This paper introduces a time-inhomogeneous parameterization of the forward LIBOR volatilities and analyzes its implications for the valuation of Bermudan swaptions. The model approximates the actual term structure of volatilities with a curve from a given set defined by the parametric...

We explore the determinants of yield differentials between long-term sovereigen bonds in Europa area. There is a common trend in yield differentials, which is correlated with the measure of tghe international risk factor. In contrast, liquidity differentials display sizeable hetrogeneity and no...

In this paper, we examine formally Keynes' idea that higher order beliefs can drivea wedge between an asset price and its fundamental value based on expected future payoffs. In a dynamic noisy rational expectations model, higher order expectations add an additional term, which we call the higher...

This paper considers the problem of investment of capital in risky assets in adynamic capital market in continuous time. The problem addressed is the control of risk, and in particular the risk associated with errors in the estimation of returns on assets. The framework for investment risk is a...

Contingent Credit Lines (CCL) play an important role in the functioning of shortterm capital markets, yet their pricing and hedging have received little interest inthe theoretical finance literature. Risk management issues that arise in maintainingportfolios of CCL are almost completely...

Under the assumption of normally distributed returns, we analyzewhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)is consistent with the Capital Asset Pricing Model. We find that in everyfinancial market equilibrium the Security Market Line Theorem holds.However, under the...