This working paper was written by Cho-Hoi Hui (Hong Kong Monetary Authority), Chi-Fai Lo (The Chinese University of Hong Kong) and Ho-Yan Ip (The Chinese University of Hong Kong).Asymmetric behaviour has been documented in unemployment rates which increase quickly in recessions but decline...

Asymmetric behaviour has been documented in unemployment rates which increase quickly in recessions but decline relatively slowly during expansions. To model such asymmetric dynamics, this paper provides a rigorous derivation of the asymmetric mean-reverting fundamental dynamics governing the...

This paper proposes a model to estimiate option-implied correlation embedded in options on the iTraxx Europe indexes as a measure of the spillover effect of default risk between the financial and corporate sectors in Europe. The correlation structure between the iTraxx Financials and...

This paper proposes a path-dependent approach for estimating realignment probabilities of targeted exchange rates based on first-passage-time distributions instead of the commonly used path-independent approach. We consider that path dependency is an intrinsic characteristic of realignment risk...

This paper assesses whether agency ratings and market-based default risk measures are consistent for East Asian banks during the period 1996 to 2006. While the market-based measures are broadly consistent with the credit rating assessments for banks in developed economies, the discrepancy...

This paper proposes a path-dependent approach for estimating maximum appreciations of the renminbi expected by the market based on first-passage-time distributions. Using market data of the renminbi spot exchange rates, non-deliverable forward rates and currency option prices from 21 July 2005...

The theoretical prediction of target exchange rates expects mean reversion of the exchange rates. This paper presents a model for valuing European foreign exchange options, in which the forward foreign exchange rate follows a mean-reverting lognormal process. The mean-reverting process has...

Following the bankruptcy of Lehman Brothers in mid-September 2008, there were severe disruptions in international money markets and banks reportedly faced severe liquidity shocks, in particular US-dollar funding shortages, prompting central banks around the world to adopt unprecedented policy...

This paper develops a valuation model of European options incorporating a stochastic default barrier, which extends a constant default barrier proposed in the Hull-White model. The default barrier is considered as an option writer's liability. Closed-form solutions of vulnerable European option...