We examine the dynamics of extreme values of overnight borrowing rates in an inter-bank money market before a financial crisis during which overnight borrowing rates rocketed up to (simple annual) 4000 percent. It is shown that the generalized Pareto distribution fits well to the extreme values...

Standard models in economics stress the role of intelligent agents who maximize utility. However, there may be situations where, for some purposes, constraints imposed by market institutions dominate intelligent agent behavior. We use data from the London Stock Exchange to test a simple model in...

The threat of deflation combined with the zero lower bound on interest rates has recently been intensely debated in economics. The consequences of a deflationary recession are manifold and severe as the Japanese example demonstrates. In this paper, we focus on the potential connections between...

The optimal bond-stock mix is examined in light of an apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors which has been pointed out by Canner et al. (1997). It is shown that the apparent inconsistency is largely explicable in terms of the...

Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase...

This paper shows that the delta hedging performance of the Black-Scholes model can be substantially improved with a rather simple adjustment of the Black-Scholes delta. By utilizing the volatility smile, the Black-Scholes delta can be adjusted to account for the inverse movements between...

This paper investigates nonlinear pricing kernels in which the risk factor is endogenously determined and preferences restrict the definition of the pricing kernel. These kernels potentially generate the empirical performance of nonlinear and multi-factor models, while maintaining empirical...

This paper investigates the implications of mixtures of affine, quadratic, and nonlinear models for the term structure of volatility. The dynamics of the term structure of interest rates appear to exhibit pronounced time-varying or stochastic volatility. Ahn, Dittmar, and Gallant (2000) provide...

This paper theoretically explores the characteristics underpinning quadratic term structure models, QTSMs, which designate the yield on a bond as a quadratic function of underlying state variables. We develop a comprehensive QTSM, which is maximally flexible and thus encompasses the features of...

Since the 1980s a number of methods and models were developed to evaluate effects of regulatory interventions in financial markets. Most of them are based on a simple cost-benefit analysis with system stability, system efficiency and stakeholder protection as target function variables. Critical...