Using a novel data set and new proxies for rollover losses and market illiquidity, this paper finds that market illiquidity affects corporate bond spreads beyond a liquidity premium through a “rollover risk channel”. This effect is economically significant during episodes of market...

This paper examines whether rollover risk is priced on corporate bond spreads. Using a novel data set and new proxies for rollover risk and market illiquidity, the empirical analysis developed reveals that market illiquidity affects corporate bond spreads beyond a liquidity premium through a...

The calculation of the capital charge for CVA risk, as required by the Basel Committee on Banking Supervision, is usually rather unstable due to the volatility of CDS spreads. Since credit derivatives on single names are not very liquid, the implied adjustments in capital charges could be...

This paper documents the fact that in options markets, the (percentage) implied volatility bid-ask spread increases at an increasing rate as the option's maturity date approaches. To explain this stylized fact, this paper provides a market microstructure model for the bid-ask spread in options...

This paper discusses a class of methodological issues that frequently arise in the risk management systems such as PFE and CVA engines. Simplified methodology and shortcuts come at a price, sometimes a steep one. To account for model deficiencies and disconnect between the calibration and the...

For most events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state...

Although several types of options on multiple assets are popular in today's financial markets, valuing multi-asset options is still a challenge in finance. The standard framework of multivariate normality is often inappropriate, since it ignores fat tails and other stylized facts of asset...

Using a novel data set and new proxies for rollover risk and market illiquidity, this paper examines whether rollover risk is priced on corporate bonds. The empirical analysis developed in this paper reveals that market illiquidity affects corporate bond spreads beyond a liquidity premium...

This study empirically examines the effect of foreign exchange (FX) market liquidity risk and volatility on the excess returns of currency carry trades. In contrast to the existent literature, we construct an alternative proxy of liquidity risk - violations of no arbitrage bounds in the forward...