PRICING ARITHMETIC ASIAN OPTIONS UNDER THE CEV PROCESS

This paper discusses the pricing of arithmetic Asian options when the underlying stock follows the constant elasticity of variance (CEV) process. We build a binomial tree method to estimate the CEV process and use it to price arithmetic Asian options. We find that the binomial tree method for the lognormal case can effectively solve the computational problems arising from the inherent complexities of arithmetic Asian options when the stock price follows CEV process. We present numerical results to demonstrate the validity and the convergence of the approach for the different parameter values set in CEV process.Exotic options; arithmetic Asian options; binomial tree method; CEV proces

Another look at sticky prices and output persistence

Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by themselves can effectively propagate business cycles in general equilibrium. We show that price rigidity in fact can (by itself) give rise to a strong propagation mechanism of the business cycle in standard New Keynesian models, provided that investment is also subject to a cash-in-advance constraint. In particular, we show that reasonable price stickiness can generate highly persistent, hump-shaped movements in output, investment and employment in response to either monetary or non-monetary shocks, even if investment is only partially cash-in-advance constrained. Hence, whether or not price rigidity is responsible for output persistence (and the business cycle in general) may not be a theoretical question, but an empirical one.Prices ; Business cycles

A Box-Counting Method with Adaptable Box Height for Measuring the Fractal Feature of Images

Most of the existing box-counting methods for measuring fractal features are only applicable to square images or images with each dimension equal to the power of 2 and require that the box at the top of the box stack of each image block is of the same height as that of other boxes in the same stack, which gives rise to inaccurate estimation of fractal dimension. In this paper, we propose a more accurate box-counting method for images of arbitrary size, which allows the height of the box at the top of each grid block to be adaptable to the maximum and minimum gray-scales of that block so as to circumvent the common limitations of existing box-counting methods

Solving linear difference systems with lagged expectations by a method of undetermined coefficients

This paper proposes a solution method to solve linear difference models with lagged expectations. Variables with lagged expectations expand the model's state space greatly when N is large; and getting the system into a canonical form solvable by the traditional methods involves substantial manual work (e.g., arranging the state vector and the associated coefficient matrices to accommodate variables with lagged expectations), which is prone to human errors. Our method avoids the need of expanding the state space of the system and shifts the burden of analysis from the individual economist/model solver toward the computer. Hence it can be a very useful tool in practice, especially in testing and estimating economics models with a high order of lagged expectations. Examples are provided to demonstrate the usefulness of the method. We also discuss the implications of lagged expectations on the equilibrium properties of indeterminate DSGE models, such as the serial correlation properties of sunspots shocks in these models.Monetary policy ; Macroeconomics