-Watt University, Edinburgh, United Kingdom


London School of Economics, United Kingdom


Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong, China

Received  September 2005 Revised  January 2006 Published  April 2006

This paper develops a valuation model for options under the class of self-exciting threshold autoregressive (SETAR) models and their variants for the price dynamics of the underlying asset using the self-exciting threshold autoregressive Esscher transform (SETARET). In particular, we focus on the first generation SETAR models first proposed by Tong (1977, 1978) and later developed in Tong (1980, 1983) and Tong and Lim (1980), and the second generation models, including the SETAR-GARCH model proposed in Tong (1990) and the double-threshold autoregressive heteroskedastic time series model (DTARCH) proposed by Li and Li (1996). The class of SETAR-GARCH models has the advantage of modelling the non-linearity of the conditional first moment and the varying conditional second moment of the financial time series. We adopt the SETARET to identify an equivalent martingale measure for option valuation in the incomplete market described by the discrete-time SETAR models. We are able to justify our choice of probability measure by the SETARET by considering the self-exciting threshold dynamic utility maximization. Simulation studies will be conducted to investigate the impacts of the threshold effect in the conditional mean described by the first generation model and that in the conditional variance described by the second generation model on the qualitative behaviors of the option prices as the strike price varies.
Citation: Tak Kuen Siu, Howell Tong, Hailiang Yang. Option pricing under threshold autoregressive models by threshold Esscher transform. Journal of Industrial & Management Optimization, 2006, 2 (2) : 177-197. doi: 10.3934/jimo.2006.2.177

Cicely K. Macnamara, Mark A. J. Chaplain. Spatio-temporal models of synthetic genetic oscillators. Mathematical Biosciences & Engineering, 2017, 14 (1) : 249-262. doi: 10.3934/mbe.2017016


Fernando P. da Costa, João T. Pinto, Rafael Sasportes. On the convergence to critical scaling profiles in submonolayer deposition models. Kinetic & Related Models, 2018, 11 (6) : 1359-1376. doi: 10.3934/krm.2018053


Jian Yang, Bendong Lou. Traveling wave solutions of competitive models with free boundaries. Discrete & Continuous Dynamical Systems - B, 2014, 19 (3) : 817-826. doi: 10.3934/dcdsb.2014.19.817


Shanshan Chen, Junping Shi, Guohong Zhang. Spatial pattern formation in activator-inhibitor models with nonlocal dispersal. Discrete & Continuous Dynamical Systems - B, 2021, 26 (4) : 1843-1866. doi: 10.3934/dcdsb.2020042


Alina Chertock, Alexander Kurganov, Mária Lukáčová-Medvi${\rm{\check{d}}}$ová, Șeyma Nur Özcan. An asymptotic preserving scheme for kinetic chemotaxis models in two space dimensions. Kinetic & Related Models, 2019, 12 (1) : 195-216. doi: 10.3934/krm.2019009


Mats Gyllenberg, Jifa Jiang, Lei Niu, Ping Yan. On the classification of generalized competitive Atkinson-Allen models via the dynamics on the boundary of the carrying simplex. Discrete & Continuous Dynamical Systems - A, 2018, 38 (2) : 615-650. doi: 10.3934/dcds.2018027


Nhu N. Nguyen, George Yin. Stochastic partial differential equation models for spatially dependent predator-prey equations. Discrete & Continuous Dynamical Systems - B, 2020, 25 (1) : 117-139. doi: 10.3934/dcdsb.2019175


Luigi C. Berselli, Jishan Fan. Logarithmic and improved regularity criteria for the 3D nematic liquid crystals models, Boussinesq system, and MHD equations in a bounded domain. Communications on Pure & Applied Analysis, 2015, 14 (2) : 637-655. doi: 10.3934/cpaa.2015.14.637


Alexandr Mikhaylov, Victor Mikhaylov. Dynamic inverse problem for Jacobi matrices. Inverse Problems & Imaging, 2019, 13 (3) : 431-447. doi: 10.3934/ipi.2019021


Simone Cacace, Maurizio Falcone. A dynamic domain decomposition for the eikonal-diffusion equation. Discrete & Continuous Dynamical Systems - S, 2016, 9 (1) : 109-123. doi: 10.3934/dcdss.2016.9.109


Xianchao Xiu, Ying Yang, Wanquan Liu, Lingchen Kong, Meijuan Shang. An improved total variation regularized RPCA for moving object detection with dynamic background. Journal of Industrial & Management Optimization, 2020, 16 (4) : 1685-1698. doi: 10.3934/jimo.2019024


Yuncherl Choi, Taeyoung Ha, Jongmin Han, Sewoong Kim, Doo Seok Lee. Turing instability and dynamic phase transition for the Brusselator model with multiple critical eigenvalues. Discrete & Continuous Dynamical Systems - A, 2021  doi: 10.3934/dcds.2021035

2019 Impact Factor: 1.366


  • PDF downloads (28)
  • HTML views (0)
  • Cited by (9)

Other articles
by authors

[Back to Top]