Mathematics - Colloquium
Wednesday, April 23, 2014
3:00 PM-4:00 PM
ABSTRACT: In the classic approach to option pricing one models the dynamics of the underlying and then calibrates the model to today's option prices. However, option prices derived from the model are often inconsistent with the observed prices in the market. To overcome this problem we model the dynamics of both the underlying and liquidly traded options together using forward characteristic processes. We develop theory and applications of forward characteristic processes in discrete time. In particular we provide a no-arbitrage characterization of our model and a rich class of examples. Finally we show how to implement our model. This is joint work with Josef Teichmann (ETH Zurich).
Suggested Audiences: Adult, College
Last Modified: April 14, 2014 at 4:36 PM