Internship offer: Arbitrage opportunities in misspecified stochastic volatility models
Laboratory
Center of Applied Mathematics (CMAP)
Supervisors
Peter Tankov Rudra P. Jena
Contact email
[email protected] [email protected]
Internship period
3–4 months between April and July 2010
Prerequisites
BSc or higher in mathematics or computer science Knowledge of probability / stochastic processes Programming skills (C++) Basic knowledge of financial math is a plus
It has been observed by several authors [1, 2, 3] under different sets of assumptions on the real-world dynamics of the underlying asset (stock index), that the European options on this underlying are not efficiently priced in options markets, giving rise to arbitrage opportunities. The aim of ongoing research by the supervisors is to quantify the potential arbitrage profit created by these opportunities within a stochastic volatility model, and to construct explicit strategies maximizing the gain. The objective of the internship is to test numerically the performance of these strategies using market data from an option price database available at the Center of Applied Mathematics.
References [1] Y. A¨ıt-Sahalia, Y. Wang, and F. Yared, Do option markets correctly price the probabilities of movement of the underlying asset, J. Econometrics, 102 (2001), pp. 67–110. [2] G. Bakshi, C. Cao, and Z. Chen, Empirical performance of alternative option pricing models, J. Finance, 52 (1997). [3] B. Dumas, J. Fleming, and R. Whaley, Implied volatility functions: Empirical tests, J. Finance, 53 (1998), pp. 2059–2106.
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