We provide a new liquidity-based model for financial asset price bubbles that explains bubble formation and bubble bursting. The martingale approach to modeling price bubbles assumes that the asset's market price process is exogenous and the fundamental price, the expected future cash flows...

The current derivatives pricing technology enables users to hedge derivatives with the underlying asset or any other traded derivative. In theory, there is no reason to prefer one hedging instrument to another. However, given model errors, this is not true. Imposing some simple assumptions on...

A time homogeneous, purely discontinuous, parsimonous Markov martingale model is proposed for the risk neutral dynamics of equity forward prices. Transition probabilities are in the variance gamma class with spot dependent parameters. Markov chain approximations give access to option prices. The...

A Markov chain with an expanding non-uniform grid matching risk-neutral marginal distributions is constructed. Conditional distributions of the chain are in the variance gamma class with pre-specified skewness and excess kurtosis. Time change and space scale volatilities are calibrated from...

When firms access unbounded liability exposures and are granted limited liability, then an all equity firm holds a call option, whereby it receives a free option to put losses back to the taxpayers. We call this option the taxpayer put, where the strike is the negative of the level of reserve...

With an interest in keeping the cost of carry at acceptable levels for the expression of a positive or negative view on an equity asset over the longer term, a variation to equity default swaps is introduced that fixes the barrier at a given quantile. The barrier level for the stock price then...