This paper proposes a self-financing trading strategy that minimizes the expected shortfall locally when hedging a European contingent claim. A positive shortfall occurs if the hedger is not willing to follow a perfect hedging or a superhedging strategy. In contrast to the classical variance...

It is well known that the sequential (premature) exercise of American-type warrants quot;mayquot; be advantageous for large warrantholders, even in the absence of regular dividends, because using exercise proceeds to expand the firm's scale increases the riskiness of an equity share. We present...

It is well known that the sequential (premature) exercise of American-type warrants may be advantageous for large warrantholders, even in the absence of regular dividends, because using exercise proceeds to repurchase stock or to expand the firm's scale increases the riskiness of an equity...

Credit derivatives are subject to at least two sources of risk: the default time and the recovery payment. This paper examines the impact of modeling the recovery payment on hedging strategies in a reduced-form model as well as a structural model. We show that all hedging approaches based on a...

This paper estimates the price for restructuring risk in the U.S. corporate bond market during 1999-2005. Comparing quotes from default swap (CDS) contracts with a restructuring event and without, we find that the average premium for restructuring risk represents 6% to 8% of the swap rate...

A constrained informationally efficient market is defined to be one whose price process arises as the outcome of some equilibrium where agents face restrictions on trade. This paper investigates the case of short sale constraints, a setting which despite its simplicity, generates new insights....

This paper derives an equilibrium asset pricing model with liquidity risk. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Under a mild set of assumptions, we prove that an equilibrium price process exists...

This paper derives an equilibrium capital asset pricing model (CAPM) in a market with trading constraints and asset price bubbles. The asset price processes are general semimartingales including Markov jump-diffusion processes as special cases, and the trading constraints considered include...

In models of financial bubbles, the price of a stock is a priori typically unbounded, and this plays a fundamental role in the analysis of finite horizon local martingale bubbles. It would seem that price bubbles do not apply to bounded risky asset prices, such as bond prices. To avoid this...