Related papers: Priced risk in corporate bonds
Income and risk coexist, yet investors are often so focused on chasing high returns that they overlook the potential risks that can lead to high losses. Therefore, risk forecasting and risk control is the cornerstone of investment. To…
Factor analysis is a statistical technique employed to evaluate how observed variables correlate through common factors and unique variables. While it is often used to analyze price movement in the unstable stock market, it does not always…
Pricing decisions stand out as one of the most critical tasks a company faces, particularly in today's digital economy. As with other business decision-making problems, pricing unfolds in a highly competitive and uncertain environment.…
This papers addresses the stock option pricing problem in a continuous time market model where there are two stochastic tradable assets, and one of them is selected as a num\'eraire. It is shown that the presence of arbitrarily small…
The robust option pricing problem is to find upper and lower bounds on fair prices of financial claims using only the most minimal assumptions. It contrasts with the classical, model-based approach and gained prominence in the wake of the…
Under very general conditions, we construct a micro-macro model for closed economy with a large number of heterogeneous agents. By introducing both financial capital (i.e. valued capital---- equities of firms) and physical capital (i.e.…
In this work, I generalize Merton's approach of pricing risky debt to the case where the interest rate risk is modeled by the CIR term structure. Closed form result for pricing the debt is given for the case where the firm value has…
Discount is the difference between the face value of a bond and its present value. I propose an arbitrage-free dynamic framework for discount models, which provides an alternative to the Heath--Jarrow--Morton framework for forward rates. I…
We explain the main concepts of Prospect Theory and Cumulative Prospect Theory within the framework of rational dynamic asset pricing theory. We derive option pricing formulas when asset returns are altered with a generalized Prospect…
Financial markets provide a natural quantitative lab for understanding some of the most advanced human behaviours. Among them is the use of mathematical tools known as financial instruments. Besides money, the two most fundamental financial…
Model risk in credit portfolio models is a serious issue for banks but has so far not been tackled comprehensively. We will demonstrate how to deal with uncertainty in all model parameters in an all-embracing, yet easy-to-implement way.
We discuss risk measures representing the minimum amount of capital a financial institution needs to raise and invest in a pre-specified eligible asset to ensure it is adequately capitalized. Most of the literature has focused on…
We propose a unifying framework for the pricing of debt securities under general time-inhomogeneous short-rate diffusion processes. The pricing of bonds, bond options, callable/putable bonds, and convertible bonds (CBs) is covered. Using…
The completeness of a bond market model with infinite number of sources of randomness on a finite time interval in the Heath-Jarrow-Morton framework is studied. It is proved that the market is not complete. A construction of a bounded…
The case that the factor model does not account for all the covariances of the observed variables is considered. This is a quite realistic condition because some model error as well as some sampling error should usually occur with empirical…
This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset…
In general, underestimation of risk is something which should be avoided as far as possible. Especially in financial asset management, equity risk is typically characterized by the measure of portfolio variance, or indirectly by quantities…
We propose a new non-linear single-factor asset pricing model $r_{it}=h(f_{t}\lambda_{i})+\epsilon_{it}$. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings -- a…
Value adjustment of uncollateralized trades is determined within a risk-neutral pricing framework. When hedging such trades, investors cannot freely trade protection on their own name, thus facing an incomplete market. This fact is…
We explore a decomposition in which returns on a large class of portfolios relative to the market depend on a smooth non-negative drift and changes in the asset price distribution. This decomposition is obtained using general continuous…