High-dimensional pricing problems frequently arise with financial options (examples include basket options, outperformance options, interest-rate and foreign currency options) and real options. American versions of these options, i.e., where the owner has the right to exercise early, are...

An important recent development in the pricing of interest rate derivatives is the emergence of models that incorporate lognormal volatilities for forward Libor or forward swap rates while keeping interest rates stable. These market models have three attractive features: they preclude arbitrage...

The Capital Assistance Program (CAP) was created by the U.S. government in February 2009 to provide backup capital to large financial institutions unable to raise sufficient capital from private investors. Under the terms of the CAP, a participating bank receives contingent capital by issuing...

Contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues. Specific proposals vary in their choice of conversion trigger and conversion mechanism. We...

This paper analyzes portfolio risk and volatility in the presence of constraints on portfolio rebalancing frequency. This investigation is motivated by the incremental risk charge (IRC) introduced by the Basel Committee on Banking Supervision. In contrast to the standard market risk measure...

Portfolio selection is vulnerable to the error-amplifying effects of combining optimization with statistical estimation and model error. For dynamic portfolio control, sources of model error include the evolution of market factors and the influence of these factors on asset returns. We develop...

We analyze the error between a discretely rebalanced portfolio and its continuously rebalanced counterpart in the presence of jumps or mean-reversion in the underlying asset dynamics. With discrete rebalancing, the portfolio's composition is restored to a set of fixed target weights at discrete...

We address the problem of defining and calculating forward volatility implied by option prices when the underlying asset is driven by a stochastic volatility process.We examine alternative notions of forward implied volatility and the information required to extract these measures from the...

Financial risk measurement relies on models of prices and other market variables, but models inevitably rely on imperfect assumptions and estimates, creating model risk. Moreover, optimization decisions, such as portfolio selection, amplify the effect of model error. In this work, we develop a...