Academic Positions
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2013-
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College of Business and Economics (AACSB International)
University of Wisconsin - Whitewater Associate Professor of Finance |
Education
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2009-2013
2008-2009 2002-2007 |
HEC Montréal (AACSB International, AMBA & EQUIS)
Ph.D. Administration, Finance Committee : Lars Stentoft, Pascale Valéry, and Christian Dorion, HEC Montréal & Jan Ericsson, McGill University. HEC Montréal (AACSB International, AMBA & EQUIS) M.Sc. Administration, Finance 2002-2007 ESG UQAM (EQUIS) B.B.A. Finance |
Research
Simulated Greeks for American Options.
Letourneau, Pascal, and Lars Stentoft
(Forthcoming Quantitative Finance)
This paper develops a method to estimate price sensitivities, so-called Greeks, for American style options using flexible simulation methods combined with initially dispersed state variables. The asymptotic properties of the estimators are studied, and convergence of the method is established. A 2-stage method is proposed with an adaptive choice of optimal dispersion of state variables, which controls and balances off the bias of the estimates against their variance. Numerical results show that the method compares exceptionally well to existing alternatives, works well for very reasonable choices of dispersion sizes, regressors, and simulated paths, and it is robust to choices of these parameters. We apply the method to models with time varying volatility, demonstrating that there are large differences between estimated Greeks with affine and non-affine models, that Greeks vary significantly through periods of crisis, and that the errors made when using Greeks implied from, e.g., misspecified models with constant volatility can be extremely large.
Letourneau, Pascal, and Lars Stentoft
(Forthcoming Quantitative Finance)
This paper develops a method to estimate price sensitivities, so-called Greeks, for American style options using flexible simulation methods combined with initially dispersed state variables. The asymptotic properties of the estimators are studied, and convergence of the method is established. A 2-stage method is proposed with an adaptive choice of optimal dispersion of state variables, which controls and balances off the bias of the estimates against their variance. Numerical results show that the method compares exceptionally well to existing alternatives, works well for very reasonable choices of dispersion sizes, regressors, and simulated paths, and it is robust to choices of these parameters. We apply the method to models with time varying volatility, demonstrating that there are large differences between estimated Greeks with affine and non-affine models, that Greeks vary significantly through periods of crisis, and that the errors made when using Greeks implied from, e.g., misspecified models with constant volatility can be extremely large.
Exercising Real Options Sooner or Later? New Insights from Quantile-Preserving Spreads on how to Hasten or Delay Exercise: Real Option Exercise Probability and Timing.
Kang, Sang Baum, and Pascal Létourneau
(Working paper)
Using Quantile-Preserving Spreads and Stochastic Dominance, this paper studies how modifying a real option's characteristic affects the holding value and optimal exercise decision. The change in exercise probability and timing depends on the preserved quantile, strike price, time of modification, and modification symmetry. We significantly generalize previously obtained results to an unspecified underlying process and a general call-like payoff function. Our results speak to climate finance, real options, and financial options literature by proposing testable predictions. Furthermore, the results are useful to determine a modification of a real option to increase or decrease its exercise probability and timing.
Kang, Sang Baum, and Pascal Létourneau
(Working paper)
Using Quantile-Preserving Spreads and Stochastic Dominance, this paper studies how modifying a real option's characteristic affects the holding value and optimal exercise decision. The change in exercise probability and timing depends on the preserved quantile, strike price, time of modification, and modification symmetry. We significantly generalize previously obtained results to an unspecified underlying process and a general call-like payoff function. Our results speak to climate finance, real options, and financial options literature by proposing testable predictions. Furthermore, the results are useful to determine a modification of a real option to increase or decrease its exercise probability and timing.
Bootstrapping the Early Exercise Boundary in the Least-Squares Monte Carlo Method.
Letourneau, Pascal, and Lars Stentoft (2019)
Journal of Risk and Financial Management
This paper proposes an innovative algorithm that significantly improves on the approximation of the optimal early exercise boundary obtained with simulation based methods for American option pricing. The method works by exploiting and leveraging the information in multiple cross-sectional regressions to the fullest by averaging the individually obtained estimates at each early exercise step, starting from just before maturity, in the backwards induction algorithm. With this method, less errors are accumulated, and as a result of this, the price estimate is essentially unbiased even for long maturity options. Numerical results demonstrate the improvements from our method and show that these are robust to the choice of simulation setup, the characteristics of the option, and the dimensionality of the problem. Finally, because our method naturally disassociates the estimation of the optimal early exercise boundary from the pricing of the option, significant efficiency gains can be obtained by using less simulated paths and repetitions to estimate the optimal early exercise boundary than with the regular method.
