A very influential model in the determination of capital requirements for credit exposures is Vacisek's model. This model underpins the Basel framework for credit exposures of financial institutions. Vacisek's model uses information on asset correlation and the unconditional mean of the...

Implied volatility skew and smile are ubiquitous phenomena in the financial derivative market especially after the Black Monday 1987 crash. Various stochastic volatility models have been proposed to capture volatility skew and smile in derivative pricing and hedging. Almost 30 years after the...

The main goal of this paper is to better understand the behavior of credit spreads in the past and the potential risk of unexpected future credit spread changes. One important consideration to note regarding credit spreads is the fact that bond spreads contain a liquidity premium, which...

The Polynomial Chaos Expansion (PCE) technique recovers a finite second order random variable exploiting suitable linear combinations of orthogonal polynomials which are functions of a given stochastic quantity $\xi$, hence acting as a kind of random basis. The PCE methodology has been developed...

This paper describes an American Monte Carlo approach for obtaining fast and accurate exercise policies for pricing of callable LIBOR Exotics (e.g., Bermudan swaptions) in the LIBOR market model using the Stochastic Grid Bundling Method (SGBM). SGBM is a bundling and regression based Monte Carlo...

Financial institutions and regulators usually measure credit risk only over a one-year time horizon. Hence, current statistical models can generate closed-form expressions for the one-year loss distribution. Losses over longer horizons are considered using scenario analysis or Monte Carlo...

Options with embedded early exercise features are of fundamental importance in finance. A simple example is the hedge of a multi-callable bond. This instrument is hedged using a Bermudan swaption.Bermudan swaptions also play a key role when pricing callable constant maturity swaps or flexible...

This paper demonstrates how to value American interest rate options under the jump extended constant-elasticity-of-variance (CEV) models. We consider both exponential jumps (see Duffie, Pan, and Singleton (2000)) and lognormal jumps (see Johannes (2004)) in the short rate process. We show how to...

We start by presenting a reduced-form multiple default type of model and derive abstract results on the influence of a state variable X on credit spreads, when both the intensity and the loss quota distribution are driven by X. The aim is to apply the results to a concrete real life situation,...

We build on Fackler and King (1990) and propose a general calibration model for implied risk neutral densities. Our model allows for the joint calibration of a set of densities at different maturities and dates. The model is a Bayesian dynamic beta Markov random field which allows for possible...