We introduce a new approach to model the market smile for inflation-linked derivatives by defining the Quadratic Gaussian Year-on-Year inflation model -- the QGY model. We directly define the model in terms of a year-on-year ratio of the inflation index on a discrete tenor structure, which,...

This paper introduces a structural credit default model that is based on a hyper-exponential jump diffusion process for the value of the firm. For credit default swap prices and other quantities of interest, explicit expressions for the corresponding Laplace transforms are derived. As an...

The payoff of many credit derivatives depends on the level of credit spreads. In particular, the payoff of credit derivatives with a leverage component is sensitive to jumps in the underlying credit spreads. In the framework of first passage time models we address these issues by specifying a...

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

This paper finds necessary and sufficient conditions of Nth-order stochastic dominance (SD) for risk aversion and develops linear tests for Nth-order SD. We introduce a linear FDSD (fourth-order SD and decreasing absolute risk aversion SD) test for standard risk aversion. A positive research...

We propose linear programming tests for spanning and intersection based on stochasticdominance rather than mean-variance analysis. An empirical application investigates thediversification benefits to US investors from emerging equity markets

The usual derivation of the Fokker-Planck partial differential eqn. (pde) assumes the Chapman-Kolmogorov equation for a Markov process [1,2]. Starting instead with an Ito stochastic differential equation (sde), we argue that finitely many states of memory are allowed in Kolmogorov’s two pdes,...

The payoff of many credit derivatives depends on the level of credit spreads. In particular, the payoff of credit derivatives with a leverage component is sensitive to jumps in the underlying credit spreads. In the framework of first passage time models we extend the model introduced in...

Asset price processes are completely described by information processes and investors' preferences. In this paper we derive the relationship between the process of investors ́expectations of the terminal stock price and asset prices in a general continous time pricing kernel framework. To...