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Option Pricing. Nagornov Alexander Parkhomenko Alexander Bakoro Jali Ahmed Sohail. Real Estate Price Model. Change in Prices is not a random walk Illiquid Market, Huge Transaction Costs Given this we cannot use Black-Scholes-Merton model.
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Option Pricing Nagornov Alexander Parkhomenko Alexander Bakoro Jali Ahmed Sohail
Real Estate Price Model • Change in Prices is not a random walk • Illiquid Market, Huge Transaction Costs • Given this we cannot use Black-Scholes-Merton model. • But we can price an option as we can predict returns – expected returns and volatility
Life-Event-Triggered Insurance Policies • Some key assumptions: • Life events are exogenous and predictable for the average policyholder • Put option pricing formula is used as described above • a – a proportion of policies that is cancelled each period • b – a proportion of all policyholders that become eligible for a claim • The parameters are generated as follows: Then a weighted sum of put options will be: Given that present value of one dollar per year insurance premium is