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Book
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Chapter
Introduction
The world-wide meltdown of asset markets in the years 2007–2009 posed great challenges for asset and portfolio managers. Many funds such as university endowments, sovereign wealth funds and pension funds were ...
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Chapter
Asset Accumulation with Estimated Low Frequency Movements of Asset Returns
As discussed in Chap. 2 academic research on asset returns seems to converge toward the view that a proper formation of expected asset returns are essential for saving and asset allocation decisions. As also s...
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Chapter
Concluding Remarks
In this book we have combined theoretical and empirical work to study the issue of sustainable asset accumulation and dynamic portfolio decisions. We mostly considered asset income but frequently included labo...
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Chapter
Forecasting and Low Frequency Movements of Asset Returns
In this chapter we provide an overview on forecasting asset returns and low frequency movements in asset returns. Saving and asset allocation decision, usually focus on low frequency movements in asset returns...
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Chapter
Portfolio Modeling with Sustainability Constraints
As mentioned in Chap. 1 following the events of the world-wide financial crisis over the periods 2007–2009, the risk profile of some assets changed drastically and many assets exhibited large losses. These eve...
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Chapter
Continuous and Discrete Time Modeling
As mentioned, the transition of a continuous time model into a discrete time model is not an easy issue. We discuss here various discretization procedures to turn continuous time into discrete time models. The...
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Chapter
Business Confidence and Macroeconomic Dynamics in a Nonlinear Two-Country Framework with Aggregate Opinion Dynamics
The main objective of the present paper is to investigate the role of the state of confidence in the macroeconomic dynamics of two interacting economies using the opinion dynamics approach by Weidlich and Haag...
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Chapter
Dynamic Saving and Portfolio Decisions-Theory
In this chapter, we illustrate the use of dynamic programming (DP) and the HJB equation for a simple model. We focus on dynamic saving and asset allocation, formulated in continuous time. We first introduce a ...
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Chapter
Asset Accumulation and Portfolio Decisions with Time Varying Asset Returns and Labor Income
Next we will include labor income into our asset accumulation and asset allocation decisions. This brings us to the problem of pension funds and retirement income. Academics, journalists and politicians have r...
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Chapter
Asset Accumulation and Portfolio Decisions Under Inflation Risk
This chapter studies intertemporal investment strategies under inflation risk by extending the dynamic programming we have used so far, to include a stochastic price index. The stochastic price index gives ris...
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Book
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Chapter
Partial Differential Equation Approach Under Geometric Jump-Diffusion Process
In this chapter we consider the solution of the integro-partial differential equation that determines derivative security prices when the underlying asset price is driven by a jump-diffusion process. We take t...
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Chapter
The Stock Option Problem
This chapter outlines the paradigm problem of option pricing and motivates key concepts and techniques that we will develop in Part I when the risk-free rate is deterministic.
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Chapter
Pricing the American Feature
To understand the problems and techniques of pricing the American feature of an option, this chapter introduces the American option pricing problem from the conventional approach based on compound options and...
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Chapter
Change of Numeraire
Many computational applications of derivative pricing models such as the determination of derivative prices by simulation or the estimation of derivative pricing models can be significantly simplified by a cha...
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Chapter
An Initial Attempt at Pricing an Option
This chapter uses the concepts developed in Chap. 2 to illustrate the problem of option pricing as a discounted expected option payoff. By assuming that investors ...
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Chapter
Volatility Smiles
It is commonly observed across many underlying assets that the implied volatility of the Black Scholes model varies across exercise price and time-to-maturity and has a pattern known as the volatility smile. I...
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Chapter
Manipulating Stochastic Differential Equations and Stochastic Integrals
Many of the calculations of derivative security pricing involve formal manipulations of stochastic differential equations and stochastic integrals. This chapter derives those that are most frequently used. We ...
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Chapter
The Continuous Hedging Argument
This chapter develops a continuous hedging argument for derivative security pricing. Following fairly closely the original Black and Scholes (1973) article, we make use of Ito’s lemma to derive the expressi...
