This paper derives a unified framework for portfolio optimization, derivative pricing, financial modeling and risk measurement. It is based on the natural assumption that investors prefer more or less, in the sense that the higher drift is preferred. Each such investor is shown to hold an...

This paper uses an alternative, parsimonious stochastic volatility model to describe the dynamics of a currency market for the pricing and hedging of derivatives. Time transformed squared Bessel processes are the basic driving factors of the minimal market model. The time transformation is...

The paper describes a continuous time share market model with a minimal number of factors. These factors are powers of Bessel processes. The asset prices are formed by ratios of the factors and have consequently leptokurtic return distributions. In this framework stochastic volatility with...

The paper proposes a financial market model that generates stochastic volatilities and stochastic interest rates using a minimal number of factors that characterise the dynamics of different denominations of a benchmark portfolio. It models asset prices essentially as functionals of square root...

Starting from the European option valuation framework of Chauveau and Gatfaoui (2002), we establish the link with stochastic volatility models. And, we propose both a new vision and a general framework for valuing European options in the light of systematic and idiosyncratic risks affecting...

The phenomenon of the frequency basis (i.e. a spread applied to one leg of a swap to exchange one oating interest rate for another of a different tenor in the same currency) contradicts textbook no-arbitrage conditions and has become an important feature of interest rate markets since the...

This paper considers a new class of Monte Carlo methods that are combined with PDE expansions for the pricing and hedging of derivative securities for multidimensional diffusion models. The proposed method combines the advantages of both PDE and Monte Carlo methods and can be directly applied to...

We analyse the effect of differing uncertainty assumptions on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. A partial equilibrium model, valid for a large class of diffusion processes, is developed and then applied to the specific cases of a...

This paper investigates the effect of operating leverage, and the subsequent abandonment option available to managers, on the relationship between corporate earnings and optimal financial leverage, thereby providing an alternative (rational) explanation for the observed negative relationship...

This paper investigates the information content of futures option prices when the futures price is regulated while the futures option price itself is not. The New York Board of Trade provides the empirical setting for this type of dichotomy in regulation. Most commodity derivatives markets...