This paper uses the market-standard Gaussian copula model to show that fair spreads on CDO tranches are much higher than fair spreads on similarly-rated corporate bonds. It implies that credit ratings are not sufficient for pricing, which is surprising given their central role in structured...

This paper analyzes influences on the credit standing of Multilateral Development Banks (MDBs), specifically the quality, diversification and single name concentration of their portfolios, and on the market practice known as Preferred Creditor Status (PCS), whereby sovereigns that default on...

Value-at-Risk (VaR) forecasting generally relies on a parametric density function of portfolio returns that ignores higher moments or assumes them constant. In this paper, we propose a new simple approach to estimation of a portfolio VaR. We employ the Gram-Charlier expansion (GCE) augmenting...

This paper deals with the main theoretical problems regarding the application of stochastic processes to leptokurtic financial return distributions. A sort of statistical tests based on the stock index Banamex 30 is performed in order to choose the stochastic model that provide the best fit to...

Three axioms provide a formal definition of relative importance in a statistical or econometric model by identifying the likelihood that any ordering of independent variables is correctly ordered with respect to their relative importance. The expected contribution to model performance of...

This paper presents a tractable model of non-linear dynamics of market returns using a Langevin approach.Due to non-linearity of an interaction potential, the model admits regimes of both small and large return fluctuations. Langevin dynamics are mapped onto an equivalent quantum mechanical (QM)...

Harry Markowitz (1959) develops "mean-variance model". Based on this model, Sharpe (1964), Lintner (1965) and Black (1972) build CAPM. However, empirical findings are not in favor of CAPM. Then，Merton (1973) generalizes CAPM and proposes ICAPM. Afterwards, Fama and French (1996) take the idea...

This paper introduces Economic Space notion to expand capacity for economic and financial modeling. Introduction of Economic Space allows define economic variables as functions of time and coordinates and opens the way for treating economic and financial relations similar to mathematical physics...

Multivariate GARCH models have been designed as an extension of their univariate counterparts. Such a view is appealing from a modeling perspective but imposes correlation dynamics that are similar to time-varying volatility. In this paper, we argue that correlations are quite different in...