Stochastic orders to approach investments in condor financial derivatives

María Concepción López-Díaz (), Miguel López-Díaz () and Sergio Martínez-Fernández ()
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María Concepción López-Díaz: Universidad de Oviedo
Miguel López-Díaz: Universidad de Oviedo
Sergio Martínez-Fernández: Unidad de Modelos de Riesgos, Liberbank

TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, 2018, vol. 27, issue 1, No 7, 122-146

Abstract: Abstract The comparison of investments is a key research topic in mathematical finance. Financial derivatives are popular tools for economic investments. A common financial derivative is the so-called condor derivative. A new mathematical framework for the comparison of investments in condor derivatives is introduced in this manuscript. That model is based on the theory of stochastic orders. Namely, a new family of stochastic orders to approach such comparison problems is introduced. That family is analyzed in detail providing characterizations of the new orders, properties and connections with other stochastic orderings. Results which permit to compare condor derivatives, when the prices of the underlying assets follow Brownian movements, or geometric Brownian movements, are developed. Moreover, an analysis with the DOWJONES and EUROSTOXX indexes shows how to use the new stochastic orders to compare investments in condor derivatives based on those indexes. On the other hand, it is shown how well-known stochastic orders can be applied to compare investments in other financial derivatives, like future derivatives, bull call spreads, call options or long straddle derivatives.

Keywords: Call option; Condor derivative; (Geometric) Brownian movement; Increasing concave order; Put option; Stochastic order; 60E15; 62P05 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s11749-017-0537-3

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