We incorporate large losses risks into the DeM arzo et al.(2012) model of dynamic agency and the q theory of investment.The large losses risks induce losses costs and losses arising from agency conflicts during the large losses prevention process.Both of them reduce firm’s value,distort investment policy and generate a deeper wedge between the marginal and average q.In addition,we study the implementation of the contract to enhance the practical utility of our model.The agent optimally manages the firm’s cash flow and treats the cash reservation and credit line as the firm’s financial slack,and hedges the productivity shocks and large losses shocks via futures and insurance contracts,respectively.
This paper proposes and makes a study of a new model(called the 3/2 plus jumps model) for VIX option pricing. The model allows the mean-reversion speed and volatility of volatility to be highly sensitive to the actual level of VIX. In particular, the positive volatility skew is addressed by the 3/2 plus jumps model. Daily calibration is used to prove that the proposed model preserves its validity and reliability for both in-sample and out-of-sample tests.The results show that the models are capable of fitting the market price while generating positive volatility skew.
TAN Xiao-yuWANG Cheng-xiangHUANG Wen-liLI Sheng-hong
This paper performs several empirical exercises to provide evidence that the stochas-tic skew behavior and asymmetric jumps exist in VIX markets.In order to adequately capture all of the features,we develop a general valuation model and obtain quasi-analytical solutions for pricing VIX options.In addition,we make comparative studies of alternative models to illustrate the e ects after taking into account these features on the valuation of VIX options and investigate the relative value of an additional volatility factor and jump components.The empirical results indicate that the multi-factor volatility structure is vital to VIX option pricing due to providing more exibility in the modeling of VIX dynamics,and the need for asymmetric jumps cannot be eliminated by an additional volatility factor.
