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

Understanding Corporate Bond Spreads Using Credit Default Swaps

Corporate bond spreads worldwide have widened markedly since the beginning of the credit crisis in 2007. This article examines default and liquidity risk--the main components of the corporate bond spread--for Canadian firms that issue bonds in the U.S. market, focusing in particular on their evolution during the credit crisis. They find that, during this period, the liquidity component increased more for speculative-grade bonds than it did for investment-grade bonds, consistent with a "flight-to-quality" phenomenon. An important implication of their results for policy-makers seeking to address problems in credit markets is that the liquidity risk in corporate spreads for investment and speculative bonds behaves differently than the default risk, especially during crisis episodes.

On the Separation of Estimation and Control in Risk-Sensitive Investment Problems under Incomplete Observation

A typical approach to tackle stochastic control problems with partial observation is to separate the control and estimation tasks. However, it is well known that this separation generally fails to deliver an actual optimal solution for risk-sensitive control problems. This paper investigates the separability of a general class of risk-sensitive investment management problems when a finite-dimensional filter exists. We show that the corresponding separated problem, where instead of the unobserved quantities, one considers their conditional filter distribution given the observations, is strictly equivalent to the original control problem. We widen the applicability of the so-called Modified Zakai Equation (MZE) for the study of the separated problem and prove that the MZE simplifies to a PDE in our approach. Furthermore, we derive criteria for separability. We do not solve the separated control problem but note that the existence of a finite-dimensional filter leads to a finite state space for the separated problem. Hence, the difficulty is equivalent to solving a complete observation risk-sensitive problem. Our results have implications for existing risk-sensitive investment management models with partial observations in that they establish their separability. Their implications for future research on new applications is mainly to provide conditions to ensure separability

Single- and dual-carrier microwave noise abatement in the deep space network

The NASA/JPL Deep Space Network (DSN) microwave ground antenna systems are presented which simultaneously uplink very high power S-band signals while receiving very low level S- and X-band downlinks. Tertiary mechanisms associated with elements give rise to self-interference in the forms of broadband noise burst and coherent intermodulation products. A long-term program to reduce or eliminate both forms of interference is described in detail. Two DSN antennas were subjected to extensive interference testing and practical cleanup program; the initial performance, modification details, and final performance achieved at several planned stages are discussed. Test equipment and field procedures found useful in locating interference sources are discussed. Practices deemed necessary for interference-free operations in the DSN are described. Much of the specific information given is expected to be easily generalized for application in a variety of similar installations. Recommendations for future investigations and individual element design are given