This paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agents coefficient of relative risk aversion to vary with the underlying economys growth rate. Existence of equilibrium is proved and its asymptotic properties...

We investigate the influence of various variables on credit default swap transaction data. Credit derivatives are arguably a superior proxy to credit risk than bond spreads. The variables considered include fixed-income as well as equity markets data. We thus provide an international analysis of...

In this paper we study the hedging of derivatives in illiquid markets. More specifically we consider a model where the implementation of a hedging strategy affects the price of the underlying security. Following earlier work we characterize perfect hedging strategies by a nonlinear version of...

Market option prices in last 20 years confirmed deviations from the Black and Scholes (BS) models assumptions, especially on the BS implied volatility. Implied binomialtrees (IBT) models capture the variations of the implied volatility known as \volatility smile". They provide a discrete...

Dimension reduction techniques for functional data analysis model and approximate smooth random functions by lower dimensional objects. In many applications the focus of interest lies not only in dimension reduction but also in the dynamic behaviour of the lower dimensional objects. The most...

We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. By empirically discriminatingbetween competing sources of this return predictability...

Stock picking is the field of financial analysis that is of particular interest for many professional investors and researchers. In this study stock picking is implemented via binary classification trees. Optimal tree size is believed to be the crucial factor in forecasting performance of the...

Empirical studies have shown that a large number of financial asset returns exhibit fat tails and are often characterized by volatility clustering and asymmetry. Also revealed as a stylized fact is Long memory or long range dependence in market volatility, with significant impact on pricing and...

The behaviour of market agents has always been extensively covered in the literature. Risk averse behaviour, described by von Neumann and Morgenstern (1944) via a concave utility function, is considered to be a cornerstone of classical economics. Agents prefer a fixed profit over uncertain...

In this paper we propose a Libor model with a high-dimensional speciallystructured system of driving CIR volatility processes. A stablecalibration procedure which takes into account a given local correlationstructure is presented. The calibration algorithm is FFT based, so fastand easy to implement.