This paper investigates the market pricing of subprime mortgage risk on the basis of data forthe ABX.HE family of indices, which have become a key barometer of mortgage marketconditions during the recent financial crisis. After an introduction into ABX index mechanicsand a discussion of...

This paper presents a valuation model for pension benefit guarantees based on discrete timeapproximations of one and two factor models of the term structure, based on the pricing modelsof Ho and Lee (1986), Hull and White (1994a) and (1994b), and Heath, Jarrow, Morton(1991). It is shown that...

We examine whether consumer confidence – as a proxy for individual investor sentiment –affects expected stock returns internationally in 18 industrialized countries. In line with recentevidence for the U.S., we find that sentiment negatively forecasts aggregate stock marketreturns on average...

Variance contracts permit the trading of ’variance risk’, i.e. the risk that the realizedvariance of stock returns changes randomly over time. We discuss why investorsmight want to trade this type of risk, and why they might prefer a variance contractto standard calls and puts for this...

This paper deals with the superhedging of derivatives on incomplete markets, i.e.with portfolio strategies which generate payoffs at least as high as that of a givencontingent claim. The simplest solution to this problem is in many cases a staticsuperhedge, i.e. a buy-and-hold strategy...

The observed prices of out-of-the money put options seem too high given standardderivative pricing models. One possible explanation is a Peso problem: crashes (forwhich the payoff of a put is high) are taken into account for pricing, but are under-represented in the data sets used for empirical...

This paper analyzes the properties of and the differences between derivative pricingmodels that include stochastic volatility or stochastic jumps or both of these riskfactors. The focus is on the pricing of European options. In a first step, we discussthe impact of the parameters in stochastic...

Today´s derivate pricing base on stochastic models developed in the 70´s. These models base on some unrealistic assumptions. The system WARRANT PRO 1 presented here combines the software agent PISA (Partially Intelligent Software Agent) and the neurosimulator FAUN (Fast Approximation with...

The vast majority of approaches to risk management, hedging, or portfolio planningassume that some model is given. However, under model risk, the true data gener-ating process is not known. The focus of this paper is on problems related to thehedging of derivative contracts. We explain the main...

In 1908, Vinzenz Bronzin, a professor of mathematics at the Accademia di Commercio e Nauticain Trieste, published a booklet in German entitled Theorie der Prämiengeschäfte (Theory ofPremium Contracts) which is an old type of option contract. Almost like Bachelierÿs now famousdissertation...