This updated second edition provides a framework that shows how to bridge the gap between the continuous-time pricing practice in financial engineering and the capital market data from discrete-time intervals. Starting with a comprehensive treatment of the particular stochastic modeling and econometric estimation framework, the main part of the book covers applications to risky assets traded on the markets for funds, fixed-income products and electricity derivatives. The second edition includes a new chapter on financial modeling which discusses vital PDE- and EMM-approaches. The reorganized and improved text further integrates the latest research contributions in the three covered application fields.

Klappentext

Covers applications to risky assets traded on the markets for funds, fixed-income products and electricity derivatives.
Integrates the latest research and includes a new chapter on financial modeling.

Inhalt

I Asset Pricing Framework.- 1 Financial Modeling.- 1.1 Continuous-Time Stochastics.- 1.1.1 Stochastic Processes and Brownian Motion.- 1.1.2 Martingales, Itô Calculus, and Changes of Measure.- 1.2 Arbitrage Pricing in Continuous Time.- 1.2.1 PDE Approach.- 1.2.2 EMM Approach.- 2 Estimation Principles.- 2.1 State Space Notation.- 2.2 Filtering Algorithms.- 2.2.1 Filtering Objective.- 2.2.2 Optimal Estimator.- 2.2.3 Filter Recursions.- 2.2.4 Extended Kalman Filtering.- 2.3 Parameter Estimation.- II Pricing Equities.- 3 Introduction and Survey.- 3.1 Opening Remarks.- 3.2 Closed-End Funds: Survey and Hypotheses.- 4 Valuation Model.- 4.1 Characteristics of Closed-End Funds.- 4.2 Economic Foundation.- 4.3 Pricing Closed-End Fund Shares.- 5 First Empirical Results.- 5.1 Sample Data.- 5.2 Implemented Model.- 5.3 State Space Form.- 5.4 Closed-End Fund Analysis.- 6 Implications for Investment Strategies.- 6.1 Testing the Forecasting Power.- 6.1.1 Setup of Forecasting Study.- 6.1.2 Evidence on Forecasting Quality.- 6.2 Implementing Trading Rules.- 6.2.1 Experimental Design.- 6.2.2 Test Results on Trading Strategies.- 7 Summary and Conclusions.- III Pricing Fixed-Income Securites.- 8 Introduction and Survey.- 8.1 Overview.- 8.2 Bond Prices and Interest Rates.- 8.3 Dynamic Term Structure Models.- 9 Term Structure Model.- 9.1 Modeling an Incomplete Market.- 9.2 Motivation for a Stochastic Risk Premium.- 9.3 Economic Model.- 10 Initial Characteristic Results.- 10.1 Valuing Discount Bonds.- 10.2 Term Structures of Interest Rates and Volatilities.- 10.2.1 Spot and Forward Rate Curves.- 10.2.2 Term Structure of Volatilities.- 10.3 Analysis of Limiting Cases.- 10.3.1 Reducing to an Ornstein-Uhlenbeck Process.- 10.3.2 Examining the Asymptotic Behavior.- 10.4 Possible Shapes of the Term Structures.- 10.4.1 Influences of the State Variables.- 10.4.2 Choosing the Model Parameters.- 11 Risk Management and Derivatives Pricing.- 11.1 Management of Interest Rate Risk.- 11.2 Pricing Interest Rate Derivatives.- 11.2.1 Bond Options.- 11.2.2 Swap Contracts.- 11.2.3 Interest Rate Caps and Floors.- 12 Calibration to Standard Instruments.- 12.1 Estimation Techniques for Term Structure Models.- 12.2 Discrete Time Distribution of the State Variables.- 12.3 US Treasury Securities.- 12.3.1 Data Analysis.- 12.3.2 Parameter Estimation.- 12.3.3 Analysis of the State Variables.- 12.4 Other Liquid Markets.- 12.4.1 Appropriate Filtering Algorithm.- 12.4.2 Sample Data and Estimation Results.- 13 Summary and Conclusions.- IV Pricing Electricity Forwards.- 14 Introduction and Survey.- 14.1 Overview.- 14.2 Commodity Futures Markets.- 14.3 Pricing Commodity Futures.- 14.4 Asset Pricing in Electricity Markets.- 15 Electricity Pricing Model.- 15.1 Model Assumptions and Risk-Neutral Pricing.- 15.2 Valuation of Electricity Forwards.- 16 Empirical Inference.- 16.1 Estimation Model.- 16.1.1 Distribution of the State Variables.- 16.1.2 State Space Formulation and Kalman Filter Setup.- 16.2 Data Analysis and Estimation Results.- 17 Summary and Conclusions.- List of Symbols and Notation.- List of Tables.- List of Figures.- References.