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Credit Risk
Featuring contributions from leading international academics and practitioners, Credit Risk: Models, Derivatives, and Management illustrates how a risk management system can be implemented through an understanding of portfolio credit risks, a set of suitable models, and the derivation of reliable empirical results. Divided into six sectio
Extreme Asymmetric Volatility
Asymmetric volatility in equity markets has been widely documented in finance (Bekaert and Wu (2000)). We study asymmetric volatility for daily Samp;P 500 index returns and VIX index changes, thereby examining the relation between extreme changes in risk-neutral volatility expectations, i.e. market stress, and aggregate asset prices. To this aim, we model market returns, implied VIX market volatility and volatility of volatility, showing that the latter is asymmetric in that past positive volatility shocks drive positive shocks to volatility of volatility. Our main result documents the existence of a significant extreme asymmetric volatility effect as we find contemporaneous volatility-return tail dependence for crashes but not for booms. We then outline aggregate market price implications of extreme asymmetric volatility, indicating that under volatility feedback a one-in-a-hundred trading day innovation to average VIX implied volatility, for example, relates to an expected market drop of more than 4 percent.
Introduction To Derivative Securities, Financial Markets, And Risk Management, An (Second Edition)
Written by two of the most distinguished finance scholars in the industry, this introductory textbook on derivatives and risk management is highly accessible in terms of the concepts as well as the mathematics.With its economics perspective, this rewritten and streamlined second edition textbook, is closely connected to real markets, and:Beginning at a level that is comfortable to lower division college students, the book gradually develops the content so that its lessons can be profitably used by business majors, arts, science, and engineering graduates as well as MBAs who would work in the finance industry. Supplementary materials are available to instructors who adopt this textbook for their courses. These include:Solutions Manual with detailed solutions to nearly 500 end-of-chapter questions and problemsPowerPoint slides and a Test Bank for adoptersPRICED! In line with current teaching trends, we have woven spreadsheet applications throughout the text. Our aim is for students to achieve self-sufficiency so that they can generate all the models and graphs in this book via a spreadsheet software, Priced!
Extreme Asymmetric Volatility, Leverage, Feedback and Asset Prices
Asymmetric volatility in equity markets has been widely documented in finance, where two competing explanations, as considered in Bekaert and Wu (2000), are the financial leverage and the volatility feedback hypothesis. We explicitly test for the role of both hypotheses in explaining extreme daily U.S. equity market movements during the period January 1990 to September 2008. To this aim, we examine asymmetric volatility based on a novel model of market returns, implied market volatility and volatility of volatility. We then test for extreme asymmetry and the distinct predictions of both hypotheses. Our results document significant extreme asymmetric volatility. This effect is contemporaneous, consistent with both hypotheses, and it is important for large market declines. We further derive aggregate asset pricing implications under extreme volatility feedback. Given our results, asymmetric volatility, which includes the effect of volatility feedback at extreme levels, is shown to play an important role in explaining substantial equity market declines.
Nonparametric Econometric Methods and Application
The present Special Issue collects a number of new contributions both at the theoretical level and in terms of applications in the areas of nonparametric and semiparametric econometric methods. In particular, this collection of papers that cover areas such as developments in local smoothing techniques, splines, series estimators, and wavelets will add to the existing rich literature on these subjects and enhance our ability to use data to test economic hypotheses in a variety of fields, such as financial economics, microeconomics, macroeconomics, labor economics, and economic growth, to name a few.
Pricing Cac 40 Index Options Under Asymmetry of Information
This article analyses, for the first time, the financial impact on the French market of September 11th, 2001. Was there any information asymmetry around this date? How deep was the reaction of the French investors? This study measures the magnitude of the shock in the stock price process.
Is There Any Black Swan Hidden in the Oil Markets?
Since the last three decades, advanced economies have been facing a substantial rise not only in the crude oil price but also in the oil price volatility. Quantifying the tail risk has become a prominent issue for investment decisions and risk management. This article reveals the existence of a tail risk hidden in the oil market by applying, for the first time, an extreme value theory analysis with a quantile regression procedure. An empirical test is carried out on the daily West Texas Intermediate (WTI) crude oil prices from 1983 to 2011. The main results indicate that the WTI becomes extreme from a daily variation of 3.50% and -2.50%. In addition, the maximum one-day variation which should be exceeded in one year every century is 20% and -30%.
How to Implement Market Models Using VBA
Accessible VBA coding for complex financial modelling How to Implement Market Models Using VBA makes solving complex valuation issues accessible to any financial professional with a taste for mathematics. With a focus on the clarity of code, this practical introductory guide includes chapters on VBA fundamentals and essential mathematical techniques, helping readers master the numerical methods to build an algorithm that can be used in a wide range of pricing problems. Coverage includes general algorithms, vanilla instruments, multi-asset instruments, yield curve models, interest rate exotics, and more, guiding readers thoroughly through pricing in the capital markets area. The companion web...
Pricing Cac 40 Index Options with Stochastic Volatility
The failure of the Black-Scholes (1973) model is now well documented in the literature. In this article, we discuss two alternative option valuation models whose volatility follows a stochastic process. Namely, the Heston (1993) closed-form solution model and the Hull and White (1988) model in a series expansion form, both allowing for arbitrary correlation between increments. The empirical study is carried out on French PXL European call options written on the CAC 40 index during the first half of year 2001. This paper fulfills the lack of option pricing empirical studies devoted to the French market. We discuss calibration of the models and results obtained from the out-of-sample pricing u...
Option Pricing with a Dynamic Fat-Tailed Model
In the aftermath of the 2008 financial crisis, the need to consider more realistic risk models for derivative products has received renewed attention. We introduce a dynamic model for the pricing of European-style options with various attractive features such as a mixture of heavy-tails and Gaussian distribution along with a leverage effect property. We test the model on FTSE 100 stock index options during the period of January 2008 to June 2009. Our empirical results show that the model adequately fits the volatility smile dynamics particularly during stress periods. Furthermore, we find that the leverage effect form is driven by the sticky-strike rule.
