In this paper we investigate alternative Levy base correlation models that arise from the Gamma, Inverse Gaussian and CMY distribution classes. We compare these models with the basic (exponential) Levy base correlation model and the classical Gaussian base correlation model. For all investigated...

In this paper, we cover some principles and guidelines that are useful for modelling and interpreting data associated with highly complex physical phenomena such as occur in multidisciplinary fields. We compare and contrast the theoretical and statistical-empirical modelling paradigms and...

It is well-established that equity returns are not Normally distributed, but what should the portfolio manager do about this, and is it worth the effort? It is now feasible to employ better multivariate distribution families that capture heavy tails and skewness in the data; we argue that among...

We study model-driven statistical arbitrage in US equities. Trading signals are generated in two ways: using Principal Component Analysis (PCA) or regressing stock returns on sector Exchange Traded Funds (ETFs). In both cases, the idiosyncratic returns are modelled as mean-reverting processes,...

As an extension of the standard Gaussian copula model to price collateralized debt obligation (CDO) tranche swaps we present a generalization of a one-factor copula model based on stable distributions. For special parameter values these distributions coincide with Gaussian or Cauchy...

This paper examines the dynamic correlation structure between A-share and B-share stock returns based on three different measures of correlation coefficients. Testing the models by employing daily stock-return data for the period from 1996 through 2003, we reach the following empirical...

We address the problem of portfolio optimization under the simplest coherent risk measure, i.e. the expected shortfall. As is well known, one can map this problem into a linear programming setting. For some values of the external parameters, when the available time series is too short, portfolio...

The pricing of exotic portfolio products, e.g. path-dependent CDO tranches, relies on the joint probability distribution of portfolio losses at different time horizons. We discuss a range of methods to construct the joint distribution in a way that is consistent with market prices of vanilla CDO...