San-Lin Chung | National Taiwan University (original) (raw)

Papers by San-Lin Chung

VOV data. 1) VOV: For each day, we estimate VOV by calculating the realized bipower variance from... more VOV data. 1) VOV: For each day, we estimate VOV by calculating the realized bipower variance from a series of five-minute model-free implied market variance within the day, using the high-frequency S&P 500 index option data. 2) ΔVOV: The innovations in market volatility-of-volatility (ΔVOV) is computed as the ARMA(1,1) model residual of the market volatility-of-volatility (VOV). To calculate implied volatility, we use the tick-by-tick quote data for the S&P 500 index (SPX) options from CBOE's Market Data Report (MDR) tapes over the time period from January 1996 to December 2015. Citation: Chen, Te-Feng, Tarun Chordia, San-Lin Chung, and Ji-Chai Lin. 2021. VOV Risk in Asset Pricing. Review of Asset Pricing Studies. (https://www.dropbox.com/s/es8sew1zpu9xciu/VOV-data-RAPS.xlsx?dl=0)

This paper extends Ho, Stapleton, and Subrahmanyam's (1997a) generalized Geske-Johnson (1984)... more This paper extends Ho, Stapleton, and Subrahmanyam's (1997a) generalized Geske-Johnson (1984) technique to price American currency options in a stochastic interest rate economy. We derive closed form solutions for European currency options and analytical form solutions for twice-exercisable currency options assuming that the volatility functions determining the term structure are deterministic. The two-point Geske and Johnson (1984) approximation formula is then applied to estimate American option prices. Numerical evaluations and comparative statics are presented to show the effect of stochastic interest rates. Although the model in this article is a special case of Amin and Bodurtha's (1995) general model, our numerical results are similar to theirs yet our method is numerically efficient.

This paper applies the static hedge portfolio (SHP) approach of Derman, Ergener, and Kani (1995) ... more This paper applies the static hedge portfolio (SHP) approach of Derman, Ergener, and Kani (1995) and Carr, Ellis, and Gupta (1998) to price and/or hedge American exotic options. We first show how to construct a static hedge portfolio to match the complicated boundary conditions of American barrier options and lookback options. Detailed analyses of the profit and loss distributions suggest that the static hedge portfolio is far less risky than the dynamic delta-hedged portfolio. Moreover, numerical results indicate that the efficiency of the proposed method is comparable to Boyle and Tian (1999) for pricing American barrier options under the constant elasticity of variance (CEV) model of Cox (1975) and comparable to Babbs (2000) for pricing American floating strike lookback options under the Black-Scholes model. In particular, the recalculation of the option prices and hedge ratios under the proposed method is much easier and quicker than the tree methods. JEL classification: G13

Journal of Futures Markets, 2021

Journal of Risk and Financial Management, 2021

In this paper, we focus on two-factor lattices for general diffusion processes with state-depende... more In this paper, we focus on two-factor lattices for general diffusion processes with state-dependent volatilities. Although it is common knowledge that branching probabilities must be between zero and one in a lattice, few methods can guarantee lattice feasibility, referring to the property that all branching probabilities at all nodes in all stages of a lattice are legitimate. Some practitioners have argued that negative probabilities are not necessarily ‘bad’ and may be further exploited. A theoretical framework of lattice feasibility is developed in this paper, which is used to investigate how negative probabilities may impact option pricing in a lattice approach. It is shown in this paper that lattice feasibility can be achieved by adjusting a lattice’s configuration (e.g., grid sizes and jump patterns). Using this framework as a benchmark, we find that the values of out-of-the-money options are most affected by negative probabilities, followed by in-the-money options and at-the-...

SSRN Electronic Journal, 2018

The Journal of Fixed Income, 2015

A large number of municipal bonds are guaranteed by monoline insurers who are at the center of th... more A large number of municipal bonds are guaranteed by monoline insurers who are at the center of the subprime crisis. This article investigates the effect of insurer-related counterparty risk on municipal bond pricing using a comprehensive dataset. The authors estimate both insurer-specific and systemic components of a counterparty risk effect. Results show that the magnitude of the counterparty risk effect is of economic significance even in normal times and is magnified during the crisis. The findings also indicate that this effect is much larger than that documented for the credit default swap and repo markets. The counterparty risk premium is higher for speculative-grade and illiquid bonds and for bonds issued by troubled states.

The Journal of Derivatives, 2013

Delta hedging is the time-honored approach to option risk management, but it requires frequent re... more Delta hedging is the time-honored approach to option risk management, but it requires frequent rebalancing to keep the risk exposure hedged and bear the associated transactions costs. An alternative approach is to set up a static hedge portfolio, consisting of some number of options at the outset, that is designed to cover the contingent payoffs of the option being hedged without extensive rebalancing. In this article, the authors apply the static hedge concept to American barrier options and show how to set up the static portfolios, which is the only time-consuming part of the problem. Unlike delta hedging, which requires essentially the same problem to be solved repeatedly in rebalancing the hedge, once the static portfolio is set up, subsequent calculations to update the option prices are very fast. Moreover, the hedging performance in terms of tracking error is distinctly superior in static hedging when compared to delta hedging and is only slightly affected by the need to use options with standardized strikes.