This paper explains the losses (or errors) associated with pricing an American option in a multi-factor setting when using the true model but a suboptimal exercise strategy as a barrier option (a calibrated misspecified model, e.g., Black-Scholes). Pricing American options in a multi-factor...

Least-squares methods enable us to price Bermudan-style options by Monte Carlo simulation. They are based on estimating the option continuation value by least squares. We show that the Bermudan price is maximized when this continuation value is estimated near the exercise boundary, which is...

En este documento de trabajo estimamos, para la inflación, las funciones de densidad neutrales al riesgo (RND) en la zona del euro diariamente desde 2009. Para ello, utilizamos swaps de inflación y opciones calls/puts, e introducimos un enfoque simple y parsimonioso para estimar conjuntamente...

We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the...

In a default corridor [0,B] that the stock price can never enter, a deep out-of-the-money American put replicates a pure credit contract (Carr and Wu, 2011). Assuming discrete (one-period-ahead predictable) cash flows, we show an endogenous credit-risk model generates, along with the default...

When firms roll over bonds of different maturity, their debt-maturity structure can feature both shorter and longer maturity in bad times. We link these debt-maturity patterns to the firms' fundamentals, assuming earnings are deterministically declining but the same firm is subject to a growth...

We introduce a new distance-to-default (DD) measure based on observable covariates, allowing us to bypass any model-based inference (e.g., Merton, 1974), that works well. It is based on the following result: The default event defined by endogenous credit-risk models, a sufficiently low asset...

Consider a non-spanned security CT in an incomplete market. We study the risk/return tradeoffs generated if this security is sold for an arbitrage-free price bC0 and then hedged. We consider recursive “one-period optimal” self-financing hedging strategies, a simple but tractable criterion....

We study a firm's debt-maturity policy. The firm, keeping book leverage constant, rolls over expiring debt by newly issuing short- or long-term bonds, which pay different coupons. In equilibrium, we always find two balanced issuance regimes, which are associated with one type of debt: In bad...

We study a rich dynamic-leverage model that includes (debt-issuance covenants, a debt floor/ceiling, and specially) a fixed cost. When firms face financial but also operational leverage---the fixed cost, the firm's financial policies strongly interact---bringing forward the default time but...