An Analytical Valuation Framework for Financial Assets with Trading Suspensions

Fries, Christian P. und Torricelli, Lorenzo (2020): An Analytical Valuation Framework for Financial Assets with Trading Suspensions. In: Siam Journal on Financial Mathematics, Bd. 11, Nr. 2: S. 566-592

Abstract

In this paper we propose a derivative valuation framework based on Levy processes which takes into account the possibility that the underlying asset is subject to information-related trading halts/suspensions. Since such assets are not traded at all times, we argue that the natural underlying for derivative risk-neutral valuation is not the asset itself but rather a contract that, when the asset is in trade suspensions upon maturity, cash settles the last quoted price plus the interest accrued since the last quote update. Combining some elements from semimartingale time changes and potential theory, we devise martingale dynamics and no-arbitrage relations for such a price process, provide Fourier transform{based pricing formulae for derivatives, and study the asymptotic behavior of the obtained formulae as a function of the halt parameters. The volatility surface analysis reveals that the short-term skew of our model is typically steeper than that of the underlying Levy models, indicating that the presence of a trade suspension risk is consistent with the well-documented stylized fact of volatility skew persistence/explosion. A simple calibration example to market option prices is provided.

• Dokumententyp: Zeitschriftenartikel
• Fakultät: Mathematik, Informatik und Statistik > Mathematik > Finanz- und Versicherungsmathematik
• Themengebiete: 500 Naturwissenschaften und Mathematik > 510 Mathematik
• ISSN: 1945-497X
• Sprache: Englisch