Letourneau, Pascal, and Lars Stentoft (2019)
Journal of Risk and Financial Management
This paper proposes an innovative algorithm that significantly improves on the approximation of the optimal early exercise boundary obtained with simulation based methods for American option pricing. The method works by exploiting and leveraging the information in multiple cross-sectional regressions to the fullest by averaging the individually obtained estimates at each early exercise step, starting from just before maturity, in the backwards induction algorithm. With this method, less errors are accumulated, and as a result of this, the price estimate is essentially unbiased even for long maturity options. Numerical results demonstrate the improvements from our method and show that these are robust to the choice of simulation setup, the characteristics of the option, and the dimensionality of the problem. Finally, because our method naturally disassociates the estimation of the optimal early exercise boundary from the pricing of the option, significant efficiency gains can be obtained by using less simulated paths and repetitions to estimate the optimal early exercise boundary than with the regular method.
An Improved Estimation Method for a Family of GARCH Models.
Letourneau, Pascal (2019)
Journal of Derivatives
This paper proposes an improved estimation and calibration method to a family of GARCH models. The suggested method fixes one parameter such that the unconditional kurtosis of the model matches the sample kurtosis. An empirical analysis using Engle and Ng's (1993) NGARCH(1,1) model shows that the method dominates previous estimation methods on multiple aspects. The optimization problem is simplified and made less sensitive to initial values. The optimization time, both when estimating on historical returns and calibrating on option prices, is reduced by roughly 50%. The in-sample fit is barely affected, while the option pricing, in and out of sample is improved.
Letourneau, Pascal (2019)
Journal of Derivatives
This paper proposes an improved estimation and calibration method to a family of GARCH models. The suggested method fixes one parameter such that the unconditional kurtosis of the model matches the sample kurtosis. An empirical analysis using Engle and Ng's (1993) NGARCH(1,1) model shows that the method dominates previous estimation methods on multiple aspects. The optimization problem is simplified and made less sensitive to initial values. The optimization time, both when estimating on historical returns and calibrating on option prices, is reduced by roughly 50%. The in-sample fit is barely affected, while the option pricing, in and out of sample is improved.
A Real Option Analysis on Retiring Existing Coal-fired Electricity Plants in the United States
Kang, Sang Baum, Pascal Létourneau, and Steven X. Sala (2018)
The Journal of Energy Markets
To reduce CO2 emissions from the electricity generation sector, the U.S. introduced the Clean Power Plan (CPP) in 2015. Specifically, building block #2 aimed to replace coal-fired electricity generation with natural gas-fired generation. In 2017, the U.S. federal government decided not to honor the U.N.’s Paris Agreement, and repealed the CPP. In this paper, we study the conditions under which a reasonable green policy by a state encourages the early replacement of existing coal plants with new natural gas plants, as CPP building block #2 suggested. Using a real option model, we calculate the probability that a firm makes an investment decision to retire an existing coal plant and build a new natural gas plant within the next few years. We find that the results critically depend on the remaining useful life of the existing coal plant. When the remaining life is short, government policies do not play a significant role in this asset replacement decision. However, if the remaining useful life is approximately 20+ years, a state government’s green policy does plays a significant role in the plant’s replacement. Because such plants were built during the “coal plant boom” period from 1965 to 1987, our findings are particularly relevant.
Kang, Sang Baum, Pascal Létourneau, and Steven X. Sala (2018)
The Journal of Energy Markets
To reduce CO2 emissions from the electricity generation sector, the U.S. introduced the Clean Power Plan (CPP) in 2015. Specifically, building block #2 aimed to replace coal-fired electricity generation with natural gas-fired generation. In 2017, the U.S. federal government decided not to honor the U.N.’s Paris Agreement, and repealed the CPP. In this paper, we study the conditions under which a reasonable green policy by a state encourages the early replacement of existing coal plants with new natural gas plants, as CPP building block #2 suggested. Using a real option model, we calculate the probability that a firm makes an investment decision to retire an existing coal plant and build a new natural gas plant within the next few years. We find that the results critically depend on the remaining useful life of the existing coal plant. When the remaining life is short, government policies do not play a significant role in this asset replacement decision. However, if the remaining useful life is approximately 20+ years, a state government’s green policy does plays a significant role in the plant’s replacement. Because such plants were built during the “coal plant boom” period from 1965 to 1987, our findings are particularly relevant.
