New Economics Papers
on Financial Markets
Issue of 2005‒02‒20
two papers chosen by
Erik Schloegl

  1. The impact of overnight periods on option pricing By Boes,Mark-Jan; Drost,Feike C.; Werker,Bas J.M.
  2. On the distribution of stock-market returns - Implications of Evolutionary Finance By Stefan Reimann

  1. By: Boes,Mark-Jan; 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
  2. 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 time-constant strategy and a dynamical trading strategy generating a flow between funds. Simulations of the price dynamics generate returns with fat-tail behavior in line with that of a hyperbolic distribution.
    Keywords: Asset returns, hyperbolic distribution, evolutionary finance
    JEL: G12 C51

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