---------- Forwarded message (reformatted) ----------
Date: Fri, 14 Jul 2000 16:07:36 +0200
From: Robert Tompkins <rtompkins(a)ins.at>
FINANCIAL OPTIONS RESEARCH CENTRE
WARWICK BUSINESS SCHOOL
UNVERSITY OF WARWICK
Director: Professor Stewart Hodges
13th ANNUAL OPTIONS CONFERENCE
Thursday & Friday 14 - 15 September 2000
The Centre was established to bridge the gap between leading academic
work on financial markets and the needs of practitioners, particularly
those concerned with derivative instruments and risk management.
FORC's research policy is to identify and work on those topics of the
greatest importance at the boundary between academic research on
derivatives and its applications in the market place.
The conference provides a unique forum for leading practitioners and
academics to discuss the latest advances in the pricing and hedging of
derivatives. We are proud of our record of identifying and promoting
key new developments:
This year's programme provides another hand picked selection of the most
exciting new theoretical and empirical research. We are pleased to
present the following speakers
Mark Davis
Stephen Figlewski
Helyette Geman
Stewart Hodges
Farshid Jamshidian
Jean-Philippe Bouchaud
Klaus Sandmann
Andrew Smith
Nassim Taleb
Robert Tompkins
WHERE AND WHEN
The conference will be held in Scarman House, at the University of
Warwick. The Conference will start at 10.00 am on Thursday 14 September
2000 and end at 5.00 pm on Friday 15 September 2000. A bus will meet
participants off the 8.15 am train from Euston, London, arriving at
Coventry Station at 9.30 am on Thursday and take them back to Coventry
station on Friday to catch the 5:37 pm train to Euston, arriving in
London at 6.55 pm.
Contact No. for enquiries: 024 76 524118
or E-mail: forcsha(a)wbs.warwick.ac.uk
Fax 024 76 524167
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To get further information and an application form (as a MS-Word
document) contact Robert Tompkins <rtompkins(a)ins.at> or
<forcsha(a)wbs.warwick.ac.uk>uk>.
CONFERENCE PROGRAMME
Thursday 14 September 2000
9.30 Registration/Coffee
10.00 On the Market Model of Futures Rates
Futures contracts are in many cases the basic securities of an interest
rate market. In despite of this observation most interest rate models
assume the forward rates as primary elements of the model. The process
of futures prices is therefore endogenous to these models. In addition
hedging strategies are formulated in terms of forward and/or spot
contracts and to a less extent in terms of futures. The modelling
framework used in this presentation is based on the Market Model
approach. Instead of finitely compounded forward rates implied futures
rates are the primary objects. The relationship between these two
modelling assumptions will be discussed and first pricing results will
be derived. Furthermore the relationship between a Market Model
approach and the Heath, Jarrow and Morton approach for continuously
compounded interest rates is investigated. Klaus Sandmann
11.15 Libor Market Model with Semimartingales
This paper extends the Libor market model to general semimartingales.
Appealing simplifications occur for special semimartingales. The case
where forward Libor rates are driven by a Brownian motion and a general
integer-valued random measure is especially highlighted. Basically,
from the existence of a state-price density, the drift of the forward
Libor system is determined in terms of the other two characteristics,
namely the covariation matrix of the continuous part and Levy measure of
the system. Necessary and sufficient conditions are established, and
formulae for forward Libor rates and deflated bond prices are derived in
the actual, forward, and spot-Libor measures. Several other topics,
such as continuous compounding as the limiting case and model
construction, are discussed. Farshid Jamshidian
12.30 Lunch
2.00 Pricing Beyond the Curve
Wherever possible, practitioners seek to price derivatives in a way
which is consistent with an observed yield curve. But some products
extend beyond the observable yield curve. Simplistic extrapolation
methods may be unstable and lead to predictable convexity losses on
revaluation. This paper considers extrapolation methods which arise from
Markovian models and are consistent with absence of arbitrage. We
identify the long spot rate as the leading eigenvalue of an integral
operator, and obtain asymptotic long bond formulas which extend the
result of Dybvig, Ingersoll and Ross. We illustrate the techniques by
pricing various long pension liabilities, expressed in currency terms,
or relative to inflation, or defined by compounded inflation subject to
caps and floors applied annually. Andrew Smith
3.10 Optimal Hedging with Basis Risk
It often happens that options are written on underlying assets that
cannot be traded directly, but where a 'closely related' asset can be
traded. Rather than simply using the traded asset as a proxy for the
option underlying, one should calculate some 'best' hedging strategy.
