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, Volume 27, Issue 1, pp 122–146 | Cite as

Stochastic orders to approach investments in condor financial derivatives

  • María Concepción López-Díaz
  • Miguel López-Díaz
  • Sergio Martínez-Fernández
Original Paper
  • 55 Downloads

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 

Mathematics Subject Classification

60E15 62P05 

Notes

Acknowledgements

The authors would like to thank the referees and the editor for their interesting comments and suggestions which have improved the manuscript.

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Copyright information

© Sociedad de Estadística e Investigación Operativa 2017

Authors and Affiliations

  1. 1.Departamento de MatemáticasUniversidad de OviedoOviedoSpain
  2. 2.Departamento de Estadística e I.O. y D.M.Universidad de OviedoOviedoSpain
  3. 3.Unidad de Modelos de Riesgos, LiberbankOviedoSpain

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