This paper suggests a method for determining rigorous upper bounds on approximation errors of numerical solutions to infinite horizon dynamic programming models. Bounds are provided for approximations of the value function and the policy function as well as the derivatives of the value function....

Kinks and jumps in the payoff function of option contracts prevent an effective implementation of higher-order numerical approximation methods. Moreover, the derivatives (the greeks) are not easily determined around such singularities, even with standard lower-order methods. This paper suggests...

We conduct an analysis of legal pre-emption rights in which a beneficiary has a right but not an obligation to acquire a specific good at a certain price. We analyse how such an option influences seller and other prospective buyers. Furthermore, we address the question of the efficiency loss if...

We consider a random utility extension of the fundamental Lucas (1978) equilibrium asset pricing model. The resulting structural model leads naturally to a likelihood function. We estimate the model using U.S. asset market data from 1871 to 2000, using both dividends and earnings as state...

We investigate the possibility of an arbitrage free model for the term structure of interest rates where the yield curve only changes through a parallel shift. We consider HJM type forward rate models driven by a multidimensionalWiener process as well as by a general marked point process. Within...

We consider the optimal asset allocation choice of an investor who can invest in <p> cash (a money market bank account), nominal bonds, and stocks (the stock index). <p> The investor faces an incomplete market setting and is not able to perfectly hedge <p> long run real interest rate risk using the...</p></p></p>

It is a delicate matter to trade spot products and financial derivatives in energy markets. Op-posite to bond and stock markets, the underlying assets are real products and a significant part of the demand for them represents a real need for the products, which can only be substituted away with...

In this paper an investigation of the pricing of callable annuities with interest-only (I-O) optionality is conducted. First the I-O optionality feature of callable annuities is introduced. Next an algorithm for pricing callable annuities with I-O optionality using the finite difference...

We develop a new rating of mutual funds: the atpRating. The atpRating assigns crowns to each individual mutual fund based upon the costs an investor pays when investing in the fund in relation to what it would cost to invest in the fund’s peers. Within each investment category, the rating...