We can only estimate the distribution of stock returns but we observe the distribution of risk neutral state prices. Risk neutral state prices are the product of risk aversion - the pricing kernel - and the natural probability distribution. The Recovery Theorem enables us to separate these and...

In frictionless markets having no arbitrage, the asymptotic zero-coupon rate never falls. The same is true of the long forward rate. The long par-coupon rate can rise and fall due to forward rate movements at short maturities. This paper relates the three types of interest rate and formalizes...

In finance, as in pathology, we can learn more from failure than from success. This lecture examines three famous financial failures, Metallgesellschaft’s oil futures business, LTCM and related hedge fund failures, and the current travails of ENRON, and performs a post mortem on each to...

Incentive fees for money managers are frequently accompanied by high water mark provisions which condition the payment of the incentive upon exceeding the maximum achieved share value. In this paper, we show that these high water mark contracts are valuable to money managers, and conversely...

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We model the space of marketed assets as a Riesz space of commodities. In this setting, two alternative characterizations are given of the space of continuous options on a bounded asset, s, with limited liability. The first characterization represents every continuous option on s as the uniform...

In finance, as in pathology, we can learn more from failure than from success. This lecture examines three famous financial failures, Metallgesellschaft’s oil futures business, LTCM and related hedge fund failures, and the current travails of ENRON, and performs a post mortem on each to see...