7,427 research outputs found
How Should We Regulate Derivatives Markets?
Provides an overview of derivatives markets and the role they played in the 2008 financial crisis. Evaluates policy proposals to reduce systemic risk and increase market efficiency, including centralized clearing and improved price transparency
Existence of independent random matching
This paper shows the existence of independent random matching of a large
(continuum) population in both static and dynamic systems, which has been
popular in the economics and genetics literatures. We construct a joint
agent-probability space, and randomized mutation, partial matching and
match-induced type-changing functions that satisfy appropriate independence
conditions. The proofs are achieved via nonstandard analysis. The proof for the
dynamic setting relies on a new Fubini-type theorem for an infinite product of
Loeb transition probabilities, based on which a continuum of independent Markov
chains is derived from random mutation, random partial matching and random type
changing.Comment: Published at http://dx.doi.org/10.1214/105051606000000673 in the
Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute
of Mathematical Statistics (http://www.imstat.org
Option pricing in affine generalized Merton models
In this article we consider affine generalizations of the Merton jump
diffusion model [Merton, J. Fin. Econ., 1976] and the respective pricing of
European options. On the one hand, the Brownian motion part in the Merton model
may be generalized to a log-Heston model, and on the other hand, the jump part
may be generalized to an affine process with possibly state dependent jumps.
While the characteristic function of the log-Heston component is known in
closed form, the characteristic function of the second component may be unknown
explicitly. For the latter component we propose an approximation procedure
based on the method introduced in [Belomestny et al., J. Func. Anal., 2009]. We
conclude with some numerical examples
Limit Theorems for Individual-Based Models in Economics and Finance
There is a widespread recent interest in using ideas from statistical physics
to model certain types of problems in economics and finance. The main idea is
to derive the macroscopic behavior of the market from the random local
interactions between agents. Our purpose is to present a general framework that
encompasses a broad range of models, by proving a law of large numbers and a
central limit theorem for certain interacting particle systems with very
general state spaces. To do this we draw inspiration from some work done in
mathematical ecology and mathematical physics. The first result is proved for
the system seen as a measure-valued process, while to prove the second one we
will need to introduce a chain of embeddings of some abstract Banach and
Hilbert spaces of test functions and prove that the fluctuations converge to
the solution of a certain generalized Gaussian stochastic differential equation
taking values in the dual of one of these spaces.Comment: To appear in Stochastic Processes and their Application
Information Percolation with Equilibrium Search Dynamics
We solve for the equilibrium dynamics of information sharing in a large
population. Each agent is endowed with signals regarding the likely outcome of
a random variable of common concern. Individuals choose the effort with which
they search for others from whom they can gather additional information. When
two agents meet, they share their information. The information gathered is
further shared at subsequent meetings, and so on. Equilibria exist in which
agents search maximally until they acquire sufficient information precision,
and then minimally. A tax whose proceeds are used to subsidize the costs of
search improves information sharing and can in some cases increase welfare. On
the other hand, endowing agents with public signals reduces information sharing
and can in some cases decrease welfare
Multi-Period Corporate Failure Prediction with Stochastic Covariates
We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on over 28,000 firm-quarters of data spanning 1971 to 2001, of significant dependence of the level and shape of the term structure of conditional future bankruptcy probabilities on a firm's distance to default (a volatility-adjusted measure of leverage) and on U.S. personal income growth, among other covariates.Variation in a firm's distance to default has a greater relative effect on the term structure of future failure hazard rates than does a comparatively sized change in U.S. personal income growth, especially at dates more than a year into the future.
Capital Mobility and Asset Pricing
We present a model for the equilibrium movement of capital between asset markets that are distinguished only by the levels of capital invested in each. Investment in that market with the greatest amount of capital earns the lowest risk premium. Intermediaries optimally trade off the costs of intermediation against fees that depend on the gain they can offer to investors for moving their capital to the market with the higher mean return. Those fees also depend on the bargaining power of the investor, in light of potential alternative intermediaries. In equilibrium, the speeds of adjustment of mean returns and of capital between the two markets are increasing in the degree to which capital is imbalanced between the two markets.capital mobility, market frictions, financial intermediation, law of one price
Evaluation of Tranche in Securitization and Long-range Ising Model
This econophysics work studies the long-range Ising model of a finite system
with spins and the exchange interaction and the external
field as a modely for homogeneous credit portfolio of assets with default
probability and default correlation . Based on the discussion
on the phase diagram, we develop a perturbative calculation method for
the model and obtain explicit expressions for and the
normalization factor in terms of the model parameters and . The
effect of the default correlation on the probabilities
for defaults and on the cumulative distribution
function are discussed. The latter means the average loss rate
of the``tranche'' (layered structure) of the securities (e.g. CDO), which are
synthesized from a pool of many assets. We show that the expected loss rate of
the subordinated tranche decreases with and that of the senior
tranche increases linearly, which are important in their pricing and ratings.Comment: 21 pages, 9 figure
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
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