Real options with priced regime-switching risk

We develop a model of regime-switching risk premia as well as regimedependent factor risk premia to price real options. The model incorporates the observation that the underlying risky income streams of real options are subject to discrete shifts over time as well as random changes. The presence of discrete shifts is due to systematic and unsystematic risk associated with changes in business cycles or in economic policy regimes or events such as takeovers, major changes in business plans. We analyze the impact of regime switching behavior on the valuation of projects and investment opportunities. We find that accounting for Markov switching risk results in a delay in the expected timing of the investment while the regime-specific factor risk premia make the possibility of a regime shift more pronounced

The effects of different parameterizations of Markov-switching in a CIR model of bond pricing

We examine several discrete-time versions of the Cox, Ingersoll and Ross (CIR) model for the term structure, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that careful consideration of which parameters of the short-term interest rate equation that are allowed to be switched is crucial. Ignoring this issue may result in a parameterization that produces no improvement (in terms of bond pricing) relative to the standard CIR model, even when there are clear breaks in the data

Demographic Shock Transmission from Large to Small Countries: An Overlapping Generations CGE Analysis

Cataloged from PDF version of article.International commodity and capital flows provide channels for the transmission of the effects of demographic changes in large countries onto small open economies by altering the prices and interest rates facing them. This implies that even small countries with relatively young populations are potentially vulnerable to the effects of population aging in large industrial economies, To address this issue, which has largely been overlooked in previous literature. this paper considers the case of European Union and Turkey and shows, within an overlapping generations general equilibrium framework, that spillovers; of the demographic shock in Europe would intensify the changes that Turkey would experience during its own demographic transition. (C) 2001 Society for Policy Modeling. Published by Elsevier Science Inc

Estimating volatility clustering and variance risk premium effects on bank default indicators

Default risk increases substantially during financial stress times due to mainly the two reasons: volatility clustering and investors’ desire to protect themselves from such increases in volatility. It manifested in the aftermath of the Global Financial Crisis of 2008–2009 with unpleasant outcomes of many bankruptcies and severe financial distress. To account for these features, we adapted the structural credit risk approach to include both time-varying (return) volatility and risk premium about the return volatility itself. By applying the model to US banks, we obtain better bank default indicators in comparison to the benchmark models. © 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.University of York; Durham University; Korea Development Institute, KDIWe thank the late Peter Christoffersen, Lynne Evans, Jens Hagendorff, Thomas Mazzoni, Aydin Ozkan, Martin Sola and seminar participants at the Durham University, the York University, England, the Universidad Torcuato Di Tella, the Korea Development Institute, the Korea Capital Market Institute, the Bank of Korea and the Korean Institute of Finance for useful comments on earlier versions of the paper. Any remaining errors are our responsibility

Real options with priced regime-switching risk

We develop a model of regime-switching risk premia as well as regime-dependent factor risk premia to price real options. The model incorporates the observation that the underlying risky income streams of real options are subject to discrete shifts over time as well as random changes. The presence of discrete shifts is due to systematic and unsystematic risk associated with changes in business cycles or in economic policy regimes or events such as takeovers, major changes in business plans. We analyze the impact of regime-switching behavior on the valuation of projects and investment opportunities. We find that accounting for Markov switching risk results in a delay in the expected timing of the investment while the regime-specific factor risk premia make the possibility of a regime shift more pronounced