Is it still economic to build a new coal-fired power plant in the U.S.? A real option analysis
Kang, Sang Baum, Pascal Létourneau, and Steven X. Sala (2018)
Applied Economics Letters
In the U.S., virtually no new coal-fired power plants have been built in recent years. Both industry experts and academics seem to believe that no rational firm will build a new coal-fired plant. Will such a trend continue in the future? To provide insights into this question, we investigate the optimal decision of an electricity company with an irreversible and deferrable opportunity to build either a new coal-fired or natural gas-fired power plant as its new base-load resource. According to our real option analysis, the optimal decision depends on the location. In the case of the eastern U.S., it is optimal to choose a natural gas plant if a firm is given a choice among a new natural gas plant, a new coal plant and deferring the investment. However, contrary to the common sentiment in the industry and academia, building a new coal plant in the western U.S. is still more economical than building a new natural gas plant in the absence of emission pricing. Furthermore, introducing carbon pricing to western U.S. states, as California did, can substantially increase the probability that a firm will optimally choose a natural gas plant over a coal plant.
Kang, Sang Baum, Pascal Létourneau, and Steven X. Sala (2018)
Applied Economics Letters
In the U.S., virtually no new coal-fired power plants have been built in recent years. Both industry experts and academics seem to believe that no rational firm will build a new coal-fired plant. Will such a trend continue in the future? To provide insights into this question, we investigate the optimal decision of an electricity company with an irreversible and deferrable opportunity to build either a new coal-fired or natural gas-fired power plant as its new base-load resource. According to our real option analysis, the optimal decision depends on the location. In the case of the eastern U.S., it is optimal to choose a natural gas plant if a firm is given a choice among a new natural gas plant, a new coal plant and deferring the investment. However, contrary to the common sentiment in the industry and academia, building a new coal plant in the western U.S. is still more economical than building a new natural gas plant in the absence of emission pricing. Furthermore, introducing carbon pricing to western U.S. states, as California did, can substantially increase the probability that a firm will optimally choose a natural gas plant over a coal plant.
The Model-Free Equivalence Condition for American Spread Options
Kang, Sang Baum, and Pascal Létourneau (2017)
Theoretical Economics Letters, 7(04), 757
A spread option involves the right to obtain the spread between two asset prices at a predefined strike price. This type of derivative security is frequently used in financial markets and academic finance. Furthermore, analysts use the spread option technique for real option modeling purposes. Some spread options are American-type in the sense that an option holder may exercise her option prior to the expiration. In this paper, we propose an equivalence condition for American spread options under which they are not exercised early, and are therefore equivalent to European options. Our theoretical results, developed within a model-free economic setting, suggest that the equivalence conditions documented by previous papers do not hold in a distribution-free environment. Traders , quantitative modelers, and financial programmers in various derivatives markets and the real option modeling area may use our results.
Kang, Sang Baum, and Pascal Létourneau (2017)
Theoretical Economics Letters, 7(04), 757
A spread option involves the right to obtain the spread between two asset prices at a predefined strike price. This type of derivative security is frequently used in financial markets and academic finance. Furthermore, analysts use the spread option technique for real option modeling purposes. Some spread options are American-type in the sense that an option holder may exercise her option prior to the expiration. In this paper, we propose an equivalence condition for American spread options under which they are not exercised early, and are therefore equivalent to European options. Our theoretical results, developed within a model-free economic setting, suggest that the equivalence conditions documented by previous papers do not hold in a distribution-free environment. Traders , quantitative modelers, and financial programmers in various derivatives markets and the real option modeling area may use our results.
Investor’s Reaction to the Government Credibility Problem: A Real Option Analysis of Emission Permit Policy Risk.
