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From Default Probabilities To Credit Spreads: Credit Risk Models Do Explain Market Prices
Denzler, Stefan; Dacorogna, Michel M.; Mueller, Ulrich A.; … - EconWPA - 2005
Credit risk models like Moody’s KMV are now well established in the market and give bond managers reliable estimates of default probabilities for individual firms. Until now it has been hard to relate those probabilities to the actual credit spreads observed on the market for corporate bonds....
Persistent link: https://www.econbiz.de/10005077017
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Term Structure of Interest Rates, Yield Curve Residuals, and the Consistent Pricing of Interest Rates and Interest Rate Derivatives
Heidari, Massoud; Wu, Liuren - EconWPA - 2002
imperfections. In contrast, option pricing in practice often takes the market observed yield curve as given and focuses exclusively … dynamics of the residuals influence option prices even if the current residual level is zero. We also find that the residuals …
Persistent link: https://www.econbiz.de/10005134665
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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
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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
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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 … notions as option indistinguishability and equivalence, domination, payoff process, trigger option, and semipositive option … established in general. The american option is then defined, and its pricing formula (for all times) is presented. Applying a …
Persistent link: https://www.econbiz.de/10005134894
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Information, Alternative Markets, and Security Price Processes: A Survey of Literature
Bhuyan, Rafiqul - EconWPA - 2002
In this paper, we survey a wide range of theoretical and empirical papers on derivatives markets to address the information contents of trading activities in derivatives markets. Both theoretical and empirical research on options market and futures market indicate that the presence of...
Persistent link: https://www.econbiz.de/10005413117
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A Dynamic Equilibrium Model of Real Exchange Rates with General Transaction Costs
Goswami, Gautam; Shrikhande, Milind; Wu, Liuren - EconWPA - 2002
We study the behavior of real exchange rates in a two­country dynamic equilibrium model. In this model, consumers can only consume domestic goods but can invest costlessly in capital stocks of both countries. Nevertheless, transporting goods between the two countries is costly and, hence, the...
Persistent link: https://www.econbiz.de/10005076998
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Long-Run Regressions: Theory and Application to US Asset Markets
Hansen, Charlotte S.; Tuypens, Bjorn E. - EconWPA - 2004
The question of long-run predictability in the aggregate US stock market is still unsettled. This is due to the lack of a robust method to judge the statistical significance of long-run regressions under the maintained hypothesis. By developing a spectral theory of long-run regressions with both...
Persistent link: https://www.econbiz.de/10005413151
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Implied Calibration of Stochastic Volatility Jump Diffusion Models
Galluccio, Stefano; Cam, Yann Le - EconWPA - 2005
In the context of arbitrage-free modelling of financial derivatives, we introduce a novel calibration technique for models in the affine- quadratic class for the purpose of contingent claims pricing and risk- management. In particular, we aim at calibrating a stochastic volatility jump diffusion...
Persistent link: https://www.econbiz.de/10005076950
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An empirical analysis of structural models of corporate debt pricing
Teixeira, Joao C. A. - EconWPA - 2005
This paper tests empirically the performance of three structural models of corporate bond pricing, namely Merton (1974), Leland (1994) and Fan and Sundaresan (2000). While the first two models overestimate bond prices, the Fan and Sundaresan model reveals an extremely good performance. When...
Persistent link: https://www.econbiz.de/10005076981