In a recent paper, Longstaff and Schwartz (2001) suggest a method to American option valuation based on simulation. The method is termed the Least Squares Monte Carlo (LSM) method, and although it has become widely used, not much is known about the properties of the estimator. This paper...

Financial time series have two features which, in many cases, prevent the use of conventional estimators of volatilities and correlations: leptokurtotic distributions and contamination of data with outliers. Other techniques are required to achieve stable and accurate results. In this paper, we...

We introduce a new calibration methodology that allows perfect fitting of the displaced diffusion LIBOR market model to caplets and co-terminal swaptions, whilst avoiding global optimizations. The approach works by regarding a forward rate as a difference of swap rates and then bootstrapping...

We apply the results of Malliavin-Thalmaier-Watanabe for strong and weak Taylor expansions of solutions of perturbed stochastic differential equations (SDEs). In particular, we determine weight expressions for the Taylor coefficients of the expansion. The results are applied to LIBOR market...

We propose a novel time-changed Lévy LIBOR (London Interbank Offered Rate) market model for jointly pricing of caps and swaptions. The time changes are split into three components. The first component allows matching the volatility term structure, the second generates stochastic volatility, and...

The size and power of the Wald, Edgeworth expansion corrected likelihood-ratio statistic (LRE), and bootstrap tests for Granger causality in integrated-cointegrated VAR systems are considered. By using Monte Carlo methods and simple graphical techniques, the p-value plots, and power-size plots,...

In this paper we examine several approaches to detecting changes in the adjustment coefficients in cointegrated VARs. We adopt recursive and rolling techniques as mis-specification tests for the detection of non-constancy and the estimation of the breakpoints. We find that inspection of the...