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The paper tests the validity of the critique of the fiscal theory of the price level. A stochastic general equilibrium model with continuous time is constructed. An active fiscal policy and a passive monetary policy have been set. Monetary…
In traditional financial markets, yield curves are widely available for countries (and, by extension, currencies), financial institutions, and large corporates. These curves are used to calibrate stochastic interest rate models, discount…
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,…
We present a new approach for the pricing of interest rate derivatives which allows a direct computation of option premiums without deriving a (Black-Scholes type) partial differential equation and without explicitly solving the stochastic…
In this paper we propose a semi-Markov modulated model of interest rates. We assume that the switching process is a semi-Markov process with finite state space E and the modulated process is a diffusive process. We derive recursive…
Supervised dimension reduction (SDR) has been a topic of growing interest in data science, as it enables the reduction of high-dimensional covariates while preserving the functional relation with certain response variables of interest.…
Consistent Recalibration models (CRC) have been introduced to capture in necessary generality the dynamic features of term structures of derivatives' prices. Several approaches have been suggested to tackle this problem, but all of them,…
We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state…
The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterisation of such breaks has been a major econometric task ever since.…
The transition probability of a Cox-Ingersoll-Ross process can be represented by a non-central chi-square density. First we prove a new representation for the central chi-square density based on sums of powers of generalized Gaussian random…
We present a new model for credit index derivatives, in the top-down approach. This model has a dynamic loss intensity process with volatility and jumps and can include counterparty risk. It handles CDS, CDO tranches, Nth-to-default and…
With a focus on linear models with smooth functional covariates, we propose a penalization framework (SACR) based on the nonzero centered ridge, where the center of the penalty is optimally reweighted in a supervised way, starting from the…
We develop a risk-neutral spot and equity option market simulator for a single underlying, under which the joint market process is a martingale. We leverage an efficient low-dimensional representation of the market which preserves no static…
When interest rate dynamics are described by the Libor Market Model as in BGM97, we show how some essential risk-management results can be obtained from the dual of the calibration program. In particular, if the objetive is to maximize…
We consider the inverse reinforcement learning (IRL) problem, where an unknown reward function of some Markov decision process is estimated based on observed expert demonstrations. In most existing approaches, IRL is formulated and solved…
This paper develops a new model of business cycles. The model is economical in that it is solved with an aggregate demand-aggregate supply diagram, and the effects of shocks and policies are obtained by comparative statics. The model builds…
We explore credit risk pricing by modeling equity as a call option and debt as the difference between the firm's asset value and a put option, following the structural framework of the Merton model. Our approach proceeds in two stages:…
We consider the SIR model and study the first time the number of infected individuals begins to decrease and the first time this population is below a given threshold. We interpret these times as functions of the initial susceptible and…
Precision matrix estimation is a cornerstone concept in statistics, economics, and finance. Despite advances in recent years, estimation methods that are simultaneously (i) dense, (ii) consistent, and (iii) model-free are lacking. While…
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…