This is an 'incomplete markets' problem, and we address it using a
utility maximization approach. With exponential utility the optimal
hedging strategy can be computed in reasonably explicit form using the
methods of convex duality. In particular, a perturbation analysis using
ideas of Malliavin calculus gives the modification to the exact
replication strategy that is appropriate when the option underlying and
traded assets are highly, but not perfectly, correlated. Mark Davis
4.20 Afternoon Tea
4.50 The Sampling Properties of Volatility Cones
In this research, we extend the original work on volatility cones by
Burghardt and Lane (1990) to consider of the sampling properties of the
variance of variance (and the standard deviation of volatility) under a
rich class of models that includes stochastic volatility and
conditionally fat-tailed distributions. Because the volatility cone
examines volatility at quite long horizons, the estimation requires the
use of overlapping data. This theory confirms the casual observation
that the estimation of the variance of variance is downward biased when
estimation is done on an overlapping basis. We identify what this bias
is and derive an adjustment factor that approximates an unbiased
estimate of the true variance of variance over various horizons when
overlapping data is used. Robert Tompkins
6.00 Finish in time for Dinner in the Sutherland Suite, Rootes Social
Building at 7.00 for 7.30 pm.
Friday 15 September 2000
9.00 Coffee
9.30 Hedging Errors under Misspecified Asset Price Processes
The paper provides a fairly general representation for hedging errors
under misspecified asset price processes. The hedging errors are then
studied in more detail for standard vanilla options, including the
relationship between the size of the hedging errors and the error in
volatility. Two alternative approaches are provided for estimating the
moments of the distribution of hedging errors: binomial tree and kernel
estimation. The analysis has potential implications for understanding
the risks of other, more exotic, contingent claims and of portfolios of
claims. Stewart Hodges/Iliana Anagnou
10.35 Historical Option Pricing: Smile, Skew and Volatility
Correlations
In this seminar, we will present recent advances in option pricing
beyond Black-Scholes, in particular we will discuss the relationship
between smile and skew/kurtosis in the terminal distribution. The main
point is to understand why the smile survives to long maturity. From an
empirical analysis of the statistics of stock prices, we will illustrate
the impact of long-range volatility auto-correalations on kurtosis and
that of price-volatility correlations on skewness. In the light of this
analysis, we will comment on recent multifractal models. Jean-Philippe
Bouchaud/ Marc Potters
11.40 Coffee
12.00 The Fine Structure of Asset Returns: An Empirical Investigation
Rubinstein binomial approximation of the process as well as delivering
unique pricing of derivatives by arbitrage. In order to capture the
recent moves of the Dow Jones and Nasdaq, we propose to introduce jumps
in the trajectories. In contrast with the Continuity of price processes
has served finance as a convenient and powerful assumption, justifying
the Cox-Ross-standard modelling of jumps for asset returns, the jump
component can display finite or infinite variation. Empirical
investigations of time series indicate that index dynamics (e.g., SPX,
RUT) are essentially devoid of a diffusion component while this
component may be present in the dynamics of individual stocks: we
analyse over a five year period time series of 13 stock prices including
IBM, General Electrics and other major companies. This result leads to
the conjecture that the risk-neutral process should be free of a
diffusion component for both indices and individual stocks. Empirical
investigation of options data tends to confirm this conjecture.
Helyette Geman
1.10 Lunch
2.30 Asymmetries in Dynamic Hedging
Discreteness in time and price movements of asset prices induces
significant asymmetries between short and long option portfolios. We
examine the microstructure of order execution and the tracking of the
replicating process. We argue that an operator long options may incur
positive transaction costs. Nassim Taleb
3.35 Afternoon Tea
3.55 Model Risk in Option Pricing
Trading in derivatives involves heavy use of quantitative models for
valuation and risk management. Traders use the available models
extensively, and make a variety of ad hoc adjustments to try to bring
the models into line with the real world. The practical result is
exposure to "model risk". We will report results from an empirical
simulation using historical data for several important markets, that
allow a quantitative assessment impact of model risk. Pricing and
hedging errors due to imperfect models and inaccurate volatility
forecasts create sizable risk exposure. We then go on to consider the
broader issue of how to evaluate the practical contribution of a given
model. The performance of a theoretical model is compared to that of a
"null model" based on minimal information. Stephen Figlewski
5.00 FINISH
Coach will take delegates to catch the 5.37 pm train from
Coventry, arriving at Euston at 6.55 pm
CONFERENCE SPEAKERS
Farshid Jamshidian is managing director of NetAnalytic, a risk
management products and services company he founded in 1999.
Previously he was Managing Director of New Products and Equity
Derivatives at Sakura Global Capital (1994-99), Executive Director of
Technical Trading at Fuji International Finance (1991-94) and head of
fixed-quantitative fixed-income research at Merrill Lynch (1986-91).
His experience covers both fixed-income and equity research and trading.
