Papers by Sellamuthu Prabakaran
International Journal of Finance Research, Oct 23, 2021
Electricity markets are becoming a popular field of research amongst academics because of the lac... more Electricity markets are becoming a popular field of research amongst academics because of the lack of appropriate models for describing electricity price behavior and pricing derivatives instruments. Models for price dynamics must consider seasonality and spiky behavior of jumps which seem hard to model by standard jump process. Without good models for electricity price dynamics, it is difficult to think about good models for futures, forward, swaps and option pricing. In this paper we attempt to introduce an algorithm for pricing derivatives to intuition from Colombian electricity market. The main ambition of this study is fourfold: 1) First we begin our approach through to simple stochastic models. for electricity pricing. 2) Next, we derive analytical formulas for prices of electricity derivatives with different derivatives tools. 3) Then we extent short of the model for price risk in the electricity spot market 4) finally we construct the model estimation under the physical measures for Colombian electricity market. And this paper end with conclusion.
Mathematical and Computer Modelling, 2000
The Black-Scholes theory of option pricing has been considered for many years as an important but... more The Black-Scholes theory of option pricing has been considered for many years as an important but very approximate zeroth-order description of actual market behavior. We generalize the functional form of the diffusion of these systems and also consider multi-factor models including stochastic volatility. We use a previous development of a statistical mechanics of financial markets to model these issues. Daily Eurodollar futures prices and implied volatilities are fit to determine exponents of functional behavior of diffusions using methods of global optimization, Adaptive Simulated Annealing (ASA), to generate tight fits across moving time windows of Eurodollar contracts. These short-time fitted distributions are then developed into long-time distributions using a robust non-Monte Carlo path-integral algorithm, PATHINT, to generate prices and derivatives commonly used by option traders. The results of our study show that there is only a very small change in at-the money option prices for different probability distributions, both for the one-factor and two-factor models. There still are significant differences in risk parameters, partial derivatives, using more sophisticated models, especially for out-of-the-money options.
Electronic Journal of Theoretical Physics, 2010
Abstract: Many researchers have attempted to viaduct their fields with others to gain insight int... more Abstract: Many researchers have attempted to viaduct their fields with others to gain insight into their own. In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called ...
Electronic Journal of Theoretical Physics, 2011
A thermodynamic analogy in economics is older than the idea of von Neumann to look for market ent... more A thermodynamic analogy in economics is older than the idea of von Neumann to look for market entropy in liquidity, advice that was not taken in any thermodynamic analogy presented so far in the literature. In this paper, we go further and use a standard approach in market fluctuation and develop a set of equations which are a simple model for market fluctuation in a hypothetical financial market.In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called Econophysics. The scope of this paper is to present a phenomenological analysis for Market Fluctuations through Thermodynamics approach The main ambition of this study is fourfold: 1) First we begin our description with how market parameters vary with time by using of simplest example. 2) To extend that the market fluctuations appears with the enforced changes of macro parameters of the market and land speculations with non existence. 3) Next we derived the equation for how market fluctuates with respect to time in an equilibrium state. 4) Finally we analyze the how the fluctuations affects the perceptions of the market agents on the future. And this paper end with conclusion.
An Exposition on Foreign Currency Exposure
SSRN Electronic Journal, 2014
ABSTRACT
Rationality in Economics – The Thermodynamics Approach and Evaluation Criteria
Rationality is one of the most over-used words in economics. Behavior can be rational, or irratio... more Rationality is one of the most over-used words in economics. Behavior can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are “rationalizable†. The scope of this paper is to present the rationality in economics with the thermodynamics approach and evaluation criteria. The main aspiration of this study is fivefold: 1) First we begin our description of a thermodynamics model of economics with the simplest example. 2) After that we introduced some important perception of rationality and uncertainty in economics. 3) Then we construct the mathematical model for a private ownership economy with finite sets of commodities and producers of equilibrium notions. 4) Find out the rationality and evaluation through the existence theorem for a vector of prices by using some solid evidence. 5) Fina...
