Related papers: A constraint-based notion of illiquidity

This paper proposes a paradigm shift in the valuation of long term annuities, away from classical no-arbitrage valuation towards valuation under the real world probability measure. Furthermore, we apply this valuation method to two examples…

We consider the pricing of derivatives in a setting with trading restrictions, but without any probabilistic assumptions on the underlying model, in discrete and continuous time. In particular, we assume that European put or call options…

The paper analyzes the mathematics of the relationship between the default risk and yield-to-maturity of a coupon bond. It is shown that the yield-to-maturity is driven not only by the default probability and recovery rate of the bond but…

This paper addresses a critical inconsistency in models of the term structure of interest rates (TSIR), where zero-coupon bonds are priced under risk-neutral measures distinct from those used in equity markets. We propose a unified TSIR…

In a market of deterministic cash flows, given as an additive, symmetric relation of exchangeability on the finite signed Borel measures on the non-negative real time axis, it is shown that the only arbitrage-free price functional that…

In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for…

Models to price long term loans in the securities lending business are developed. These longer horizon deals can be viewed as contracts with optionality embedded in them. This insight leads to the usage of established methods from…

This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are…

Financial contagion has been widely recognized as a fundamental risk to the financial system. Particularly potent is price-mediated contagion, wherein forced liquidations by firms depress asset prices and propagate financial stress,…

CDS (credit default swap) contracts that were initiated some time ago frequently have spreads and/or maturities that are not available on the current market of CDSs, and are thus illiquid. This article introduces an incomplete-market…

The regulator is interested in proposing a capital adequacy test by specifying an acceptance set for firms' capital positions at the end of a given period. This set needs to be surplus-invariant, i.e., not to depend on the surplus of firms'…

We present a general framework for measuring the liquidity risk. The theoretical framework defines a class of risk measures that incorporate the liquidity risk into the standard risk measures. We consider a one-period risk measurement…

We propose a unified structural credit risk model incorporating both insolvency and illiquidity risks, in order to investigate how a firm's default probability depends on the liquidity risk associated with its financing structure. We assume…

We explore a model of the interaction between banks and outside investors in which the ability of banks to issue inside money (short-term liabilities believed to be convertible into currency at par) can generate a collapse in asset prices…

We consider an optimal consumption/investment problem to maximize expected utility from consumption. In this market model, the investor is allowed to choose a portfolio which consists of one bond, one liquid risky asset (no transaction…

We adress the maximization problem of expected utility from terminal wealth. The special feature of this paper is that we consider a financial market where the price process of risky assets can have a default time. Using dynamic…

We present a limits-to-arbitrage model to study the impact of securitization, leverage and credit risk protection on the cyclicity of bank credit. In a stable bank credit situation, no cycles of credit expansion or contraction appear.…

Experimental results on market behavior establish a lower stability and efficiency of markets for durable re-tradable assets compared to markets for non-durable, or perishable, goods. In this chapter, we revisit this known but…

In this paper we develop numerical pricing methodologies for European style Exchange Options written on a pair of correlated assets, in a market with finite liquidity. In contrast to the standard multi-asset Black-Scholes framework, trading…

We study super-replication of contingent claims in an illiquid market with model uncertainty. Illiquidity is captured by nonlinear transaction costs in discrete time and model uncertainty arises as our only assumption on stock price returns…