We consider a stochastic volatility model of the mean-reverting type to describe the evolution of a firm’s values instead of the classical approach by Merton with geometric Brownian motions. We develop an analytical expression for the default probability. Our simulation results indicate that...

This study tests whether the behaviour of daily stock returns for the sample of three banks and the composite index in the Malaysian market are nonlinear dependence. Using three nonlinear testing procedures, the study suggests nonlinearity in the return series for all cases. The cause for the...

The study provides evidence of the nature of the volatility transmission for daily currency futures contracts traded at the International Monetary Market (IMM) and the Singapore Exchange (SIMEX). The samples of the German mark currency futures contracts and the Japanese yen currency futures...

We investigate the arbitrage-free property of stock price models where the local martingale component is based on an ergodic diffusion with a specified stationary distribution. These models are particularly useful for insurer asset-liability management as they allow the modelling of long term...

This paper investigates international index return predictability using option-implied information. We document the significant predictive power of the variance risk premium (VRP), Foster-Hart risk (FH), and higher-order moments for horizons ranging from 1 to 250 days. Our results from...

Risk-neutral valuation is used to value a portfolio and decompose it into the components accruing to its stakeholders. The analysis incorporates managers' expected performance and contract renewal issues. A managed portfolio's economic value is shown to differ from its net asset value. A better...

Allowing for correlated squared returns across two consecutive periods, portfolio theory for two periods is developed. This correlation makes it necessary to work with non-Gaussian models. The two period conic portfolio problem is formulated and implemented. This development leads to a mean ask...

Using leverage adjusted index option data, a novel prediction of the anchoring adjusted option pricing model is tested. The anchoring model is based on the idea that the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. The...

We examine both theoretically and empirically whether increased trading activity in index futures and exchange traded funds (ETFs) is associated with higher equity return correlations. Our model predicts that demand shocks to ETFs and futures lead to stronger price comovement for index stocks...

We present a structural method for measuring the upper bound for the illiquidity risk of liabilities issued by a levered firm. The method calculates the upper bound of illiquidity spread of a corporate bond given its duration and the issuing firm's asset risk and leverage ratio. Consistent with...