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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | How Much Is the Gap? Efficient Jump Risk-Adjusted Valuation of Leveraged Certificates |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Quantitative Finance |
| Publisher | Taylor & Francis |
| Geographical Reach | international |
| ISSN | 1469-7688 |
| Volume | 17 |
| Number | 9 |
| Page Range | 1387 - 1401 |
| Date | 2017 |
| Abstract Text | This paper develops a novel and highly efficient numerical algorithm for the gap risk-adjusted valuation of leveraged certificates. The existing literature relies on Monte Carlo simulations, which are not fast enough to be used in a market making environment. This is because issuers need to compute thousands of price updates per second. By valuing leveraged certificates as multi-window barrier options, we explicitly model random jumps that occur at known times, such as between the exchange closing and re-opening. Our algorithm combines the one-day transition probability with Simpson's numerical integration rule. This yields a backward induction scheme which requires a significantly coarser spacial and time grid than finite difference methods. We confirm its robustness and accuracy through Monte Carlo simulations. |
| Related URLs | |
| Digital Object Identifier | 10.1080/14697688.2016.1276299 |
| Other Identification Number | merlin-id:14643 |
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