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An Empirical Comparison of Default Swap Pricing Models

Houweling, Patrick; Vorst, Ton - EconWPA - 2001

In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for...

Persistent link: https://www.econbiz.de/10005413092

Numeraire-invariant option pricing and american, bermudan, trigger stream rollover (v1.6)

Jamshidian, Farshid - EconWPA - 2004

Part I proposes a numeraire-invariant option pricing framework. It defines an option, its price process, and such … established in general. The american option is then defined, and its pricing formula (for all times) is presented. Applying a … notions as option indistinguishability and equivalence, domination, payoff process, trigger option, and semipositive option …

Persistent link: https://www.econbiz.de/10005134894

Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes

Raviv, Alon - EconWPA - 2004

Several studies have recommended reliance on subordinated debt as a tool for monitoring banks by investors and for enhancing depositors’ protection. However, subordinated debenture increases the level of leverage and thus the probability of costly failure. We propose a novel financial...

Persistent link: https://www.econbiz.de/10005413031

Do Brokers Misallocate Customer Trades? Evidence From Futures Markets

Park, Hun Y.; Sarkar, Asani; Wu, Lifan - EconWPA - 1998

In the context of futures markets, we study whether brokers allocate more favorable trades to their own accounts, and less favorable trades to their customers. We find that, within a thirty minute trading bracket, brokers on average buy at a lower price and sell at a higher price for their own...

Persistent link: https://www.econbiz.de/10005413100

The Random Yield Curve and Interest Rate Options

Chu, Meifang - EconWPA - 1997

trajectory produces a random surface described by a Brownian sheet. Generalising Black-Scholes' PDE methodology, we derive the … Kolmogorov field equation which describes the time-evolution of the contingent claims and obtain explicit pricing formulae for a …

Persistent link: https://www.econbiz.de/10005413112

Taking Positive Interest Rates Seriously

Pan, Enlin; Wu, Liuren - EconWPA - 2004

We present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. One dynamic factor controls the level...

Persistent link: https://www.econbiz.de/10005413120

When to Put All Your Eggs in One Basket.....When Diversification Increases Portfolio Risk!

Los, Cornelis A. - EconWPA - 2004

Portfolio diversification may not always lower the portfolio risk, but may actually increase it. It depends on the long memory and distributional stability characteristics of the underlying rates of return. This disturbing result is based on the theoretical Fama- Samuelson proposition of...

Persistent link: https://www.econbiz.de/10005413142

Variance Risk Premia

Carr, Peter; Wu, Liuren - EconWPA - 2004

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular...

Persistent link: https://www.econbiz.de/10005413197

Estimating the Volatility Structure of an Arbitrage-Free Interest Rate Model Via the Futures Markets

Bhar, Ram; Chiarella, Carl; To, Thuy-Duong - EconWPA - 2004

This paper considers a class of Heath-Jarrow-Morton (1992) term structure models, characterized by time deterministic volatilities for the instantaneous forward rate. The bias that arises from using observed futures yields as a proxy for the unobserved instantaneous forward rate is analyzed. The...

Persistent link: https://www.econbiz.de/10005413218

Static Hedging of Standard Options

Carr, Peter; Wu, Liuren - EconWPA - 2004

of random size. Working in a single factor Markovian setting, we derive a new spanning relation between a given option … performance of our static hedge deteriorates moderately as we increase the gap between the maturity of the target call option and …

Persistent link: https://www.econbiz.de/10005413226