price_with_intensity_link: Helper function (instrument pricing) for calibration of...

In brianboonstra/ragtop: Pricing Equity Derivatives with Extensions of Black-Scholes

Description

Given derivative instruments (subclasses of GridPricedInstrument, though typically either AmericanOption or EuropeanOption objects), along with their prices and spreads, calibrate variance cumulation (the at-the-money volatility of the continuous process) and then price the instruments via equity linked default intensity of the form $h(s + (1-s)(S0/S_t)^p)$.

Usage

price_with_intensity_link(
  p,
  s,
  h,
  variance_instruments,
  variance_instrument_prices,
  variance_instrument_spreads,
  fit_instruments,
  S0,
  num_time_steps = 30,
  ...,
  relative_spread_tolerance = 0.15,
  num_variance_time_steps = 30
)

Arguments

p	Power of default intensity
s	Proportion of constant default intensity
h	Base default intensity
variance_instruments	A list of instruments in strictly increasing order of maturity, from which the volatility term structure will be inferred. Once the calibration is finished, the chosen parameters will reproduce the prices of these instruments with fairly high precision.
variance_instrument_prices	Central price targets for the variance instruments
variance_instrument_spreads	Bid-offer spreads used to normalize errors in variance instrument prices during term structure fitting
fit_instruments	A list of instruments in any order, from which the mispricing penalties used for judging fit quality will be computed
S0	Current underlying price
num_time_steps	Time step count passed on to find_present_value while fitting instrument values
...	Further arguments passed to both fit_variance_cumulation and to find_present_value
relative_spread_tolerance	Tolerance to apply in calling fit_variance_cumulation
num_variance_time_steps	Number of time steps to use in calling fit_variance_cumulation

brianboonstra/ragtop documentation built on March 7, 2020, 2:23 p.m.