Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical...

We derive discrete markov chain approximations for continuous state equilibrium term structure models. The states and transition probabilities of the markov chain are chosen effciently according to a quadrature rule as in Tauchen and Hussey (1991). Quadrature provides a simple yet method which...

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...

A lattice-based method is advanced for evaluating functionals of sequences of path-wise values of a lattice's state variable. For the Asian call valuations in this paper, the lattices discretely replicate the stochastic future states of conventionally prescribed, lognormally distributed, equity...

Convertible bonds are hybrid securities whose pricing relies on a set of complex inter-dependencies due to the sensitivity to interest rate risk, underlying (equity) risk, FX risk, and credit risk, and due to the convertible bond’s early exercise American feature. We present a two factor model...

This note derives new expressions for the moments of the average of values taken by Wiener paths at an arbitrary number, N, of discrete times. The expressions are closed summations, which entail only the N-th powers of, and the successive differences between, the moments of the lognormal finite...

The twin brothers Libor Market and Gaussian HJM models are investigated. A simple exotic option, floor on composition, is studied. The same explicit approach is used for both models. Using an approximation the LLM price is obtained without Monte Carlo simulation. The results of the approximation...

Binomial lattices are sequences of discrete distributions commonly used to approximate the future value states of a financial claim, such as a stock price, when the instantaneous rate of return is assumed to be governed by a Wiener diffusion process. In that case, both pedagogical and...

We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. In the model, synchronization effects, which generate large fluctuations in returns, can arise purely from communication and imitation among traders. The key element in...