An Analytical Valuation Framework for Financial Assets with Trading Suspensions

31 Pages Posted: 27 Mar 2018 Last revised: 2 Jul 2019

See all articles by Christian P. Fries

Christian P. Fries

Ludwig Maximilian University of Munich (LMU) - Faculty of Mathematics; DZ Bank AG

Lorenzo Torricelli

University of Parma, Department of Economics and Management

Date Written: June 27, 2019

Abstract

In this paper we propose a derivative valuation framework based on Lévy processes which takes into account the possibility that the underlying asset is subject to information-related trading halts/suspensions. Since such assets are not traded at all times, we argue that the natural underlying for derivative risk-neutral valuation is not the asset itself, but rather a contract that, when the asset is in trade suspensions upon maturity, cash-settles the last quoted price plus the interests accrued since the last quote update.

Combining some elements from semimartingale time changes and potential theory, we devise martingale dynamics and no-arbitrage relations for such a price process, provide Fourier transform-based pricing formulae for derivatives, and study the asymptotic behavior of the obtained formulae as a function of the halt parameters.

The volatility surface analysis reveals that the short term skew of our model is typically steeper than that of the underlying Levy models, indicating that the presence of a trade suspension risk is consistent with the well-documented stylized fact of volatility skew persistence/explosion.

Keywords: Market Halts and Suspensions, Time Changes, Levy Subordinators, Derivative Pricing, Levy Processes

JEL Classification: G20, H60

Suggested Citation

Fries, Christian P. and Torricelli, Lorenzo, An Analytical Valuation Framework for Financial Assets with Trading Suspensions (June 27, 2019). Available at SSRN: https://ssrn.com/abstract=3150557 or http://dx.doi.org/10.2139/ssrn.3150557

Christian P. Fries

Ludwig Maximilian University of Munich (LMU) - Faculty of Mathematics ( email )

Theresienstrasse 39
Munich
Germany

DZ Bank AG ( email )

60265 Frankfurt am Main
Germany

Lorenzo Torricelli (Contact Author)

University of Parma, Department of Economics and Management ( email )

Viale Kennedy 6
Parma
Italy

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