Dividend derivatives

2020

Mathematical Finance

Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump‐diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 Index dividend futures and dividend options, and Euro Stoxx 50 Index options.

Section: Introductionmentioning

confidence: 99%

A term structure model for dividends and interest rates

Filipović

2020

Mathematical Finance

“…Smoothing the dividends through a negative correlation between stock price and the jump amplitudes, as in Buehler et al (2010), is therefore not possible. In a second approach, Tunaru (2018) directly models the cumulative dividends with a logistic diffusion model. The latter has however no guarantee to be monotonically increasing, meaning that negative dividends occur frequently.…”

Section: Introductionmentioning

confidence: 99%

“…Moreover, the model must be reset on an annual basis. Option pricing is done using Monte-Carlo simulation for both methods in Tunaru (2018). Buehler (2018) decomposes the stock price as the sum of a fundamental component, representing the present value of all future dividends, and a residual bubble component.…”

Section: Introductionmentioning

confidence: 99%

Linear Stochastic Dividend Model

2019

SSRN Journal

In this paper we propose a new model for pricing stock and dividend derivatives. We jointly specify dynamics for the stock price and the dividend rate such that the stock price is positive and the dividend rate non-negative. In its simplest form, the model features a dividend rate that is mean-reverting around a constant fraction of the stock price. The advantage of directly specifying dynamics for the dividend rate, as opposed to the more common approach of modeling the dividend yield, is that it is easier to keep the distribution of cumulative dividends tractable. The model is non-affine but does belong to the more general class of polynomial processes, which allows us to compute all conditional moments of the stock price and the cumulative dividends explicitly. In particular, we have closed-form expressions for the prices of stock and dividend futures. Prices of stock and dividend options are accurately approximated using a moment matching technique based on the principle of maximal entropy. * EPFL and Swiss Finance Institute. 1 In reality, dividends are paid out discretely instead of continuously. Most liquid dividend derivatives, however, reference dividends paid by a stock index, in which case continuously paid dividends are considered an acceptable approximation.

“…Their model guarantees a perfect fit to observed option prices, however all pricing is based on Monte-Carlo simulations. Tunaru (2018) proposes two different models to value dividend derivatives. The first model is similar to the one of Buehler et al (2010), with the key difference that Z is modeled with a beta distribution instead of a log-normal.…”

Section: Introductionmentioning

confidence: 99%

“…The model is able to produce a skew in dividend option prices, but Monte-Carlo simulations are required for the computation. In a second approach, Tunaru (2018) directly models the cumulative dividends with a diffusive logistic growth model. This modeling choice is motivated by the 'sigmoidal' shape of the time-series of cumulative Euro Stoxx 50 dividends.…”

Section: Introductionmentioning

confidence: 99%

A Term-Structure Model for Dividends and Interest Rates

Filipović

2017

SSRN Journal

Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jumpdiffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend options, and Euro Stoxx 50 index options.JEL Classification: C32, G12, G13 MSC2010 Classification: 91B70, 91G20, 91G30