Dr. Jamshidian has made important contributions to the theory contingent
claims, and has published extensively, especially on interest-rate
modelling. He has Ph.D. in mathematics from Harvard University, and an
MSc. in computer science from Stanford University.
Mark Davis is a Visiting Professor in the Financial and Actuarial
Mathematics Group at the Technical University of Vienna and, from August
2000, Professor of Mathematics at Imperial College London. From 1995-99
he was Head of Research and Product Development at Tokyo-Mitsubishi
International (TMI), the London-based investment banking subsidiary of
the Tokyo-Mitsubishi Bank, where his front-office group developed
pricing models and risk analysis for equity, fixed-income and credit
derivative products. Prior to this he was at Imperial College,
specializing in stochastic analysis, control theory and financial
mathematics. He holds a PhD in Electrical Engineering from the
University of California and an ScD in Mathematics from Cambridge
University.
Andrew Smith is an associate at Bacon & Woodrow, actuaries and
consultants. He is responsible for the development and implementation of
Monte Carlo worldwide capital market models. He applies these to pricing
and risk management problems for financial institutions.
Stephen Figlewski is a Professor of Finance at the New York University
Leonard N. Stern School of Business, where he has been since 1976. He
has published extensively in academic journals, especially in the area
of financial futures and options. He is the founding Editor of The
Journal of Derivatives and an Associate Editor for several other
journals. He also edits the Financial Economics Network's two
"Derivatives" series published over the Internet. His most recent
endeavour is the NYU Stern School Derivatives Research Project. He has
also spent time on Wall Street. He was a Vice President at the First
Boston Corporation, in charge of research on equity derivative products,
and has been a member of the New York Futures Exchange and a Competitive
Options Trader at the New York Stock Exchange.
Professor H�lyette Geman is a graduate from Ecole Normale Sup�rieure,
holds a master's degree in theoretical physics and PhDs in probability
theory and Finance. Previously a Director at Caisse des D�p�ts in change
of Research and Development, she is currently a scientific adviser for
major financial institutions and industrial firms. Dr Geman received in
1993 the first prize of the Merrill Lynch awards for her work on exotic
options and has extensively published in the top international journals.
She is the author of the book ( Insurance and Weather Derivatives (.
Robert Tompkins holds joint appointments as a University Dozent at the
Technical Universitaet, Vienna and in the Finance Group at the Institute
for Advanced Studies (Vienna). He was formerly the Head of
International Quantitative Research at Kleinwort Benson Investment
Management. In addition, he remains the Managing Director of the Minerva
Group. Prior to this, he was the Futures and Options Specialist at
Merrill Lynch, Europe and an Interest Rate Options Dealer and Currency
Options Trader at two major Chicago banks. He has an MA in Quantitative
Methods and an MBA from the University of Chicago, and a PhD in Finance
from the University of Warwick. Robert has authored three books on
Options and edited a book on exotic options "From Black Scholes to Black
Holes". He has published widely in RISK Magazine, and a number of
academic journals.
Nassim N. Taleb is currently President and Head Trader at Empirica
Capital LLC, an option hedge fund operator in Greenwich CT, and a fellow
and adjunct professor at the Courant Institute of New York University.
He previously held positions of senior derivatives trader at a variety
of houses (including CSFB, UBS, Bankers Trust and Paribas), and operated
as an independent floor trader on the Chicago exchanges. He holds an
MBA from the Wharton School and a Ph.D. from Paris-Dauphine and is the
author of Dynamic Hedging (Wiley 1997). His main research focuses
around volatility econometrics and the adaptation of option theory to
the real-world stochastic process.
Marc Potters Marc Potters holds a Ph.D. in physics from Princeton
University and was a post-doctoral fellow at the University of Rome `La
Sapienza'. In 1995, he joined Science & Finance a research company
located in Paris and founded by J.-P. Bouchaud and J.-P. Aguilar. Dr.
Potters is now Head of Research of S&F. In collaboration with the
researchers at S&F, he has published numerous articles in the new field
of statistical finance and worked on concrete applications of financial
forecasting, option pricing and risk control
Jean Philippe Bouchaud Jean-Philippe Bouchaud. graduated from Ecole
Normale Suprieure in Paris, where he obtained his PhD in physics. He
was then appointed by the CNRS until 1992, where he worked on diffusion
in random media. Dr Bouchaud joined the Service de Physique de l'Etat
Condens (CEA-Saclay) where he works on the dynamics of glassy systems
and on granular media. His work in finance includes extreme risk
control and alternative
Stewart Hodges Stewart Hodges directs the Financial Options Research
Centre and is Professor of Financial Management at the University of
Warwick. He is an associate editor of the Journal of Derivatives and
has published widely. His current research interests include the role
of derivatives in incomplete markets and their use in investment
management.
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