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We address the issue of variable selection in the regression model with very high ambient dimension, i.e., when the number of covariates is very large. The main focus is on the situation where the number of relevant covariates, called…
Based on criteria of mathematical simplicity and consistency with empirical market data, a model with volatility driven by fractional noise has been constructed which provides a fairly accurate mathematical parametrization of the data.…
We discovered that past changes in the market correlation structure are significantly related with future changes in the market volatility. By using correlation-based information filtering networks we device a new tool for forecasting the…
Affine term structure models have gained significant attention in the finance literature, mainly due to their analytical tractability and statistical flexibility. The aim of this article is to present both theoretical foundations as well as…
We investigate the stability of the Epstein-Zin problem with respect to small distortions in the dynamics of the traded securities. We work in incomplete market model settings, where our parametrization of perturbations allows for joint…
We study a new measure of codependency in the second moment of a continuous-time multivariate asset price process, which we name the realized copula of volatility. The statistic is based on local volatility estimates constructed from…
For a general class of dynamic and stochastic structural models, we show that (i) non-linearity in economic dynamics is a necessary and sufficient condition for time-varying parameters (TVPs) in the reduced-form VARMA process followed by…
This paper presents a novel methodology for evaluating the boundedness, stability, and instability of some vector nonlinear systems with multiple time-varying delays and variable coefficients. The proposed technique develops two scalar…
Overwhelming majority of econometric models applied on a long term basis in the financial forex market do not work sufficiently well. The reason is that transaction costs and arbitrage opportunity are not included, as this does not simulate…
We study a continuous-time financial market with continuous price processes under model uncertainty, modeled via a family $\mathcal{P}$ of possible physical measures. A robust notion ${\rm NA}_{1}(\mathcal{P})$ of no-arbitrage of the first…
We introduce a statistical test for simultaneous jumps in the price of a financial asset and its volatility process. The proposed test is based on high-frequency data and is robust to market microstructure frictions. For the test, local…
Sensitivity analysis informs causal inference by assessing the sensitivity of conclusions to departures from assumptions. The consistency assumption states that there are no hidden versions of treatment and that the outcome arising…
We present a detailed analysis of interest rate derivatives valuation under credit risk and collateral modeling. We show how the credit and collateral extended valuation framework in Pallavicini et al (2011), and the related collateralized…
We deal with the interest rate model proposed by Schaefer and Schwartz, which models the long rate and the spread, defined as the difference between the short and the long rates. The approximate analytical formula for the bond prices…
Empirical diagnosis of stability has received considerable attention, mostly focused on variance metrics for early warning signals of abrupt system change. Despite this, the theoretical foundation and application has been limited to…
The problem of existence of arbitrage free and monotone CDO term structure models is studied. Conditions for positivity and monotonicity of the corresponding Heath-Jarrow-Morton-Musiela equation for the $x$-forward rates with the use of the…
Historical trends suggest the decline in importance of land as a production factor but its continued importance as a store of value. Using an overlapping generations model with land and aggregate uncertainty, we theoretically study the…
This note studies a certain stochastic evolution equation in the space of probability measures, including existence and uniqueness results. A solution of this equation gives rise, in a natural way, to an interest rate term structure model,…
This note continues investigation of randomness-type properties emerging in idealized financial markets with continuous price processes. It is shown, without making any probabilistic assumptions, that the strong variation exponent of…
An extensive empirical literature documents a generally negative correlation, named the "leverage effect," between asset returns and changes of volatility. It is more challenging to establish such a return-volatility relationship for jumps…