Exchange Rate Equilibrium – The Thermodynamics Approach
International Journal of Finance & Economics, 2014
A thermodynamic analogy in economics is older than the idea of von Neumann to look for market ent... more A thermodynamic analogy in economics is older than the idea of von Neumann to look for market entropy in liquidity, advice that was not taken in any thermodynamic analogy presented so far in the literature. Many researchers have attempted to viaduct their fields with others to gain insight into their own. In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called Econophysics. In this paper we attempt to introduce a thermodynamics approach to exchange rate equilibrium. The main ambition of this study is fourfold: 1) First we begin our description of a thermodynamics model of economics with the simplest example. 2) To expand shown how to construct a mathematical theory of exchange rate equilibrium without the notion of utility. 3) Next we derived the equation for exchange rate market with respect to time in an equilibrium state by using some solid evidence 4) Finally we construct the...
Black Scholes Option Pricing Model Brownian Motion Approach
SSRN Electronic Journal, 2014
Brownian motion has become one of the fundamental building blocks of modern quantitative finance.... more Brownian motion has become one of the fundamental building blocks of modern quantitative finance. The mathematical theory of Brownian motion has been applied in contexts ranging far beyond the movement of particles in fluids. Until recently, stock market researchers have confronted the same problem. While they can chart the path of the market on a minute by minute basis it is very hard for them to observe who buys, who sells and how demand and supply affects price fluctuations. There exist many researchers about how the behavior of different investors makes the option price movement in a stock market. The purpose of this paper is to construct the black Scholes option pricing model in the stock markets by using of Brownian motion approach. The main ambition of this study is fourfold: 1) First we begin our approach to construction of Brownian motion from the simple symmetric random walk. 2) Next we introduce the Black – Scholes option pricing model with stock price movement by using of Geometric Brownian motion. 3) Then we extent this Brownian motion approach in the stock market and 4) Finally we construct the model for the generalization based on the deformation of the standard Brownian motion and Black Scholes pricing formula. And this paper will end with conclusion.
International Journal of Engineering & Technology, 2018
Energy derivatives are an energy instrument whose value be determined by on or derived from the v... more Energy derivatives are an energy instrument whose value be determined by on or derived from the values, more basic, a fundamental energy asset, such as crude oil, electricity, or natural gas. Energy derivatives are nonstandard products that have been generated by financial engineers (I. e exotic derivatives) and include exchange-traded contracts such as options and futures. In energy industries, the risk management and pricing model are important because the volatility of pricing in energy products. The price of the volatility can decrease the income of business strategies and its affects the consumer´s buying and selling decisions. For this reason, we have to manage the pricing risk and it became a pressure in the energy industries to continue the profitability and to avoid competitive disadvantages. The main goal of this study is to construct the option-pricing model for energy derivative markets.
Application of Thermodynamics Entropy Concept in Financial Markets
Advances in Panel Data Analysis in Applied Economic Research
Entropy is a mathematically defined quantity that is generally used for characterizing the probab... more Entropy is a mathematically defined quantity that is generally used for characterizing the probability of outcomes in a system that is undergoing a process. It was originally introduced in thermodynamics by Rudolf Clausius (Philos Mag J Sci 40:122–127, 1870) to measure the ratio of transferred heat through a reversible process in an isolated system. In statistical mechanics the interpretation of entropy is the measure of uncertainty about the system that remains after observing its macroscopic properties (pressure, temperature, or volume). In this work, we attempt that the concept of entropy in thermodynamics be applied to financial markets. The main goal of this study is fourfold: (1) First we begin our approach through the concept of financial economics entropy. (2) Next we introduce the concept of entropy in economic systems. (3) Here we are exploring the interpretation of entropy in finance. (4) Then we extend the concept of entropy used in finance with standard economic utility theory by using of entropy and its maximization. (5) Finally, we construct the model of variance equilibrium under an entropy (financial) risk measure. And this paper ends with conclusion.
Construction of Pde Black-Scholes with Jump-Diffusion Models
Jump diffusion is a stochastic process that involves jumps and diffusion. It has important applic... more Jump diffusion is a stochastic process that involves jumps and diffusion. It has important applications in magnetic reconnection, coronal mass ejections, condensed matter physics, in Pattern theory and computational vision and in option pricing. In option pricing, a jump-diffusion model is a form of mixture model, mixing a jump process and a diffusion process. Robert C. Merton as an extension of jump models has introduced jump-diffusion models. Due to their computational tractability, the special case of a basic affine jump diffusion is popular for some credit risk and short-rate models. Jump diffusion processes have been used in modern finance to capture discontinuous behavior in asset pricing. The jump-diffusion process was constructed to have ergodic properties so that after initially flowing away from its initial condition it would generate samples from the posterior probability model. The main objective of this study is to Construction of Black Scholes PDE with Jump-Diffusion M...
