Related papers: Repo convexity
We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the…
This paper derives a novel representation of the exponential discounting model that allows one to assess departures from the model via a measure of efficiency. The approach uses a revealed preference methodology that does not make any…
The quotient of random variables with normal distributions is examined and proven to have have power law decay, with density $f\left( x\right) \simeq f_{0}x^{-2}$, with the coefficient depending on the means and variances of the numerator…
We describe the pricing and hedging of financial options without the use of probability using rough paths. By encoding the volatility of assets in an enhancement of the price trajectory, we give a pathwise presentation of the replication of…
Consider a financial market in which an agent trades with utility-induced restrictions on wealth. By introducing a general convex-analytic framework which includes the class of umbrella wedges in certain Riesz spaces and faces of convex…
Recent spectrum auctions in the United Kingdom, and some proposals for future auctions of spectrum in the United States, are based on preliminary price discovery rounds, followed by calculation of final prices for the winning buyers. For…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
We consider the problem of option hedging in a market with proportional transaction costs. Since super-replication is very costly in such markets, we replace perfect hedging with an expected loss constraint. Asymptotic analysis for small…
This is a variation of the two-sided market model of [10]: Demand D is concave in \tilde{D} in (16) of [10] So, in (5) of [10] and after Theorem 2, take the parametric case 0 < a <1. Thus, demand D is both decreasing and concave in price p,…
We revisit the problem of pricing options with historical volatility estimators. We do this in the context of a generalized GARCH model with multiple time scales and asymmetry. It is argued that the reason for the observed volatility risk…
Chance constraints describe a set of given random inequalities depending on the decision vector satisfied with a large enough probability. They are widely used in decision making under uncertain data in many engineering problems. This paper…
Interest rate market models, like the LIBOR market model, have the advantage that the basic model quantities are directly observable in financial markets. Inflation market models extend this approach to inflation markets, where zero-coupon…
The problem of quantile hedging for basket derivatives in the Black-Scholes model with correlation is considered. Explicit formulas for the probability maximizing function and the cost reduction function are derived. Applicability of the…
Securities borrowing and lending are critical to proper functioning of securities markets. To alleviate securities owners' exposure to borrower default risk, overcollateralization and indemnification are provided by the borrower and the…
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for…
Motivated by problems in contact mechanics, we propose a duality approach for computing approximations and associated a posteriori error bounds to solutions of variational inequalities of the first kind. The proposed approach improves upon…
The volatility characterizes the amplitude of price return fluctuations. It is a central magnitude in finance closely related to the risk of holding a certain asset. Despite its popularity on trading floors, the volatility is unobservable…
Using microscopic price models based on Hawkes processes, it has been shown that under some no-arbitrage condition, the high degree of endogeneity of markets together with the phenomenon of metaorders splitting generate rough Heston-type…
The left tail of the implied volatility skew, coming from quotes on out-of-the-money put options, can be thought to reflect the market's assessment of the risk of a huge drop in stock prices. We analyze how this market information can be…
This paper studies convex duality in optimal investment and contingent claim valuation in markets where traded assets may be subject to nonlinear trading costs and portfolio constraints. Under fairly general conditions, the dual expressions…