This paper contrasts the valuation of accounting numbers related to two classes of assets - the internally managed, fully-controlled assets versus the "significant influence" investments, that is, investments where the investing firm exercises influence, but not control, over the assets. We find...

This paper reviews methods that can be used to value illiquid investments, with a particular focus on private equity and real estate. We discuss the traditional valuation methods, in particular the net present value (NPV) rule, and show in what circumstances these can lead to suboptimal...

This paper solves the mean-variance hedging problem in Heston's model with a stochastic opportunity set moving systematically with the volatility of stock returns. We allow for correlation between stock returns and their volatility (so-called leverage effect).lt;brgt;lt;brgt;Our contribution is...

The present article provides a novel theoretical way to evaluate tradeability in markets of ordinary exponential Lévy type. We consider non-tradeability as a particular type of market illiquidity and investigate its impact on the price of the assets. Starting from an adaption of the...

This paper discusses risk-minimizing hedging strategies under affine GARCH models driven by Gaussian innovations. First, we derive a closed-form expression for an optimal hedge ratio under this model that is applicable to European derivatives with payoff functions that admit an inverse Laplace...

A framework for measuring and managing the risk of embedded options in non-traded credit is developed. For typical bank clients there is no market information related to their ability to pay (bond or CDS spreads) available. In this case a bank has to rely solely on statistical data to judge the...

This paper presents a tractable dynamic equilibrium model of stock return extrapolation in the presence of stochastic volatility. In the model, consistent with survey evidence, following positive (negative) stock returns, investors expect future returns to be higher (lower) but also less (more)...

Contrary to well-known asset pricing models, volatilities implied by equity index options exceed realized stock market volatility and exhibit a pattern known as the volatility skew. We explain both facts using a model that can also account for the mean and volatility of equity returns. Our model...

We provide an analytic valuation formula for convertible bonds with regime-switching market conditions. We divide the convertible bond into a coupon-bearing bond component and an American-type exchange option component. We develop a new valuation method of the exchange option component by...

In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the contract's maturity the contract is perfectly hedged. We...