Applications of canonical valuation

Newman, Scott P. (2002). Applications of canonical valuation Honours Thesis, School of Business, The University of Queensland.

       
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Author Newman, Scott P.
Thesis Title Applications of canonical valuation
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 2002
Thesis type Honours Thesis
Total pages 51
Language eng
Subjects 1503 Business and Management
Formatted abstract Proposed by Stutzer (1996), canonical valuation is a relatively new method for valuing derivative securities under the risk-neutral valuation framework. It is nonparametric, simple to apply and unlike many alternative approaches does not require any option data. While canonical valuation has great potential, its applicability in realistic scenarios has not yet been widely tested. This paper provides evidence on the ability of canonical valuation price derivatives a number of settings. In a constant volatility world, canonical estimates of prices closely match those of a Black-Scholes estimate based on historical volatility. However in a more realistic stochastic volatility setting, canonical valuation is shown to outperform the Black-Scholes model. As the volatility generating process becomes further removed from the constant volatility world, the relative performance edge of canonical valuation is even more evident. In general the results are encouraging that canonical valuation is a useful technique for valuing derivatives.

 
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Created: Thu, 18 Nov 2010, 15:37:49 EST by Muhammad Noman Ali on behalf of The University of Queensland Library