
on Financial Markets 
Issue of 2005‒02‒20
two papers chosen by Erik Schloegl School of Mathematical Sciences University of Technology 
By:  Boes,MarkJan; Drost,Feike C.; Werker,Bas J.M. (Tilburg University, Center for Economic Research) 
Abstract:  This paper investigates the effect of closed overnight exchanges on option prices. During the trading day asset prices follow the literature s standard affine model which allows asset prices to exhibit stochastic volatility and random jumps. Independently, the overnight asset price process is modelled by a single jump. We find that the overnight component reduces the variation in the random jump process significantly. However, neither the random jumps nor the overnight jumps alone are able to empirically describe all features of asset prices. We conclude that both random jumps during the day and overnight jumps are important in explaining option prices, where the latter account for about one quarter of total jump risk. 
JEL:  G11 G13 
Date:  2005 
URL:  http://d.repec.org/n?u=RePEc:dgr:kubcen:200501&r=fmk 
By:  Stefan Reimann 
Abstract:  Risk management and asset pricing benefit from simple functional descriptions of the distribution of real asset returns. Recently, several authors have proposed that asset returns in real stock markets are distributed according to a hyperbolic distribution. While asset returns are generated by trades over time, the natural question is: What does economic theory imply concerning return distributions? We propose a simple model of price formation and, thus, return distribution which is based on economic reasoning. The markets behavior is represented by a pair consisting of a timeconstant strategy and a dynamical trading strategy generating a flow between funds. Simulations of the price dynamics generate returns with fattail behavior in line with that of a hyperbolic distribution. 
Keywords:  Asset returns, hyperbolic distribution, evolutionary finance 
JEL:  G12 C51 
URL:  http://d.repec.org/n?u=RePEc:zur:iewwpx:232&r=fmk 