We model the dynamics of asset prices and associated derivatives by consideration of the dynamics of the conditional probability density process for the value of an asset at some specified time in the future. In the case where the asset is driven by Brownian motion, an associated "master...

This paper provides a brief overview of the stochastic modeling of variance swap curves. Focus is on affine factor models. We propose a novel drift parametrization which assures that the components of the state process can be matched with any pre-speci fied points on the variance swap curve....

Empirical evidence suggests that fixed income markets exhibit unspanned stochastic volatility (USV), that is, that one cannot fully hedge volatility risk solely using a portfolio of bonds. While Collin-Dufresne and Goldstein (2002) showed that no two-factor Cox-Ingersoll-Ross (CIR) model can...

Polynomial processes have the property that expectations of polynomial functions (of degree n, say) of the future state of the process conditional on the current state are given by polynomials (of degree n) of the current state. Here we explore the application of polynomial processes in the...

Many factors inhibiting and facilitating economic growth have been suggested. Will international income data tell which matter when all are treated symmetrically a priori? We find that growth determinants emerging from agnostic Bayesian model averaging and classical model selection procedures...

In this paper, we make use of state space models toinvestigate the presence of stochastic trends in economic time series. Amodel is specified where such a trend can enter either in the autoregressiverepresentation or in a separate state equation. Tests based on the formerare analogous to...

In this paper we consider two cases of pairs trading strategies: a conditional statistical arbitrage method and an implicit statistical arbitrage method. We use a simulation-based Bayesian procedure for predicting stable ratios, defined in a cointegration model, of pairs of stock prices. We show...