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...

We develop a new approach to approximating asset prices in the context of continuous-time models. For any pricing model that lacks a closed-form solution, we provide a closed-form approximate solution, which relies on the expansion of the intractable model around an “auxiliary” one. We...

Exotic interest rate derivatives are hard to value. Care must be taken to make sure that sources of volatility that impact the contingent claim are properly modeled, and that appropriate relationships are maintained between the underlying rates involved.In this presentation, we outline the...

Key structures for insurance risk transfer to capital markets are insurance-linked securities issued by industrial corporations and insurance-reinsurance companies. This paper develops an arbitrage approach to valuing these structured products for non-catastrophic events in a framework of...

We present the first step in a program to develop a comprehensive, unified equilibrium theory of asset and liability pricing. We give a mathematical framework for pricing insurance products in a multiperiod financial market. This framework reflects classical economic principles (like utility...

Tutorial on valuation of mortgage backed securities and collateralized mortgage obligations, including: - Structure of the mortgage market - Prepayment modeling - OAS analysis - Interest rate modeling - Numerical methods - Parallelization

This paper derives a closed-form formula for the hedging error of optimal and continuously rebalanced hedging strategies in a model with leptokurtic IID returns and, in contrast to the standard Black-Scholes result, shows that continuous hedging is far from riskless even in the absence of...