A unified approach to pricing and risk management of equity and credit risk

We propose a unified framework for equity and credit risk modeling, where the default time is a doubly stochastic random time with intensity driven by an underlying affine factor process. This approach allows for flexible interactions between the defaultable stock price, its stochastic volatility and the default intensity, while maintaining full analytical tractability. We characterize all risk-neutral measures which preserve the affine structure of the model and show that risk management as well as pricing problems can be dealt with efficiently by shifting to suitable survival measures. As an example, we consider a jump- to-default extension of the Heston stochastic volatility model

Volatility forecasting

Volatility has been one of the most active and successful areas of research in time series econometrics and economic forecasting in recent decades. This chapter provides a selective survey of the most important theoretical developments and empirical insights to emerge from this burgeoning literature, with a distinct focus on forecasting applications. Volatility is inherently latent, and Section 1 begins with a brief intuitive account of various key volatility concepts. Section 2 then discusses a series of different economic situations in which volatility plays a crucial role, ranging from the use of volatility forecasts in portfolio allocation to density forecasting in risk management. Sections 3, 4 and 5 present a variety of alternative procedures for univariate volatility modeling and forecasting based on the GARCH, stochastic volatility and realized volatility paradigms, respectively. Section 6 extends the discussion to the multivariate problem of forecasting conditional covariances and correlations, and Section 7 discusses volatility forecast evaluation methods in both univariate and multivariate cases. Section 8 concludes briefly. JEL Klassifikation: C10, C53, G1

Essays in finance: wrong-way risk, jumps and stochastic volatility

The main focus of this thesis is about understanding the behavior of asset prices and asset returns regarding tail events, in the light of time-varying stochastic volatility and with respect to market efficiency. Thus, the contribution of this thesis is twofold: The first part deals with topics related to risk management whereas the second part deals with topics related to asset pricing. With new regulations like the credit valuation adjustment (CVA) the assessment of wrong-way risk (WWR) is of utter importance. Wrong-way risk means a negative dependence of the exposure to a counterparty on the counterparty’s credit quality. Thus, the first paper studies the co-movement of counterparty credit risk and returns of different asset classes (equity, currency, commodity and interest rate). Extreme movements in asset prices are often characterized by jumps and drying up liquidity. The second paper aims to improve the understanding of the (unconditioned) link between jumps and liquidity in chapter 3. In the third paper the dynamics of asset prices are time-changed to study the influence of stochastic volatility on asset prices in a parameter-free approach. Applying the time-changing technique avoids to use a specific process for volatility to study the impact of stochastic volatility on asset prices. Firstly, formulas for the expected return of assets and the risk-free rate are derived. It is noteworthy that the risk-free rate becomes stochastic under the time-change. Based on the theoretical findings, stochastic consumption volatility is explored considering prevailing puzzles. Secondly, a factor is constructed mimicking the effect of stochastic volatility of the market portfolio on asset prices extending the five-factor model of Fama and French (2015). Considering anomalies targeted by existing factor models, the constructed factor especially helps to describe cross-sectional excess returns of portfolios formed on size and momentum. This finding indicates that the momentum effect is partly explicable by stochastic volatility. The fourth paper deals with ambiguous volatility as an explanation for time-variation in the market’s risk premium. Finally, the fifth paper is about the currently discussed topic of market efficiency regarding cryptocurrencies. Using three delay measures as given in Hou and Moskowitz (2005) it is shown that news, affecting the cryptocurrency market, are much faster incorporated in prices during the last three years indicating that the cryptocurrency market becomes more efficient over time. Furthermore, the price delay is mainly driven by liquidity which is studied in the cross-section of 75 cryptocurrencies

Continuous-time VIX dynamics: on the role of stochastic volatility of volatility

This paper examines the ability of several different continuous-time one- and two-factor jump-diffusion models to capture the dynamics of the VIX volatility index for the period between 1990 and 2010. For the one-factor models we study affine and non-affine specifications, possibly augmented with jumps. Jumps in one-factor models occur frequently, but add surprisingly little to the ability of the models to explain the dynamic of the VIX. We present a stochastic volatility of volatility model that can explain all the time-series characteristics of the VIX studied in this paper. Extensions demonstrate that sudden jumps in the VIX are more likely during tranquil periods and the days when jumps occur coincide with major political or economic events. Using several statistical and operational metrics we find that non-affine one-factor models outperform their affine counterparts and modeling the log of the index is superior to modeling the VIX level directly

The History of the Quantitative Methods in Finance Conference Series. 1992-2007

This report charts the history of the Quantitative Methods in Finance (QMF) conference from its beginning in 1993 to the 15th conference in 2007. It lists alphabetically the 1037 speakers who presented at all 15 conferences and the titles of their papers.