In the basic Markowitz and Merton models, a stock's weight in efficient portfolios goes up if its expected rate of return goes up. Put differently, there are no financial Giffen goods. By an example from mortgage choice we illustrate that for more complicated portfolio problems Giffen effects do...

In this paper the performance of locally risk-minimizing hedge strategies for European options in stochastic volatility models is studied from an experimental as well as from an empirical perspective. These hedge strategies are derived for a large class of diffusion-type stochastic volatility...

We address some key issues related to risk and capital allocation in insurance companies. We argue that the Froot-Stein approach to risk is relevant to a number of important problems in the daily management of an insurance portfolio and that - taken to its consequence - this approach will lead...

We extend the short rate model of Vasicek (1977) to include jumps in the local mean. Conditions ensuring existence of a unique equivalent martingale measure are given, implying that the model is arbitrage-free and complete. We develop efficient numerical methods for computation of zero coupon...

The paper surveys eight different derivations that all lead to the celebrated Black and Scholes (1973) formula. Describing these derivations leads us through many of the techniques applied in continuous-time asset pricing. The paper can therefore also be seen as an introduction to...

In Denmark many homeowners/borrowers manage their debt very actively. The individual borrower faces a number of non-trivial decisions. He has to decide whether to use adjustable rate loans where the debt is refinanced on a yearly basis or the more traditional fixed rate 20- or 30-year annuities...

In this paper the empirical performance of alternative models for barrier option valuation and risk management is studied. Five commonly used models are compared: the Black-Scholes model, the constant elasticity of variance model, the Heston stochastic volatility model, the Merton jump-diffusion...

The Danish mortgage market is large and sophisticated. However, most Danish mortgage banks advise private home-owners based on simple, if sensible, rules of thumb. In recent years a number of papers (from Nielsen and Poulsen in J Econ Dyn Control 28:1267–1289, <CitationRef CitationID="CR8">2004</CitationRef> over Rasmussen and Zenios in...</citationref>

The problem of dynamic portfolio choice with transaction costs is often addressed by constructing a Markov Chain approximation of the continuous time price processes. Using this approximation, we present an efficient numerical method to determine optimal portfolio strategies under time- and...