Results 1  10
of
49
Maximum likelihood estimation of latent affine processes, Working paper
 Processes, forthcoming, Review of Financial Studies
, 2006
"... This article develops a direct filtrationbased maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. Filtration is conducted in the transform space of characteristic functions, using a version of Bayes ’ rule for recursively updating the joint cha ..."
Abstract

Cited by 24 (1 self)
 Add to MetaCart
This article develops a direct filtrationbased maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. Filtration is conducted in the transform space of characteristic functions, using a version of Bayes ’ rule for recursively updating the joint characteristic function of latent variables and the data conditional upon past data. An application to daily stock market returns over 195396 reveals substantial divergences from EMMbased estimates; in particular, more substantial and timevarying jump risk. The implications for pricing stock index options are examined. 3 “The Lion in Affrik and the Bear in Sarmatia are Fierce, but Translated into a Contrary Heaven, are of less Strength and Courage.” Jacob Ziegler; translated by Richard Eden (1555) While models proposing timevarying volatility of asset returns have been around for thirty years, it has proven extraordinarily difficult to estimate the parameters of the underlying volatility process,
Stochastic risk premiums, stochastic skewness in currency options, and stochastic discount factors in international economies
 Journal of Financial Economics
, 2007
"... We develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. We estimate the models using timeseries returns and option prices on three currency pairs that form a triangular relation. Estimation shows ..."
Abstract

Cited by 19 (1 self)
 Add to MetaCart
We develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. We estimate the models using timeseries returns and option prices on three currency pairs that form a triangular relation. Estimation shows that the average risk premium in Japan is larger than that in the US or the UK, the global risk premium is more persistent and volatile than the countryspecific risk premiums, and investors respond differently to different shocks. We also identify highfrequency jumps in each economy, but find that only downside jumps are priced. Finally, our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals.
Economic catastrophe bonds
 American Economic Review
"... The central insight of asset pricing is that a security’s value depends on both its distribution of payo¤s across economic states and state prices. In …xed income markets, many investors focus exclusively on estimates of expected payo¤s, such as credit ratings, without considering the state of the e ..."
Abstract

Cited by 18 (1 self)
 Add to MetaCart
The central insight of asset pricing is that a security’s value depends on both its distribution of payo¤s across economic states and state prices. In …xed income markets, many investors focus exclusively on estimates of expected payo¤s, such as credit ratings, without considering the state of the economy in which default is likely to occur. Such investors are likely to be attracted to securities whose payo¤s resemble those of economic catastrophe bonds–bonds that default only under severe economic conditions. We show that many structured …nance instruments can be characterized as economic catastrophe bonds, but o¤er far less compensation than alternatives with comparable payo ¤ pro…les. We argue that this di¤erence arises from the willingness of rating agencies to certify structured products with a low default likelihood as “safe ” and from a large supply of investors who view them as such.
366 “The informational content of overthecounter currency options” by
, 2004
"... In 2004 all publications will carry a motif taken from the €100 banknote. This paper can be downloaded without charge from ..."
Abstract

Cited by 8 (1 self)
 Add to MetaCart
In 2004 all publications will carry a motif taken from the €100 banknote. This paper can be downloaded without charge from
Extreme spectral risk measures: an application to futures, Electronically available on
 University of California – Berkley
, 2006
"... This paper applies the ExtremeValue (EV) Generalised Pareto distribution to the extreme tails of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses tail estimators from these contracts to estimate spectral risk measures, which are coherent ..."
Abstract

Cited by 6 (2 self)
 Add to MetaCart
This paper applies the ExtremeValue (EV) Generalised Pareto distribution to the extreme tails of the return distributions for the S&P500, FT100, DAX, Hang Seng, and Nikkei225 futures contracts. It then uses tail estimators from these contracts to estimate spectral risk measures, which are coherent risk measures that reflect a user’s riskaversion function. It compares these to more familiar VaR and Expected Shortfall (ES) measures of risk, and also compares the precision and discusses the relative usefulness of each of these risk measures.
Estimating option implied riskneutral densities using spline and hypergeometric functions
, 2007
"... ..."
Improving portfolio selection using optionimplied volatility and skewness, Working Paper
, 2009
"... Our objective in this paper is to examine whether one can use optionimplied information to improve the selection of portfolios with a large number of stocks, and to document which aspects of optionimplied information are most useful for improving their outofsample performance. Portfolio performa ..."
Abstract

