Related papers: Credit Default Swaps Liquidity modeling: A survey
Prudent management of insurance investment portfolios requires competent asset pricing of fixed-income assets with time-to-event contingent cash flows, such as consumer asset-backed securities (ABS). Current market pricing techniques for…
Modern market management systems continue to evolve due to the intentions to improve system security and reliability. This evolvement has been leading to a transition of market auction models from a deterministic structure with…
The hypothesis that committed revolving credit lines with fixed spreads can provide firms with interest rate insurance is a standard feature of models on these credit facilities' interest rate structure. Nevertheless, this hypothesis has…
This paper considers liquidity as an explanation for the positive association between expected idiosyncratic volatility (IV) and expected stock returns. Liquidity costs may affect the stock returns, through bid-ask bounce and other…
Since the Great Financial Crisis (GFC), the use of stress tests as a tool for assessing the resilience of financial institutions to adverse financial and economic developments has increased significantly. One key part in such exercises is…
We examine how the introduction of concentrated liquidity has changed the liquidity provision market in automated market makers such as Uniswap. To this end, we compare average liquidity provider returns from trading fees before and after…
We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are…
In the third part of this series we introduce consistent relative value measures for CDS-Bond basis trades using the bond-implied CDS term structure derived from fitted survival rate curves. We explain why this measure is better than the…
Model risk measures consequences of choosing a model in a class of possible alternatives. We find analytical and simulated bounds for payoff functions on classes of plausible alternatives of a given discrete model. We measure the impact of…
Discretely sampled variance and volatility swaps trade actively in OTC markets. To price these swaps, the continuously sampled approximation is often used to simplify the computations. The purpose of this paper is to study the conditions…
In this three-part series of papers, we argue that the conventional spread measures are not well defined for credit-risky bonds and introduce a set of credit term structures which correct for the biases associated with the strippable cash…
In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities, and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the…
The role of collateral in derivative pricing has evolved beyond credit risk mitigation, particularly following the global financial crisis, when funding costs and basis spreads became central to valuation practices. This development…
Credit Valuation Adjustment is a balance sheet item which is nowadays subject to active risk management by specialized traders. However, one of the most important risk factors, which is the vector of default intensities of the counterparty,…
There is empirical evidence that recovery rates tend to go down just when the number of defaults goes up in economic downturns. This has to be taken into account in estimation of the capital against credit risk required by Basel II to cover…
This paper considers the problem of measuring the credit risk in portfolios of loans, bonds, and other instruments subject to possible default under multi-factor models. Due to the amount of the portfolio, the heterogeneous effect of…
The valuation of counterparty risk for single name credit derivatives requires the computa- tion of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint…
In this paper we study the evolution of asset price bubbles driven by contagion effects spreading among investors via a random matching mechanism in a discrete-time version of the liquidity based model of [25]. To this scope, we extend the…
We empirically analyze the price and liquidity responses to trade signs, traded volumes and signed traded volumes. Utilizing the singular value decomposition, we explore the interconnections of price responses and of liquidity responses…
It is commonly accepted that Commodities futures and forward prices, in principle, agree under some simplifying assumptions. One of the most relevant assumptions is the absence of counterparty risk. Indeed, due to margining, futures have…