Review and Prospects of Taiwan Derivatives Research: Pricing, Hedging, and Arbitrage

This paper reviews the existing literature for pricing and hedging derivatives in Taiwan. We focus on articles published in TSSCI journals after the year 2000. The underlying assets studied in Taiwan include equity, foreign currency, commodities, interest rate, real estate, weather, etc. The financial derivatives priced in Taiwan include futures, forward contract, standard options, swaps, hybrid products (such as convertible bonds), exotic options (e.g., Asian options), etc. The pricing models adopted include Black-Scholes model, jump diffusion model, stochastic volatility model, GARCH model, Levy model, etc. The prcing methods used contain lattice method, Monte Carlo simulation method, the fast Fourier method, dynamic programming, etc. Concerning the hedging and arbitrage studies in Taiwan, many risk factors are considered, e.g., equity, foreign currency, commodities, interest rate, etc. The hedging strategies studied mainly focus on proposing new or improved econometric models/methods. Finally, the arbitrage research covers the Intra- and Inter-market arbitrage strategies, information transmission efficiency, etc.