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,...

We propose a general framework for efficient pricing via a Partial Differential Equation (PDE) approach of cross-currency interest rate derivatives under the Hull-White model. In particular, we focus on pricing long-dated foreign exchange (FX) interest rate hybrids, namely Power Reverse Dual...

A numerical technique based on the embedding technique proposed in [21, 33] for dynamic mean-variance (MV) optimization problems may yield spurious points, i.e. points which are not on the efficient frontier. In [27], it is shown that spurious points can be eliminated by examining the left upper...

After Lehman default (credit crisis 2007), practitioners considered the default risk as a major risk. The regulators pushed the industry to use collateral in order to reduce the risk. In this new world, we want to see how this new considerations affect the theory related to the Partial...

We solve a dynamic general equilibrium model with generalized disappointment aversion preferences and continuous state endowment dynamics. We apply the framework to the term structure of interest rates and show that the model generates an upward sloping term structure of nominal interest rates,...

We generalize the idea of semi-self-financing strategies, originally discussed in Ehrbar, Journal of Economic Theory (1990), and later formalized in em Cui et al, Mathematical Finance 22 (2012), for the pre-commitment mean-variance (MV) optimal portfolio allocation problem. The proposed...

One-way coupling often occurs in multi-dimensional stochastic models in finance. In this paper, we develop a highly efficient Monte Carlo (MC) method for pricing European options under a N-dimensional one-way coupled model, where N is arbitrary. The method is based on a combination of (i) the...

The pricing of the European cash-settled swaptions is analysed. The standard market formula results are compared to results obtained from different models. Significant discrepancies are observed, justifying the title

Derivative pricing is about cash flow discounting at the riskfree rate. This teaching has lost its meaning post the financial crisis, due to the addition of extra value adjustments (XVA), which also made derivatives pricing and valuation a very difficult task for investors. This article recovers...

Using a stochastic discount factor approach, we derive the exact solution for arbitrage-free bond yields for the case that the short-term interest rate follows a threshold process with the intercept switching endogenously. The yield functions, mapping the one-month rate into n-period yields,...