Related papers: Nonhedgeable risk and Credit Risk Pricing
We propose a hedging approach for general contingent claims when liquidity is a concern and trading is subject to transaction cost. Multiple assets with different liquidity levels are available for hedging. Our risk criterion targets a…
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with…
In a stochastic volatility framework, we find a general pricing equation for the class of payoffs depending on the terminal value of a market asset and its final quadratic variation. This allows a pricing tool for European-style claims…
We give a comprehensive review of credit term structure modeling methodologies. The conventional approach to modeling credit term structure is summarized and shown to be equivalent to a particular type of the reduced form credit risk model,…
This paper studies the problem of option replication in general stochastic volatility markets with transaction costs, using a new specification for the volatility adjustment in Leland's algorithm \cite{Leland}. We prove several limit…
The paper reviews origins of the approach to pricing derivatives post-crisis by following three papers that have received wide acceptance from practitioners as the theoretical foundations for it - [Piterbarg 2010], [Burgard and Kjaer 2010]…
We show how inter-asset dependence information derived from market prices of options can lead to improved model-free price bounds for multi-asset derivatives. Depending on the type of the traded option, we either extract correlation…
The usual theory of asset pricing in finance assumes that the financial strategies, i.e. the quantity of risky assets to invest, are real-valued so that they are not integer-valued in general, see the Black and Scholes model for instance.…
In the present work, the optimal portfolio minimizing the investment risk with cost is discussed analytically, where this objective function is constructed in terms of two negative aspects of investment, the risk and cost. We note the…
The dynamic hedging theory only makes sense in the setup of one given model, whereas the practice of dynamic hedging is just the opposite, with models fleeing after the data through daily recalibration. This is quite of a quantitative…
We study an optimal investment/consumption problem in a model capturing market and credit risk dependencies. Stochastic factors drive both the default intensity and the volatility of the stocks in the portfolio. We use the martingale…
We extend a linear version of the liquidity risk model of Cetin et al. (2004) to allow for price impacts. We show that the impact of a market order on prices depends on the size of the transaction and the level of liquidity. We obtain a…
For several decades, the no-arbitrage (NA) condition and the martingale measures have played a major role in the financial asset's pricing theory. We propose a new approach for estimating the super-replication cost based on convex duality…
This work addresses the problem of optimal pricing and hedging of a European option on an illiquid asset Z using two proxies: a liquid asset S and a liquid European option on another liquid asset Y. We assume that the S-hedge is dynamic…
We model investor heterogeneity using different required returns on an investment and evaluate the impact on the valuation of an investment. By assuming no disagreement on the cash flows, we emphasize how risk preferences in particular, but…
We consider the problem of hedging a European interest rate contingent claim with a portfolio of zero-coupon bonds and show that an HJM type Markovian model driven by an infinite number of sources of randomness does not have some of the…
We develop a general theory of risk measures that determines the optimal amount of capital to raise and invest in a portfolio of reference traded securities in order to meet a pre-specified regulatory requirement. The distinguishing feature…
The present article provides a novel theoretical way to evaluate tradeability in markets of ordinary exponential L\'evy type. We consider non-tradeability as a particular type of market illiquidity and investigate its impact on the price of…
We formulate a superhedging theorem in the presence of transaction costs and model uncertainty. Asset prices are assumed continuous and uncertainty is modelled in a parametric setting. Our proof relies on a new topological framework in…
Reference prices have long been studied in applied economics and business research. One of the classic formulations of the reference price is in terms of an iterative function of past prices. There are a number of limitations of such a…