Kang, Sang Baum, and Pascal Létourneau (2016)
Energy Economics, 54: 96-107
In relation to creating a CO2 emission permit market, there are two types of climate change policy risks: 1) It is uncertain whether and when a cap-and-trade system will be implemented; and 2) once a policy is in place, there may be government credibility issues. This paper examines the effect of these policy risks on real option decisions of electric power plant investment. To model both an investment decision and generation flexibility, this study evaluates an exotic compound American option on multiple strips of European spread options through the implementation of least squares Monte-Carlo simulation. Government credibility risk leads to more investment in “less green” resources and induces additional cash flow variation, which increases the average time to investment (value of waiting). However, in an extreme case, government credibility can actually hasten investment because the risk may be more favorable to electric power companies. Furthermore, if emission trading is planned to be implemented in the future (e.g., 2020), and the market believes that the probability of successful implementation is low, firms will build a “less green” plant early to benefit from the period before the green rule is applied..
Kang, Sang Baum, and Pascal Létourneau (2016)
Energy Economics, 54: 96-107
In relation to creating a CO2 emission permit market, there are two types of climate change policy risks: 1) It is uncertain whether and when a cap-and-trade system will be implemented; and 2) once a policy is in place, there may be government credibility issues. This paper examines the effect of these policy risks on real option decisions of electric power plant investment. To model both an investment decision and generation flexibility, this study evaluates an exotic compound American option on multiple strips of European spread options through the implementation of least squares Monte-Carlo simulation. Government credibility risk leads to more investment in “less green” resources and induces additional cash flow variation, which increases the average time to investment (value of waiting). However, in an extreme case, government credibility can actually hasten investment because the risk may be more favorable to electric power companies. Furthermore, if emission trading is planned to be implemented in the future (e.g., 2020), and the market believes that the probability of successful implementation is low, firms will build a “less green” plant early to benefit from the period before the green rule is applied..
Refining the Least Squares Monte Carlo Method by Imposing Structure.
Létourneau, Pascal, and Lars Stentoft (2014)
Quantitative Finance 14.3 (2014): 495-507.
The least squares Monte Carlo method of Longstaff and Schwartz (2001) has become a standard numerical method for option pricing with many potential risk factors. An important choice in the method is the number of regressors to use and using too few or too many regressors leads to biased results. This is so particularly when considering multiple risk factors or when simulation is computationally expensive and hence relatively few paths can be used. In this paper we show that by imposing structure in the regression problem we can improve the method by reducing the bias.
Létourneau, Pascal, and Lars Stentoft (2014)
Quantitative Finance 14.3 (2014): 495-507.
The least squares Monte Carlo method of Longstaff and Schwartz (2001) has become a standard numerical method for option pricing with many potential risk factors. An important choice in the method is the number of regressors to use and using too few or too many regressors leads to biased results. This is so particularly when considering multiple risk factors or when simulation is computationally expensive and hence relatively few paths can be used. In this paper we show that by imposing structure in the regression problem we can improve the method by reducing the bias.
Presentations
Real Options' Exercise Probability and Timing. (presented under a different title)
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January 2020
April 2018 November 2017 October 2017 September 2017 February 2016 |
American Economic Association Annual Meeting
HEC Montreal Southern Finance Association Annual Meeting Financial Management Association Annual Meeting (semi-finalist for best paper award) University of Wisconsin - Whitewater Illinois Institute of Technology |
Improved Greeks for American Options Using Simulation.
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October 2016
February 2015 |
Financial Management Association Annual Meeting 2016
Illinois Institute of Technology |
This is how you make a GARCH smile - A new estimation method for the NGARCH model.
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April 2015
October 2014 |
Eastern Finance Association Annual Meeting 2015,
Illinois Institute of Technology |
How “Animal Spirits” React to the Government Credibility Problem - a Real Option Analysis of Emission Permits Policy Risk.
Unspanned risk factors in the cap volatility surface: A non-linear approach.
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October 2013
September 2013 April 2013 Nov 2012 Nov 2012 May 2012 May 2012 Feb 2012 May 2011 |
Financial Management Association Annual Meeting 2013, Chicago, USA.
Northern Finance Association Annual General meeting 2013, Quebec, Canada. Eastern Finance Association Annual Meeting 2013, Florida, Usa Internal seminar, HEC Montreal, Canada Seminar, University of Wisconsin - Whitewater, USA Seminar at Lingnan University, Hong Kong IFM2, Mathematical finance days, Montreal, Canada CIRPÉE students’ days, Montreal, Canada IFM2, Mathematical finance days, Montreal, Canada |
3 Essays on financial derivatives.
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March 2012
May 2012 |
HEC Finance Days
Dissertation Proposal |
Refining the Least-Squares Monte Carlo Method by Imposing Structure.
