Classical option pricing theories are usually built on the law of one price, neglecting the impact of market liquidity that may contribute to significant bid-ask spreads. Within the framework of conic finance, we develop a stochastic liquidity model, extending the discrete-time constant...

In this paper we study a fairly general Wiener driven model for the term structure of forward prices. The model, under a fixed martingale measure, Q, consists of two infinite dimensional stochastic differential equations (SDEs). The first system is a standard HJM model for (forward) interest...

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,...

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...

We present a parsimonious multi-asset Heston model. All single-asset sub-models follow the well-known Heston dynamics and their parameters are typically calibrated on implied market volatilities. We focus on the calibration of the correlation structure between the single-asset marginals in the...

A bank's stock price is modeled as a call option on the spread of random assets over random liabilities. The logarithm of assets and liabilities are jointly modeled as driven by four variance gamma processes and this model is estimated by calibrating to quoted equity options seen as compound...

We present a new approach to the pricing of catastrophe event derivatives that does not assume a fully diversifiable event risk. Instead, we assume that the event occurrence and intensity affect the return of the market portfolio of an agent that trades in the event derivatives. Based on this...

We propose a model which allows to price and hedge credit/IR/FX hybrid products whose payoffs do not depend on the change in credit quality of the underlying entity prior to default. It is based on the multi-currency Hull-White model, with Gaussian short rates and log-normal spot FX rates. The...

Empirical evidence shows that, in equity options markets, the slope of the skew is largely independent of the volatility level. Single-factor stochastic volatility models are not flexible enough to account for the stochastic behavior of the skew. On the other hand, multifactor stochastic...