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6
votes
1answer
264 views

Consistency of economic scenarios in nested stochastics simulation

I am interested in references on research regarding the consistency of economic scenarios in nested stochastics for risk measurement. Background: Pricing by Monte-Carlo: For pricing complex ...
2
votes
1answer
45 views

Data Selection for Empirical Pricing Kernel Estimation (Stochastic Discount Factor)

I want to estimate an empirical pricing kernel for an index. Hence, I need to estimate a physical and risk neutral density. For estimating the physical density, only the index data in an observed time ...
4
votes
0answers
81 views

Risk neutral measure in exponential levy model

Is there a method of finding a risk-neutral measure for assets driven by the levy process? I understand there is the esscher transform but I think it tends to transform the processes into ...
2
votes
0answers
155 views

Measure change in a bond option problem

This is not a homework or assignment exercise. I'm trying to evaluate $\displaystyle \ \ I := E_\beta \big[\frac{1}{\beta(T_0)} K \mathbf{1}_{\{B(T_0,T_1) > K\}}\big]$, where $\beta$ is the ...
1
vote
0answers
67 views

Provide a bond pricing differential equation and invoke Feynman-Kac

Grateful for any assistance. Consider the process: $dZ=r(t)Z\,dt$ , where $r(t)$ is stochastic and $Z=Z(r,t;T)$ is a zero coupon bond. Provide a bond pricing differential equation and invoke ...
1
vote
0answers
69 views

How to convert HJM model risk-neutral measure $\mathbb{Q}$ to real measure $\mathbb{P}$?

HJM model, $df(t,T) = \mu(t,T) dt + \xi (t, T)dW(t)$, is defined in risk-neutral measure $\mathbb{Q}$, according to Brigo's "Interest Rate Models" book. I wonder, how could I transform it to real ...
1
vote
0answers
88 views

What are the industry standard models for monte carlo simulation of basket options?

I would like to simulate an equity index, a risk free cash account and the yield curve for the purposes of valuing a guarantee on an insurance product that is being backed by both equities and cash. ...
1
vote
0answers
180 views

Pricing a Power Contract derivative security

I'm trying to price a "power contract" and would appreciate guidance on the next step. The payoff at time $T$ is $(S(T)/K)^\alpha$, where $K > 0$, $\alpha \in \mathbb{N}$, $T > 0$. $S$ is ...