In recent years, one of the factors that had a significant impact on the economic development was... more In recent years, one of the factors that had a significant impact on the economic development was represented by climatic change. At international level, the weather risk management stands for a priority for Governments, insurance companies and companies within the industries affected by the weather variability. The main objective of this study is to modelling and Pricing of Weather Derivative Market. The main goal of this study is fourfold: 1) First, we begin our approach to construct the temperature model under Ornstein – Uhlenbeck process which is driven by a Levy process rather than a standard Brownian motion is investigated. 2) Then we extent our approach to briefly present the weather derivatives market model. 3) Next we construct the Modeling and pricing of weather derivatives. 4) Finally, how weather forecasting and seasonal forecasting can potentially improve our valuation of weather derivative contracts. In addition, this paper ends with conclusion.
Volatility Modeling for EMCALI Electricity Prices
2020 10th International Conference on Power and Energy Systems (ICPES)
The term "price volatility" is used to describe price fluctuations in asset prices. Pri... more The term "price volatility" is used to describe price fluctuations in asset prices. Prices of basic energy (natural gas, electricity, heating oil) are generally more volatile than prices of other commodities. Volatility indicates a measure of price uncertainty in markets. When volatility rises, firms may delay investment and other decisions or increase their risk management activities such as hedging. The costs associated with such activities tend to increase the costs of supplying and consuming energy. The main goal of this paper is to build a volatility model and demonstrate a mechanism to forecast electricity price volatility using electricity distribution of EMCALI ("Empresses Municipals de Cali") in Colombian electricity market. The objectives of this study are threefold: 1) First we begin our approach by introducing the energy market in Colombia and EMCALI’s role in generation and distribution of electricity. 2) Next we discuss some of the more widely used time series techniques and also show how we can utilize generalized autoregressive conditional heteroscedastic (GARCH) volatility model as a volatility forecasting model for the energy price in Colombia. 3) Finally, we apply this model to estimate the behavior of the electricity price volatility and discuss the results obtained. The paper ends with conclusions.
International Journal of Finance Research
Electricity markets are becoming a popular field of research amongst academics because of the lac... more Electricity markets are becoming a popular field of research amongst academics because of the lack of appropriate models for describing electricity price behavior and pricing derivatives instruments. Models for price dynamics must consider seasonality and spiky behavior of jumps which seem hard to model by standard jump process. Without good models for electricity price dynamics, it is difficult to think about good models for futures, forward, swaps and option pricing. In this paper we attempt to introduce an algorithm for pricing derivatives to intuition from Colombian electricity market. The main ambition of this study is fourfold: 1) First we begin our approach through to simple stochastic models for electricity pricing. 2) Next, we derive analytical formulas for prices of electricity derivatives with different derivatives tools. 3) Then we extent short of the model for price risk in the electricity spot market 4) Finally we construct the model estimation under the physical meas...
