We formulate banks’ capital optimization problem as a classic mean variance optimization, by leveraging an accurate linear approximation to the Shapely or Constrained Aumann-Shapley (CAS) allocation of max or nested max cost functions. This reduced form formulation admits an analytical...

This paper describes a flexible and tractable bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification. The stochastic recovery specification only models the first two moments of the spot recovery rate as the higher moments of the recovery rate have...

The paper investigates pricing issues in a dyadic supply chain, in which a core supplier sells products through a fair-minded retailer. The retailer is fair-minded and has an ability of self-persuasion as well. If the retailer faces advantageous inequality, though he does not deserve these extra...

We propose a top-down model for cash CLO. This model can consistently price cash CLO tranches both within the same deal and across different deals. Meaningful risk measures for cash CLO tranches can also be defined and computed. This method is self-consistent, easy to implement and...

This paper describes a consistent and arbitrage-free pricing methodology for bespoke CDO tranches. The proposed method is a multi-factor extension to the (Li 2009) model, and it is free of the known flaws in the current standard pricing method of base correlation mapping. This method assigns a...

We performed a comprehensive analysis on the price bounds of CDO tranche options, and illustrated that the CDO tranche option prices can be effectively bounded by the joint distribution of default time (JDDT) from a default time copula. Systemic and idiosyncratic factors beyond the JDDT only...