Cited by 5 (2 self)
 Add to MetaCart
Our objective in this paper is to examine whether one can use optionimplied information to improve the selection of portfolios with a large number of stocks, and to document which aspects of optionimplied information are most useful for improving their outofsample performance. Portfolio performance is measured in terms of four metrics: volatility, Sharpe ratio, certaintyequivalent return, and turnover. Our empirical evidence shows that, while using optionimplied volatility and correlation does not improve significantly the portfolio volatility, Sharpe ratio, and certaintyequivalent return, exploiting information contained in the volatility risk premium and optionimplied skewness increases substantially both the Sharpe ratio and certaintyequivalent return, although this is accompanied by higher turnover. And, the volatility risk premium and optionimplied skewness help improve not just the performance of meanvariance portfolios, but also the performance of parametric portfolios developed in Brandt, SantaClara, and Valkanov (2009).
The Generalized Extreme Value (GEV) Distribution, Implied Tail Index and Option Pricing 1
, 2005
"... Crisis events such as the 1987 stock market crash, the Asian Crisis and the bursting of the DotCom bubble have radically changed the view that extreme events in financial markets have negligible probability. This paper argues that the use of the Generalized Extreme Value (GEV) distribution to model ..."
Abstract

Cited by 5 (2 self)
 Add to MetaCart
Crisis events such as the 1987 stock market crash, the Asian Crisis and the bursting of the DotCom bubble have radically changed the view that extreme events in financial markets have negligible probability. This paper argues that the use of the Generalized Extreme Value (GEV) distribution to model the Risk Neutral Density (RND) function provides a flexible framework that captures the negative skewness and excess kurtosis of returns, and also delivers the market implied tail index of asset returns. We obtain an original analytical closed form solution for the Harrison and Pliska (1981) no arbitrage equilibrium price for the European option in the case of GEV asset returns. The GEV based option prices successfully remove the well known pricing bias of the BlackScholes model. We explain how the implied tail index is efficacious at identifying the fat tailed behaviour of losses and hence the left skewness of the price RND functions, particularly around crisis events.
EXPLAINING THE CHARACTERISTICS OF THE POWER (CRRA) UTILITY FAMILY
 HEALTH ECON.
, 2008
"... The power family, also known as the family of constant relative risk aversion (CRRA), is the most widely used parametric family for fitting utility functions to data. Its characteristics have, however, been little understood, and have led to numerous misunderstandings. This paper explains these char ..."
Abstract

Cited by 5 (0 self)
 Add to MetaCart
The power family, also known as the family of constant relative risk aversion (CRRA), is the most widely used parametric family for fitting utility functions to data. Its characteristics have, however, been little understood, and have led to numerous misunderstandings. This paper explains these characteristics in a manner accessible to a wide
Stock Based Compensation: Firmspecific risk, Efficiency and Incentives
, 2002
"... We propose a continuous time utility maximization model to value stock and option compensation from the executive’s perspective. We allow the executive to invest nonoption wealth in the market and riskless asset but not in the company stock itself. This enables executives to adjust exposure to mark ..."
Abstract

Cited by 2 (0 self)
 Add to MetaCart
We propose a continuous time utility maximization model to value stock and option compensation from the executive’s perspective. We allow the executive to invest nonoption wealth in the market and riskless asset but not in the company stock itself. This enables executives to adjust exposure to market risk, but they are subject to firmspecific risk for incentive purposes. Since the executive is risk averse, this unhedgeable firm risk leads them to place less value on the options than their cost to the company, given by their market or Black Scholes value. By distinguishing between these two types of risks, we are able to examine the effect of stock volatility, firmspecific risk, and market risk on the value to the executive. Executives do not necessarily want to increase stock volatility, as their risk aversion can outweigh the option’s convexity effect. Firmspecific risk generally reduces option value, although if market risk is held fixed and the options are outofthemoney it is possible for the reverse to hold. Generally, market risk has a positive effect on option value. An implication of the model is that the Black Scholes formula exaggerates the incentives for the executive to increase the company stock price. We examine the relationship between risk and optimal incentives, and find firmspecific risk decreases optimal incentives (regardless