Related papers: The Jarrow & Turnbull setting revisited
The quanto option is a cross-currency derivative in which the pay-off is given in foreign currency and then converted to domestic currency, through a constant exchange rate, used for the conversion and determined at contract inception.…
Weighted reciprocity between two agents can be defined as the minimum of sending and receiving value in their bilateral relationship. In financial networks, such reciprocity characterizes the importance of individual banks as both liquidity…
The foreign exchange market has taken an important role in the global financial market. While foreign exchange trading brings high-yield opportunities to investors, it also brings certain risks. Since the establishment of the foreign…
In this paper, we analyze the diversity of term structure functions (e.g., yield curves, swap curves, credit curves) constructed in a process which complies with some admissible properties: arbitrage-freeness, ability to fit market quotes…
In the aftermath of the global financial crisis, much attention has been paid to investigating the appropriateness of the current practice of default risk modeling in banking, finance and insurance industries. A recent empirical study by…
The authors examine the concept of probability of default for asset-backed loans. In contrast to unsecured loans it is shown that probability of default can be defined as either a measure of the likelihood of the borrower failing to make…
A heat kernel approach is proposed for the development of a general, flexible, and mathematically tractable asset pricing framework in finite time. The pricing kernel, giving rise to the price system in an incomplete market, is modelled by…
In this paper, we implement a stochastic deflator with five economic and financial risk factors: interest rates, market price of risk, stock prices, default intensities, and convenience yields. We examine the deflator with different…
In this paper, we introduce a numeraire-free and original probability based framework for financial markets. We reformulate or characterize fair markets, the optional decomposition theorem, superhedging, attainable claims and complete…
Foundation models - already transformative in domains such as natural language processing - are now starting to emerge for time-series tasks in finance. While these pretrained architectures promise versatile predictive signals, little is…
This paper investigates the pricing of European-style lookback options when the price dynamics of the underlying risky asset are assumed to follow a Markov-modulated Geo-metric Brownian motion; that is, the appreciation rate and the…
We develop a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication approach to a generality that has not yet been studied previously and reaching valuation when…
In this paper incomplete-information models are developed for the pricing of securities in a stochastic interest rate setting. In particular we consider credit-risky assets that may include random recovery upon default. The market…
A standard quantitative method to access credit risk employs a factor model based on joint multivariate normal distribution properties. By extending a one-factor Gaussian copula model to make a more accurate default forecast, this paper…
Interpretability analysis methods for artificial intelligence models, such as LIME and SHAP, are widely used, though they primarily serve as post-model for analyzing model outputs. While it is commonly believed that the transparency and…
Intuitively, the default risk of a single borrower is higher when her or his assets and debt are denominated in different currencies. Additionally, the default dependence of borrowers with assets and debt in different currencies should be…
The notion of a credit spread curve is fundamental in fixed income investing, but in practice it is not `given' and needs to be constructed from bond prices either for a particular issuer, or for a sector rating-by-rating. Rather than…
A very brief history of relative valuation in neoclassical finance since 1973 is presented, with attention to core currency issues for emerging economies. Price formation is considered in the context of hierarchical causality, with…
This paper presents a new interacting particle system and uses it as a spin model for financial market microstructure. The asymptotic analysis of this stochastic process exhibits a lower bound to the contemporaneous measurement of price and…
In our model, private actors with interbank cash flows similar to, but nore general than (Carmona, Fouque, Sun, 2013) borrow from the outside economy at a certain interest rate, controlled by the central bank, and invest in risky assets.…