The basic model of financial economics is the Samuelson model of geometric Brownian motion because of the celebrated Black-Scholes formula for pricing the call option. The asset's volatility is a linear function of the asset value and the model garantees positive asset prices. In this paper it...

This paper presents an integrated risk management methodology for measuring and managing the economics, risks, and financial resources/constraints related to deposits and loans in a commercial bank. Within a comprehensive and integrated framework, we develop valuation and risk models for all...

Climate change and its two-way relation with economic activity is stochastic and so is therefore the optimal tax internalizing the climate externality. But with capital irreversibility a stochastic time path for carbon prices slows down the reallocation from brown to green sectors because...

Characteristic-based factors embed large unpriced components that depress Sharpe ratios and deviate from the mean-variance efficient (MVE) frontier. We discuss how to decompose tradable factor returns into priced (MVE) and unpriced components, showing that hedging unpriced variation realigns...

This paper investigates the effect of derivatives on the relationship between the foreign exchange rate and the stock market. A theoretical model is used to extend the understanding of that relationship. Also, the model is tested with an empirical analysis using the GMM strategy for the Mexican...

In literature, many researchers focus on information contained in stochastic volatility dynamics, such as CBOE VIX index and its risk premium. However, there are relatively fewer studies on stochastic skewness dynamics. Simple linear regression indicates that stochastic volatility and stochastic...

Basel III introduces new capital charges for CVA. These charges, and the Basel 2.5 default capital charge can be mitigated by CDS. Therefore, to price in the capital relief that CDS contracts provide, we introduce a CDS pricing model with three legs: premium; default protection; and capital...