We explore the cost of implicit leverage associated with an S&P 500 Index futures contract and derive an implied financing rate (the Futures-Implied Rate or FIR), based on a simple model of stock and futures, without any explicit arbitrage or other relationship to market interest rates. We...

Factor analysis of security returns aims to decompose a return covariance matrix into systematic and specific risk components. To date, most commercially successful factor analysis has been based on fundamental models, although there is a large academic literature on statistical models. While...

Financial markets produce massive amounts of complex data from multiple agents, and analyzing these data is important for building an understanding of markets, their formation, and the influence of different trading strategies. We introduce a signal processing approach to deal with these...

We provide a simple and easy to use goodness-of-fit test for the misspecification of the volatility function in diffusion models. The test uses power variations constructed as functionals of discretely observed diffusion processes. We introduce an orthogonality condition which stabilizes the...

Risk management applications often require estimating the tail distribution of total default losses on a portfolio of credit-sensitive positions such as loans and corporate bonds. This paper develops, analyzes and tests an importance sampling estimator of large-loss probabilities. The estimator...

Stochastic point process models of event timing are common in many areas, including finance, insurance and reliability. Monte Carlo simula- tion is often used to perform computations for these models. The standard sampling algorithm, which is based on a time-change argument, is widely applicable...

This paper formulates and analyzes a discretization scheme for a jump-diffusion process with general state-dependent drift, volatility, jump intensity, and jump size. The jump times of the process are constructed as time-changed Poisson arrival times, and the Euler method is used to generate the...