We explore the pricing of variance risk by decomposing stocks' total variance into systematicand idiosyncratic return variances. While systematic variance risk exhibits a negative priceof risk, common shocks to the variances of idiosyncratic returns carry a large positive riskpremium. This...

Variance contracts permit the trading of ’variance risk’, i.e. the risk that the realizedvariance of stock returns changes randomly over time. We discuss why investorsmight want to trade this type of risk, and why they might prefer a variance contractto standard calls and puts for this...

In the 40’s and early 50’ two decision theories were proposed and have since dominated the sceneof the fascinating field of decision-making. In 1944 – when von Neumann and Morgenstern showedthat if preferences are consistent with a set of axioms then it is possible to represent these...

Here we develop an approach for efficient pricing discrete-time American and Bermudan options which employs the fact that such options are equivalent to theEuropean ones with a consumption, combined with analysis of the market model over a small number of steps ahead. This approach allows...

This study explores the information content of HML and SMB by linking the Fama-French factors toshocks in the state variables which predict future investment opportunities. It shows that the HMLfactor contains information about shocks to default spread. Moreover, the Fama-French modelexplains...

In this paper we analyze the source and magnitude of marketing gains from selling structured debtsecurities at yields that reflect only their credit ratings, or specifically at yields on equivalently ratedcorporate bonds. We distinguish between credit ratings that are based on probabilities of...

The payoff of many credit derivatives depends on the level of credit spreads. Inparticular, credit derivatives with a leverage component are subject to gap risk, a riskassociated with the occurrence of jumps in the underlying credit default swaps. Inthe framework of first passage time models, we...

We investigate the problem of modeling defaults of dependent credits.In the framework of the class of structural default models we studythreshold models where for each credit the underling ability-to-payprocess is a transformation of a Wiener processes. We propose a modelfor dependent defaults...

In this article, we describe the various sorts of American Parisian options and propose valuation formulae. Although there is no closed-form valuation for these products in the non perpetual case, we have been able to reformulate their price as a function of the exercise frontier. In the...

We model the dynamics of asset prices and associated derivatives by considerationof the dynamics of the conditional probability density process for the value of an assetat some specied time in the future. In the case where the asset is driven by Brownianmotion, an associated \master equation"...