Results 1  10
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31
Measuring Default Risk Premia from Default Swap Rates and EDFs
, 2004
"... This paper estimates recent default risk premia for U.S. corporate debt, based on a close relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The defaultswap data, obtained through CIBC from 22 banks and specialty dealers, allow us ..."
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Cited by 94 (7 self)
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This paper estimates recent default risk premia for U.S. corporate debt, based on a close relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The defaultswap data, obtained through CIBC from 22 banks and specialty dealers, allow us to establish a strong link between actual and riskneutral default probabilities for the 69 firms in the three sectors that we analyze: broadcasting and entertainment, healthcare, and oil and gas. We find dramatic variation over time in risk premia, from peaks in the thrid quarter of 2002, dropping by roughly 50% to late 2003.
A selective overview of nonparametric methods in financial econometrics
 Statist. Sci
, 2005
"... Abstract. This paper gives a brief overview of the nonparametric techniques that are useful for financial econometric problems. The problems include estimation and inference for instantaneous returns and volatility functions of timehomogeneous and timedependent diffusion processes, and estimation ..."
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Cited by 35 (8 self)
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Abstract. This paper gives a brief overview of the nonparametric techniques that are useful for financial econometric problems. The problems include estimation and inference for instantaneous returns and volatility functions of timehomogeneous and timedependent diffusion processes, and estimation of transition densities and state price densities. We first briefly describe the problems and then outline the main techniques and main results. Some useful probabilistic aspects of diffusion processes are also briefly summarized to facilitate our presentation and applications.
MultiPeriod Corporate Failure Prediction with Stochastic Covariates
, 2004
"... We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firmspecific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on ..."
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Cited by 16 (3 self)
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We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firmspecific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on over 28,000 firmquarters of data spanning 1971 to 2001, of significant dependence of the level and shape of the term structure of conditional future bankruptcy probabilities on a firm's distance to default (a volatilityadjusted measure of leverage) and on U.S. personal income growth, among other covariates. Variation in a firm's distance to default has a greater relative e#ect on the term structure of future failure hazard rates than does a comparatively sized change in U.S. personal income growth, especially at dates more than a year into the future.
Pricing multiname credit derivatives: heavy tailed hybrid approach
, 2002
"... In recent years, credit derivatives have become the main tool for transferring and hedging credit risk. The credit derivatives market has grown rapidly both in volume and in the breadth of the instruments it offers. Among the most complicated of these instruments are the multiname ones. These are in ..."
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Cited by 13 (1 self)
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In recent years, credit derivatives have become the main tool for transferring and hedging credit risk. The credit derivatives market has grown rapidly both in volume and in the breadth of the instruments it offers. Among the most complicated of these instruments are the multiname ones. These are instruments with payoffs that are contingent on the default realization in a portfolio of names. The modeling of dependent defaults is difficult because there is very little historical data available about joint defaults and because the prices of those instruments are not quoted. Therefore, the models cannot be calibrated, neither to defaults nor to prices. In this paper, we present a methodology for the estimation, simulation, and pricing of multiname contingent instruments. Our model is a hybrid of the wellknown structural and reduced form approaches for modeling defaults. The dependence structure of our model is of a tcopula that possesses nontrivial tail dependence. The tcopula allows for more joint extreme events, which have a big impact on the prices of multiname instruments, e.g. n thtodefault baskets and CDOs. We demonstrate this impact with n thtodefault baskets.
Number of paths versus number of basis functions in American option pricing
 ANN. APPL. PROBAB
, 2004
"... An American option grants the holder the right to select the time at which to exercise the option, so pricing an American option entails solving an optimal stopping problem. Difficulties in applying standard numerical methods to complex pricing problems have motivated the development of techniques t ..."
