This paper proposes a two-factor hazard rate model, in closed form, to price risky debt. The likelihood of default is captured by the firm's non-interest sensitive assets and default-free interest rates. The distinguishing features of the model are threefold. First, the impact of capital...

Comparisons are made of the CBOE skew index with those derived from parametric skews of bilateral gamma models and from the differentiation of option implied characteristic exponents. Discrepancies may be attributed to strike discretization in evaluating prices of powered returns. The remedy...

In an affine term structure framework with stochastic volatility, we derive the characteristic function of the log swap rate. Having the characteristic function, we employ Fast Fourier Techniques (FFT) to price swaptions. Using ten years of swap rates and swaption premiums, model parameters are...

Stochastic processes arising in the description of the risk-neutral evolution of equity prices are reviewed. Starting with Brownian motion, I review extensions to Lévy and Sato processes. These processes have independent increments; the former are homogeneous in time, whereas the latter are...