This paper considers the estimation of the volatility of the instantaneous short interest rate from a new perspective. Rather than using discretely compounded market rates as a proxy for the instantaneous short rate of interest, we derive a relationship between observed LIBOR rates and certain...

A market is considered where trading can take place only at discrete time points, the trading frequency cannot grow without bound, and the number of states of nature is finite. The main objectives of the paper are to show that the market can be completed also with highly correlated risky assets,...

This paper considers the measurement of the equity risk premium in financial markets from a new perspective that picks up on a suggestion from Merton (1980) to use implied volatility of options on a market portfolio as a direct 'ex-ante' estimate for market variance, and hence the risk premium....

The main purpose of the paper is to provide a mathematical background for the theory of bond markets similar to that available for stock markets. We suggest two constructions of stochastic integrals with respect to processes taking values in a space of continuous functions. Such integrals are...

We investigate the term structure of zero coupon bonds when interest rates are driven by a general marked point process as well as by a Wiener process. Developing a theory that allows for measure-valued trading portfolios, we study existence and uniqueness of a martingale measure. We also study...

The paper proposes the use of the growth optimal portfolio for pricing and hedging in incomplete markets when there are unobserved factors that have to be filtered. The proposed filtering framework is applicable also in cases when there does not exist an equivalent risk neutral martingale...

We study the applicability of the method of Dynamic Programming (DP) for the solution of a general class of sequential decision problems under uncertainty, that may more commonly be referred to as discrete-time control problems under uncertainty. The uncertainty is due to the fact that the...