We performed a comprehensive analysis on the price bounds of CDO tranche options, and illustrated that the CDO tranche option prices can be effectively bounded by the joint distribution of default time (JDDT) from a default time copula. Systemic and idiosyncratic factors beyond the JDDT only...

This paper describes a consistent and arbitrage-free pricing methodology for bespoke CDO tranches. The proposed method is a multi-factor extension to the (Li 2009) model, and it is free of the known flaws in the current standard pricing method of base correlation mapping. This method assigns a...

This paper describes a flexible and tractable bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification. The stochastic recovery specification only models the first two moments of the spot recovery rate as its higher moments have almost no contribution...

We show that stochastic recovery always leads to counter-intuitive behaviors in the risk measures of a CDO tranche - namely, continuity on default and positive credit spread risk cannot be ensured simultaneously. We then propose a simple recovery variance regularization method to control the...

We are interested in model risk control problems. We study a strategy for the trader which, in a sense, guarantees good performances whatever is the unknown model for the assets of his/her portfolio. The trader chooses trading strategies to decrease the risk and therefore acts as a minimizer;...

In this paper we study the convergence rate of the numerical approximation of the quantiles of the marginal laws of (Xt), where (Xt) is a diffusion process, when one uses a Monte Carlo method combined with the Euler discretization scheme. Our convergence rate estimates are obtained under two...

A dynamic normal formulation for differential games is introduced and the "pedestrian principle" is discussed as a means of dynamically implementing the equilibrium strategy in a single game. Our formulation emphasizes the distinction between a player's rational prediction and the actual...

We investigate the role of bounded rationality in asset pricing and information efficiency. We show that the market stays between the weak-form efficiency and the semi-strong-form efficiency in a market with a single asymmetric information and without noise supply. We show the existence of an...