Researchers solve long-standing financial puzzle

Feb 06, 2008

UQ Business School academic Dr Jamie Alcock and graduate Trent Carmichael have solved a financial problem that has puzzled researchers for more than 10 years.

Posed in 1996 by Professor Michael Stutzer, of Leeds School of Business at The University of Colorado in the US, the problem challenged the world's finance scholars and practitioners to come up with a nonparametric method of pricing American options in the mid nineties.

Dr Alcock said it had taken over a decade to solve the problem.

“A nonparametric method is one that doesn't make any assumptions about the statistical distribution of underlying stock prices,” Dr Alcock said.

“Most methods used to price stock and derivatives do rely on a model of stock price movements – so if the model doesn't reflect what actually happens, the pricing method can become useless.

“Nonparametric methods make no assumptions, instead letting the data speak for itself.”

UQ Business School graduate Trent Carmichael, who was UQ's Graduate of the Year in 2006, worked with Dr Alcock on the project.

Mr Carmichael said the new method did not require observed option prices, only stock prices.

“Our method is unique among nonparametric methods because, thanks to using only stock prices, it works even when the options are not traded securities,” Mr Carmichael said.

“Our method can be applied to real options, credit risk models and executive stock options.”

A paper co-authored by Alcock and Carmichael describing the method won the ASX / SFE Best Derivatives Paper at the 2007 Australian Banking and Finance Conference. The paper will be published in the Journal of Futures Markets later this year.

Source: University of Queensland

Explore further: History books spark latest Texas classroom battle

add to favorites email to friend print save as pdf

Related Stories

Russian and American astronauts return to Earth

24 minutes ago

Two Russian cosmonauts and an American astronaut returned to Earth on Thursday after spending more than six months working together aboard the International Space Station, as tensions between their countries ...

Mexican 'water monster' salamander battles extinction

14 minutes ago

Dubbed the "water monster" by the Aztecs, the axolotl salamander is battling extinction in the remnants of Mexico City's ancient lake, alarming scientists hoping mankind learns from its ability to regenerate organs.

Astronomers pinpoint 'Venus Zone' around stars

8 hours ago

San Francisco State University astronomer Stephen Kane and a team of researchers presented today the definition of a "Venus Zone," the area around a star in which a planet is likely to exhibit the unlivable ...

History books becoming next fight in Texas schools

9 hours ago

The next ideological fight over new textbooks for Texas classrooms intensified Wednesday with critics lambasting history lessons that they say exaggerate the influence of Moses in American democracy and negatively portray ...

Recommended for you

History books spark latest Texas classroom battle

Sep 16, 2014

As Texas mulls new history textbooks for its 5-plus million public school students, some academics are decrying lessons they say exaggerate the influence of Christian values on America's Founding Fathers.

Flatow, 'Science Friday' settle claims over grant

Sep 16, 2014

Federal prosecutors say radio host Ira Flatow and his "Science Friday" show that airs on many National Public Radio stations have settled civil claims that they misused money from a nearly $1 million federal ...

User comments : 0