We consider second, third, fourth and fifth order stochastic dominance (SSD, TSD, FOSD and FISD, respectively) as well as decreasing absolute risk aversion (DARA) stochastic dominance (DSD). For comparison with DSD we also consider stochastic dominance (ESD) based on CARA utility functions....

The aim of this paper is to present the multi-factor swap market model with non-parametric local volatility functions and stochastic volatility scaling factors. We provide a Dupire-like formula with which calibration can be carried out with the particle algorithm in an efficient manner. We also...

Models of dependence in asset returns with non-Gaussian marginals are investigated on ETF daily return data. The first is a full rank Gaussian copula. The second is a linear mixture of independent Lévy processes. The third correlates Gaussian components in a variance gamma representation. On a...

Variance premium is studied under a discrete-time consumption-based equilibrium model, with two stochastic volatility factors. The formulas for VIX and variance premium term structure are derived. As an empirical application of the model, the predicion power of VIX and variance premium term...

Lions and Musiela (2007) give sufficient conditions to verify when a stochastic exponential of a continuous local martingale is a martingale or a uniformly integrable martingale. Blei and Engelbert (2009) and Mijatovi c and Urusov (2012c) give necessary and sufficient conditions in the case of...

The empirical tests of traditional structural models of credit risk tend to indicate that such models have been unsuccessful in the modeling of credit spreads. To address these negative findings some authors introduce single-factor stochastic volatility specifications and/or jumps.In the yield...

Empirical evidence suggests that fixed income markets exhibit unspanned stochastic volatility (USV), that is, that one cannot fully hedge volatility risk solely using a portfolio of bonds. While Collin-Dufresne and Goldstein (2002) showed that no two-factor Cox-Ingersoll-Ross (CIR) model can...

According to IFRS 9, an Entity shall assess - by performing a quantitative assessment - the relevance of the modification of the time value of money element, i.e. the modification of the interest that can be observed, e.g. in all the instruments whose underlying interest rate tenors are...

This paper builds a real-options model of the firm with stochastic volatility to shed new light on the value premium, financial distress, and credit spread puzzles. Since the equity of growth firms and financially distressed firms have embedded options, such securities hedge against volatility...