When pricing the convexity effect in irregular interest rate derivatives such as, e.g., Libor-in-arrears or CMS, one often ignores the volatility smile, which is quite pronounced in the interest rate options market. This note solves the problem of convexity by replicating the irregular interest...

We present a simple and numerically efficient approach to the calibration of the Heston stochastic volatility model with piecewise constant parameters. Extending the original ansatz for the characteristic function, proposed in the seminal paper by Heston, to the case of piecewise constant...

The influence of past stock price movements on volatilities and correlations is essential for understanding diversification and contagion in financial markets. We develop a model that makes the influence of past returns on volatilities and correlations explicit. Employing information about...

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,...