Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the...

This paper introduces a novel kind of interest-rate model offering simple analytical pricing formulas for swaps, futures, swaptions, caps and floors. The model is based on an original use of regime-switching features that makes it consistent with the non-linear behavior of interest rates. In...

An anchoring adjusted currency option pricing formula is developed in which the risk of the underlying currency is used as a starting point which gets adjusted upwards to arrive at the currency call risk. Anchoring bias implies that such adjustments are insufficient. The new formula converges to...

Here, we show that agents who are ex ante rational, if allowed to interact locally, may generate clustering of volatility. Hence, there is no need to reject the notion of rationality in agent based models.

This paper develops an arbitrage-free affine term structure model of potentially defaultable sovereign bonds to model a cross-section of eight euro area government bond yield curves since January 1999. The existence of a common monetary policy under European Monetary Union determines the short...

In this paper, we present a general discrete-time affine framework aimed at jointly modeling yield curves associated with different debtors. The underlying fixed-income securities may differ in terms of credit quality and/or in terms of liquidity. The risk factors follow conditionally Gaussian...

We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows...

In order to derive closed-form expressions of the prices of credit derivatives, standard credit-risk models typically price the default intensities, but not the default events themselves. The default indicator is replaced by an appropriate prediction and the prediction error, that is the...