The Cross Sectional Dependence Puzzle

The analysis of unit roots and cointegration in panel data is becoming a growing research area. A number of issues have been raised in the literature (see Phillips and Moon 1999 and 2000, Banerjee 2000, Maddala and Wu 1999). The aim of the present paper is to contribute to the issue of cross sectional dependence in non-stationary panel data. We review some of the most recent econometric techniques proposed by the literature to dealing with cross sectional dependence and notice a sort of puzzle. We extend the bootstrap methodology proposed by Maddala and Wu (1999) and apply the resulting test to test for PPP. We find no evidence favouring PPP. Finally, we use Monte Carlo simulation to analyse the size distortion of the bootstrap test presented in this paper. The proposed test presents size distortion only when T = 100.

Valuing American Derivatives by Least Squares Methods

Least Squares estimators are notoriously known to generate sub-optimal exercise decisions when determining the optimal stopping time. The consequence is that the price of the option will be underestimated. We show how to use variance reduction techniques to extend some recent Monte Carlo estimators for option pricing and assess their performance in finite samples. Finally, we extend the Longstaff and Schwartz (2001) method to price American options under stochastic volatility. This is the first study to implement and apply the Glasserman and Yu (2004b) methodology to price Asian options and basket options.American options, Monte Carlo method

Black market and official exchange rates: Long-run equilibrium and short-run dynamics

This paper provides further empirical results on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relation between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, in addition to the long-run equilibrium, it also analyses the short-run dynamic responses of both markets to shocks. Evidence of market inefficiency and incomplete (or long-lived) reversion to long-run equilibrium is found. This implies that financial managers can only partially reduce the exchange rate risk, whilst monetary authorities can effectively pursue their policy objectives by imposing foreign exchange or direct controls

Valuing American Put Options Using Chebyshev Polynomial Approximation

This paper suggests a simple valuation method based on Chebyshev approximation at Chebyshev nodes to value American put options. It is similar to the approach taken in Sullivan (2000), where the option`s continuation region function is estimated by using a Chebyshev polynomial. However, in contrast to Sullivan (2000), the functional is fitted by using Chebyshev nodes. The suggested method is flexible, easy to program and efficient, and can be extended to price other types of derivative instruments. It is also applicable in other fields, providing efficient solutions to complex systems of partial differential equations. The paper also describes an alternative method based on dynamic programming and backward induction to approximate the option value in each time period

Dynamic option adjusted spread and the value of mortgage backed securities

We extend a reduced form model for pricing mortgage-backed securities (MBS) pass through and provide a novel hedging tool for investors in this market. To calculate the price of an MBS traders use what is known as option-adjusted spread (OAS). The resulting OAS value represents the required basis points adjustment to reference curve discounting rates needed to match an observed market price. The OAS suffers from some drawbacks. For example, it remains constant until the maturity of the bond (thirty years in mortgage-backed securities), and does not incorporate interest rate volatility. We suggest instead what we call dynamic option adjusted spread (DOAS). The latter allows investors in the mortgage market to account for both prepayment risk and changes of the slope of the yield curve

Customizing Data-plane Processing in Edge Routers

While OpenFlow enables the customization of the control plane of a router, currently no solutions are available for the customization of the data plane. This paper presents a prototype that offers to third parties (even end-users) the possibility to install their own applications on the data plane of a router, particularly the ones operating at the edge of the network. This paper presents the motivation of the idea, the reason why we use OpenFlow even if it does not seem appropriate for the data plane, the architecture and the implementation of our prototype, and a first characterization of the system running in our la

Valuing American style derivatives by least squares methods

We implement some recent Monte Carlo estimators for option pricing and assess their performance in finite samples. We find that the accuracy of these estimators is remarkable, even when more exotic financial derivatives are considered. Finally, we implement the Glasserman and Yu (2004b) methodology to price Asian Bermudan options and basket options

Does the Purchasing Power Parity Hold in Emerging Markets? Evidence from Black Market Exchange Rates

We examine the Purchasing Power Parity (PPP) hypothesis using a unique panel of monthly data on black market exchange rates for twenty emerging market economies over the period 19973M1-1993M12. We apply a large number of recent heterogeneous panel unit root and cointegration tests. Panel unit root tests do not favour mean reversion in the real black market exchange rate. The evidence for non-rejection of the unit root hypothesis remains robust even after allowing for structural breaks. Panel cointegration tests support evidence of cointegration between the nominal exchange rate and relative prices. These results contrast with those obtained from unit root tests. Since we believe that the former may be biased by the imposition of the joint symmetry and proportionality restriction, we test for such a restriction using likelihood ratio tests and find that it is strongly rejected.black market exchange rates, purchasing power parity, panel unit root and cointegration tests

Dynamic Option Adjusted Spread and the Value of Mortgage Backed Securities

We extend a reduced form model for pricing pass-through mortgage backed securities (MBS) and provide a novel hedging tool for investors in this market. To calculate the price of an MBS, traders use what is known as option-adjusted spread (OAS). The resulting OAS value represents the required basis points adjustment to reference curve discounting rates needed to match an observed market price. The OAS suffers from some drawbacks. For example, it remains constant until the maturity of the bond (thirty years in mortgage-backed securities), and does not incorporate interest rate volatility. We suggest instead what we call dynamic option adjusted spread (DOAS). The latter allows investors in the mortgage market to account for both prepayments risk and changes of the yield curve.Asset pricing, Mortgage Backed Securities, Term Structure Ambiguity, arrival rate of innovation, R&D investments.

Adaptive Continuous time Markov Chain Approximation Model to General Jump-Diffusions

We propose a non-equidistant Q rate matrix formula and an adaptive numerical algorithm for a continuous time Markov chain to approximate jump-diffusions with affine or non-affine functional specifications. Our approach also accommodates state-dependent jump intensity and jump distribution, a flexibility that is very hard to achieve with other numerical methods. The Kologorov-Smirnov test shows that the proposed Markov chain transition density converges to the one given by the likelihood expansion formula as in Ait-Sahalia (2008). We provide numerical examples for European stock option pricing in Black and Scholes (1973), Merton (1976) and Kou (2002)