Misspecification and the pricing and hedging of long-term foreign currency options

Article Abstract:

The impact of stochastic volatility on the pricing and hedging of long-term foreign currency options is investigated using the constant option volatility pricing model and the traditional model. Results show that the constant option volatility pricing model provided overly large estimates of option prices while the traditional model provided ineffective hedging strategies. One more asset has to be added to the traditional model to improve its accuracy in estimating short-term options.

Hedging (Finance), Currency options

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Cointegration and predictability of asset prices

Article Abstract:

The belief that cointegration implies predictability of all n asset prices was invalidated by cointegration tests. Tests showed that in the case of r cointegrating vectors, only r prices are predictable. The standard Wald or LM tests that are undertaken within the Johansen's Maximum Likelihood (ML) framework proved to be effective in determining which r prices are predictable in a system with r cointegrating vectors.

Economics, Research and Development in the Social Sciences and Humanities, Economic aspects, Assets (Accounting)

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Why empirical international portfolio models fail: evidence that model misspecification creates home asset bias

Article Abstract:

'Home asset bias' refers to the reluctance of investors to put more of their wealth into foreign assets. International portfolio data indicate that misspecification contributes to this bias. The degree of 'home asset bias' is exaggerated by considering the invalid assumption that purchasing power parity holds. Researchers are urged to give more attention to empirical model specification in the future.

International aspects, Portfolio management, Risk (Economics), Investments, Beliefs, opinions and attitudes, Investors

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