A temperature stochastic model for option pricing and its impacts on the electricity market
Economic Analysis and Policy
Construction of the Black-Scholes Pde with Jump-Diffusion Model
Far East Journal of Mathematical Sciences (FJMS)
s Brownian motion has become one of the fundamental building blocks of modern quantitative financ... more s Brownian motion has become one of the fundamental building blocks of modern quantitative finance. The mathematical theory of Brownian motion has been applied in contexts ranging far beyond the movement of particles in fluids. Until recently, stock market researchers have confronted the same problem. While they can chart the path of the market on a minute by minute basis it is very hard for them to observe who buys, who sells and how demand and supply affects price fluctuations. There exist many researchers about how the behavior of different investors makes the option price movement in a stock market. The purpose of this paper is to construct the Black Scholes option pricing model in the stock markets by using Brownian motion approach. The main ambition of this study is fourfold: 1) First we begin our approach to construction of Brownian motion from the simple symmetric random walk. 2) Next we introduce the Black – Scholes option pricing model with stock price movement by using of Geometric Brownian motion. 3) Then we extent this Brownian motion approach in the stock market and 4) Finally we construct the model for the generalization based on the deformation of the standard Brownian motion and Black Scholes pricing formula. And this paper will end with conclusion. INTRODUCTION Brownian motion is a simple continuous stochastic process that is widely used in physics and finance for modeling random behavior that evolves over time. Examples of such behavior are the random movements of a molecule of gas or fluctuations in an asset " s price. Brownian motion gets its name from the botanist Robert Brown [1] in (1828) who observed in 1827. While Brown was studying how particles of pollen suspended in water moved erratically on a microscopic scale. The motion was caused by water molecules randomly buffeting the particle of pollen and he observed minute particles in the pollen grains executing the jittery motion. After repeating the experiment with particles of dust, he was able to conclude that the motion was due to pollen being " alive " but the origin of the motion remained unexplained. The first one to give a theory of Brownian motion was Louis Bachelier in 1900 in his PhD thesis " The theory of speculation ". However, it was only in 1905 that Albert Einstein, using a probabilistic model, could sufficiently explain Brownian motion. He observed that if the kinetic energy of fluids was right, the molecules of water moved at random. Thus, a small particle would receive a random number of impacts of random strength and from random directions in any short period of time. This random bombardment by the molecules of the fluid would cause a sufficiently small particle to move exactly just how Brown described it [2]. However, stock markets, the foreign exchange markets, commodity markets and bond markets are all assumed to follow Brownian motion, where assets are changing continually over very small intervals of time and the position, namely the change of state on the assets, is being altered by random amounts. More importantly, the mathematical models used to describe Brownian motion are the fundamental tools on which all financial asset pricing and derivatives pricing models are based. The purpose of this paper is to construct the Black Schools Option Pricing Model through the Brownian motion approach.
A thermodynamic analogy in economics is older than the idea of von Neumann to look for market ent... more A thermodynamic analogy in economics is older than the idea of von Neumann to look for market entropy in liquidity, advice that was not taken in any thermodynamic analogy presented so far in the literature. Many researchers have attempted to viaduct their fields with others to gain insight into their own. In the past decade or so, physicists have begun to do academic research in economics. Perhaps people are now actively involved in an emerging field often called Econophysics. In this paper we attempt to introduce a thermodynamics approach to exchange rate equilibrium. The main ambition of this study is fourfold: 1) First we begin our description of a thermodynamics model of economics with the simplest example. 2) To expand shown how to construct a mathematical theory of exchange rate equilibrium without the notion of utility. 3) Next we derived the equation for exchange rate market with respect to time in an equilibrium state by using some solid evidence 4) Finally we construct the economic model with the actual exchange market at constant temperature. And this paper end with conclusion.
s Thermodynamics is a phenomenological science that derives its concepts directly from observatio... more s Thermodynamics is a phenomenological science that derives its concepts directly from observation and experiment. The laws of thermodynamics can be considered as axioms of a mathematical model, and the fact that they are based upon commonplace observations makes them tremendously powerful and generally valid. In particular, the interest of applying thermodynamics in a systematic manner to describe the behavior of economic and financial systems has a long history [29]. In this paper we set out the first and second laws of Thermodynamics, which are fundamentals in the world of physics, and we examine the dynamics of the main processes encountered as applied to economic systems. And also we construct the mathematical model for constant pries process. And finally this paper end with conclusion.
Rationality is one of the most over-used words in economics. Behavior can be rational, or irratio... more Rationality is one of the most over-used words in economics. Behavior can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are " rationalizable ". The scope of this paper is to present the rationality in economics with the thermodynamics approach and evaluation criteria. The main aspiration of this study is fivefold: 1) First we begin our description of a thermodynamics model of economics with the simplest example. 2) After that we introduced some important perception of rationality and uncertainty in economics. 3) Then we construct the mathematical model for a private ownership economy with finite sets of commodities and producers of equilibrium notions. 4) Find out the rationality and evaluation through the existence theorem for a vector of prices by using some solid evidence. 5) Finally we constructed the evaluation approach to the study of economics process by using of thermodynamics concepts, and this paper end with conclusion.
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Papers by Sellamuthu Prabakaran