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Abstract: We price vulnerable derivatives - i.e. derivatives where the counter- party may default. These are basically the derivatives traded on the OTC markets. Default is modeled in a structural framework. The technique employed for pricing is Good Deal Bounds. The method imposes a new restriction in the arbitrage free model by setting upper bounds on the Sharpe ratios of the assets. The potential prices which are eliminated represent unreasonably good deals. The constraint on the Sharpe ratio translates into a constraint on the stochastic discount factor. Thus, tight pricing bounds can be obtained. We provide a link between the objec- tive probability measure and the range of potential risk neutral measures which has an intuitive economic meaning. We also provide tight pricing bounds for European calls and show how to extend the call formula to pricing other nancial products in a consistent way. Finally, we numeri- cally analyze the behavior of the good deal pricing bounds. URI: http://hdl.handle.net/10398/8899 Files in this item: 1
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Modeling and Risk AnalysisCont, Rama; Jessen, Cathrine (, 2011)[More information][Less information]
Abstract: Constant Proportion Debt Obligations (CPDOs) are structured credit derivatives which generate high coupon payments by dynamically leveraging a position in an underlying portfolio of investment grade index default swaps. CPDO coupons and principal notes received high initial credit ratings from the major rating agencies, based on complex models for the joint transition of ratings and spreads for all names in the underlying portfolio. We propose a parsimonious model for analyzing the performance of CPDO strategies using a top-down approach which captures the essential risk factors of the CPDO. Our approach allows to compute default probabilities, loss distributions and other tail risk measures for the CPDO strategy and analyze the dependence of these risk measures on various parameters describing the risk factors. We nd that the probability of the CPDO defaulting on its coupon payments is found to be small{and thus the credit rating arbitrarily high{ by increasing leverage, but the ratings obtained strongly depend on assumptions on the credit environment (high spread or low spread). More importantly, CPDO loss distributions are found to be bimodal with a wide range of tail risk measures inside a given rating category, suggesting that credit ratings are insu cient performance indicators for such complex leveraged strategies. A worst-case scenario analysis indicates that CPDO strategies have a high exposure to persistent spread-widening scenarios CPDO ratings are shown to be quite unstable during the lifetime of the strategy. URI: http://hdl.handle.net/10398/8890 Files in this item: 1
constant_proportion_cathrine_jessen.pdf (599.2Kb) -
Krishnamurthy, Arvind; Vissing-Jørgensen, Annette (Chicago, 2012)[More information][Less information]
Abstract: Investors value the liquidity and safety of US Treasuries. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 73 basis points, on average, from 1926 to 2008. Both the liquidity and safety attributes of Treasuries are driving this phenomenon. We document this by analyzing the spread between assets with different liquidity (but similar safety) and those with different safety (but similar liquidity). The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money. URI: http://hdl.handle.net/10398/8882 Files in this item: 1
aggregate_demand_annette_vissing (2).pdf (1.802Mb) -
Dick-Nielsen, Jens; Feldhütter, Peter; Lando, David (Amsterdam, 2012)[More information][Less information]
Abstract: We analyze liquidity components of corporate bond spreads during 2005–2009 using a new robust illiquidity measure. The spread contribution from illiquidity increases dramatically with the onset of the subprime crisis. The increase is slow and persistent for investment grade bonds while the effect is stronger but more short-lived for speculative grade bonds. Bonds become less liquid when financial distress hits a lead underwriter and the liquidity of bonds issued by financial firms dries up under crises. During the subprime crisis, flight-to-quality is confined to AAA-rated bonds. URI: http://hdl.handle.net/10398/8864 Files in this item: 1
corporate_bon_liquidity_david_lando.pdf (623.7Kb) -
Moskowitz, Tobias J.; Ooi, Yao Hua; Heje Pedersen, Lasse (Amsterdam, 2012)[More information][Less information]
Abstract: We document significant ‘‘time series momentum’’ in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for one to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers. URI: http://hdl.handle.net/10398/8862 Files in this item: 1
time_series_momentum_lasse_heje.pdf (997.5Kb)