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May 2011
May 2010 April 2010 |
GERAD 2011, Montreal, Canada
IFM2, Mathematical finance days, Montreal, Canada Sprott School of Business PhD Symposium, Ottawa, Canada |
Scholarships and Awards
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2016
2010-2013 2011-2012 2010 2009-2012 2010 2009 2007 |
Summer Research Grant: University of Wisconsin - Whitewater
Fond Québécois de la recherche sur la société et la culture (FQRSC), Research scholarship CIRPÉE-HEC Montréal, Excellence Scholarship Edouard-Montpetit-Standard-Life, Excellence Scholarship HEC Montréal, Program scholarship Sprott School of Business PhD symposium “Best Presentation runner-up” for “Improving the Least-Square Monte Carlo method by Imposing Structure” HEC Montréal, M.S.c. Acceleration scholarship ESG – UQAM, Dean Honours Roll |
Research and Teaching Experience
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2019-
2013- 2010-2013 2009-2012 2009 1998 - 2007 |
Associate Professor of Finance, University of Wisconsin - Whitewater
Assistant Professor of Finance, University of Wisconsin - Whitewater Research Assistant of Lars Stentoft, HEC Montréal Particle filters estimation of continuous time NGARCH models and various research tasks. Lecturer, HEC Montréal Introduction to Financial Mathematics (M. Sc.) Portfolio Management (Specialized Graduate Diploma) (Ad hoc replacement for 3 sessions) Teaching for the private sector System Administration for IT professionals System Expertise for corporate employees |
Professional Experience
2006-2013 Caisse Desjardins Haut-Richelieu, Elected member of the Board of Director and member of the Audit Committee
(Financial cooperative institution with 64,000 members and overall assets of over $1 billion; member of Desjardins Group, the largest cooperative financial group in Canada, with more than 5.6M members and overall assets of over $190 billion)
• Board of Directors: Attend Board meetings; ensure members satisfaction, establish Caisse’s vision and strategy in order to improve members’ wealth.
• Audit Committee: Oversee financial statements..
1998 - 2007 Groupe Conseil OSI, Information Technology Consultant
Selected mandates:
• Client: Municipality (2007): Managed the IT department with a total budget of $1.75M. Managed a team of 6 employees in a transition period. Analyzed the operational processes and enhanced the client quality service and the communication with other services.
• Client: Insurance (2006): Successfully managed an IT disaster recovery. All system where available 5 times faster than designed in the Disaster Recovery Plan.
• Various clients (1998-2007): Developed various applications and interfaces integrated to multiple databases. Administrated a 24/7 support team for various clients.
2006-2013 Caisse Desjardins Haut-Richelieu, Elected member of the Board of Director and member of the Audit Committee
(Financial cooperative institution with 64,000 members and overall assets of over $1 billion; member of Desjardins Group, the largest cooperative financial group in Canada, with more than 5.6M members and overall assets of over $190 billion)
• Board of Directors: Attend Board meetings; ensure members satisfaction, establish Caisse’s vision and strategy in order to improve members’ wealth.
• Audit Committee: Oversee financial statements..
1998 - 2007 Groupe Conseil OSI, Information Technology Consultant
Selected mandates:
• Client: Municipality (2007): Managed the IT department with a total budget of $1.75M. Managed a team of 6 employees in a transition period. Analyzed the operational processes and enhanced the client quality service and the communication with other services.
• Client: Insurance (2006): Successfully managed an IT disaster recovery. All system where available 5 times faster than designed in the Disaster Recovery Plan.
• Various clients (1998-2007): Developed various applications and interfaces integrated to multiple databases. Administrated a 24/7 support team for various clients.
Additional Information
Languages: French (native tongue), English (fully fluent)
Computer skills: Smart board, MATLAB, Mathematica, STATA, C#, C++, VB, Bloomberg, LaTeX, SQL, etc.
Languages: French (native tongue), English (fully fluent)
Computer skills: Smart board, MATLAB, Mathematica, STATA, C#, C++, VB, Bloomberg, LaTeX, SQL, etc.