We introduce a model to discuss an optimal investment problem of an insurance company using a game theoretic approach. The model is general enough to include economic risk, financial risk, insurance risk, and model risk. The insurance company invests its surplus in a bond and a stock index. The...

Dilip B Madan discusses how even good financial models often fail to perform when applied to real economic data. To overcome market volatility, he suggests, the right model must successfully reduce dimension.

We consider a simple single period economy in which agents invest so as to maximize expected utility of terminal wealth. We assume the existence of three asset classes, namely a riskless asset (the bond), a single risky asset (the stock), and European options of all strikes (derivatives). In...

We report on the adequacy of using Sato processes to value equity structured products. In models used to price options on realized variance, the latter must be a random variable with a positive variance. An analysis of this variance of realized variance for Sato processes shows that these...

We analyse the equilibrium asset pricing implications for an economy with single period return exposures to explicit non-Gaussian systematic factors, that may be both skewed and long-tailed, and Gaussian idiosyncratic components. Investors maximize expected exponential utility and equilibrium...

We define the class of local Levy processes. These are Levy processes time changed by an inhomogeneous local speed function. The local speed function is a deterministic function of time and the level of the process itself. We show how to reverse engineer the local speed function from traded...

This paper follows the insights of Black and Scholes (1973 J. Political Economy 81 637-54) and Merton (1973 Bell J. Economics Management Sci. 4 141-83) in contexts where their conclusions cannot be exactly obtained. Specifically, we consider an infinite activity Levy process with no continuous...

The concept of stress levels embedded in S&P500 options is defined and illustrated with explicit constructions. The particular example of a stress function used is MINMAXVAR. Seven joint laws for the top 50 stocks in the index are considered. The first time changes a Gaussian one factor copula....