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Cited by 13 (0 self)
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An American option grants the holder the right to select the time at which to exercise the option, so pricing an American option entails solving an optimal stopping problem. Difficulties in applying standard numerical methods to complex pricing problems have motivated the development of techniques that combine Monte Carlo simulation with dynamic programming. One class of methods approximates the option value at each time using a linear combination of basis functions, and combines Monte Carlo with backward induction to estimate optimal coefficients in each approximation. We analyze the convergence of such a method as both the number of basis functions and the number of simulated paths increase. We get explicit results when the basis functions are polynomials and the underlying process is either Brownian motion or geometric Brownian motion. We show that the number of paths required for worstcase convergence grows exponentially in the degree of the approximating polynomials in the case of Brownian motion and faster in the case of geometric Brownian motion.
An informationbased framework for asset pricing: Xfactor theory and its applications
, 2006
"... An InformationBased Framework for Asset Pricing: XFactor Theory and its Applications. This thesis presents a new framework for asset pricing based on modelling the information available to market participants. Each asset is characterised by the cash flows it generates. Each cash flow is expressed ..."
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Cited by 4 (2 self)
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An InformationBased Framework for Asset Pricing: XFactor Theory and its Applications. This thesis presents a new framework for asset pricing based on modelling the information available to market participants. Each asset is characterised by the cash flows it generates. Each cash flow is expressed as a function of one or more independent random variables called market factors or “Xfactors”. Each Xfactor is associated with a “market information process”, the values of which become available to market participants. In addition to true information about the Xfactor, the information process contains an independent “noise ” term modelled here by a Brownian bridge. The information process thus gives partial information about the Xfactor, and the value of the market factor is only revealed at the termination of the process. The market filtration is assumed to be generated by the information processes associated with the Xfactors. The price of an asset is given by the riskneutral expectation of the sum of the discounted cash flows, conditional on the information available from the filtration. The thesis develops the theory in some detail, with a variety of applica
A Short Course on Credit Risk Modeling with Affine Processes. Working Paper, Graduate
, 2002
"... ..."
Relative Extinction of Heterogeneous Agents
"... In all the existing literature on survival in heterogeneous economies, the rate at which an agent vanishes in the long run relative to another agent can be characterized by the difference of the socalled survival indices, where each survival index only depends on the preferences of the correspondin ..."
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Cited by 2 (1 self)
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In all the existing literature on survival in heterogeneous economies, the rate at which an agent vanishes in the long run relative to another agent can be characterized by the difference of the socalled survival indices, where each survival index only depends on the preferences of the corresponding agent and the properties of the aggregate endowment. In particular, one agent experiences extinction relative to another (that is, the wealth ratio of the two agents goes to zero) if and only if she has a smaller survival index. We consider a simple complete market model and show that the survival index is more complex if there are more than two agents in the economy. In fact, the following phenomenon may take place: even if agent one experiences extinction relative to agent two, adding a third agent to the economy may reverse the situation and force the agent two to experience extinction relative to agent one. We also calculate the rates of convergence.
Financial Intermediation, International Risk Sharing, and Reserve Currencies
, 2011
"... I provide a framework for understanding the global financial architecture as an equilibrium outcome of the risk sharing between countries with different levels of financial development. The country that has the most developed financial sector takes on a larger proportion of global fundamental and fi ..."
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Cited by 2 (1 self)
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I provide a framework for understanding the global financial architecture as an equilibrium outcome of the risk sharing between countries with different levels of financial development. The country that has the most developed financial sector takes on a larger proportion of global fundamental and financial risk because its financial intermediaries are better able to deal with funding problems following negative shocks. This asymmetric risk sharing has real consequences. In good times, and in the long run, the more financially developed country consumes more, relative to other countries, and runs a trade deficit financed by the higher financial income that it earns as compensation for taking greater risk. During global crises, it suffers heavier capital losses than other countries, exacerbating its fall in consumption. This country’s currency emerges as the world’s reserve currency because it appreciates during crises and so provides a good hedge. The model is able to rationalize these facts, which characterize the role of the US as the key country in the global financial architecture.