With increasing appreciation of the fact that stock return variance is stochastic and variance risk is heavily priced, the industry has created a series of variance derivative products to span variance risk. The variance swap contract is the most actively traded of these products. It pays at...

The challenge of international term structure models is to simultaneously account for the properties of interest rate term structures and foreign exchange rates within an arbitrage-free framework. We extend the quadratic term structure models proposed in Leippold and Wu (2002) to multiple...

This paper studies the information content of the S&P 500 and VIX markets on the volatility of the S&P 500 returns. We estimate a flexible affine model based on a joint time series of underlying indexes and option prices on both markets. An extensive model specification analysis reveals that...

We introduce a new class of flexible and tractable matrix a±ne jump-diffusions (AJD) to modelmultivariate sources of financial risk. We first provide a complete transform analysis of this model class,which opens a range of new potential applications to, e.g., multivariate option pricing with...

We examine the quantification of operational risk for banks. We adopt a financial-economics approach and interpret operational risk management as a means of optimizing the profitability of an institution along its value chain. We start by defining operational risk and then propose a...

We propose a simple and implementable model of credit contagion where we in-clude macro- and microstructural dependencies among the debtors within a creditportfolio. We show that, even for diversified portfolios, moderate microstructuraldependencies have already a significant impact on the tails...

The validation of probability calibration is an inherently difficult task. We develop a testing procedure for credit-scoring models. The models comprise two components to check whether the ex-ante probabilities support the ex-post frequencies. The first component tests the level of the...

This paper concerns the pricing of American options with stochastic stopping time constraints expressed in terms of the states of a Markov process. Following the ideas of Menaldi, Robin, and Sun (1996) we transform the constrained into an unconstrained optimal stopping problem. The...

Institutional but also private investors have often limited flexibility in timing their investment decision. Therefore, they look for investments that would ideally be independent of the timing decision. We introduce a new class of derivative products whose payoff is linked to the trend of the...

We propose a new continuous time framework to study asset prices under learning and ambiguity aversion. In a partial information Lucas economy with time additive power utility, a discount for ambiguity arises if and only if the elasticity of intertemporal substitution (EIS) is above one. Then,...