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Autoregressive trending risk function and exhaustion in random asset price movement

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  • Qi Tang
  • Danni Yan

Abstract

In this article, we look again at the derivation of Black–Scholes option value equation. The risk function involved, as we discussed, if looked at more closely, is more complicated than the standard deviation function that people are used to. This observed risk function implies interesting properties of asset price movements in real‐world situations and it seems to have the ability to indicate when price move in one direction is ‘exhausted’ and a reverse of trend should take place. Therefore, a model based on random walk theory may derive autoregressive trend reversing indicator at particular moments of asset price movements.

Suggested Citation

  • Qi Tang & Danni Yan, 2010. "Autoregressive trending risk function and exhaustion in random asset price movement," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(6), pages 465-470, November.
    • Handle: RePEc:bla:jtsera:v:31:y:2010:i:6:p:465-470
    DOI: 10.1111/j.1467-9892.2010.00678.x
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    References listed on IDEAS

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    1. Thomas J. Linsmeier & Neil D. Pearson, 1996. "Risk Measurement: An Introduction to Value at Risk," Finance 9609004, University Library of Munich, Germany.
    2. Linsmeier, Thomas J. & Pearson, Neil D., 1996. "Risk measurement: an introduction to value at risk," ACE Reports 14796, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    3. Carlo Acerbi & Dirk Tasche, 2002. "Expected Shortfall: A Natural Coherent Alternative to Value at Risk," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(2), pages 379-388, July.
    4. Higham,Desmond J., 2004. "An Introduction to Financial Option Valuation," Cambridge Books, Cambridge University Press, number 9780521547574.
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