Recent academic work has developed a method to determine, in real time, if a given stock is exhibiting a price bubble. Currently there is speculation in the financial press concerning the existence of a price bubble in the aftermath of the recent IPO of LinkedIn. We analyze stock price tick data...

Discretely sampled variance and volatility swaps trade actively in OTC markets. To price these swaps, the continuously sampled approximation is often used to simplify the computations. The purpose of this paper is to study the conditions under which this approximation is valid. Our first set of...

The classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are derived, revealing how information driven default contagion...

Consider a d-dimensional Brownian motion X (Xl, ... ,Xd ) and a function F which belongs locally to the Sobolev space W 1,2. We prove an extension of Ito's formula where the usual second order terms are replaced by the quadratic covariations [fk(X), Xkj involving the weak first partial...

This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633–664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager’s information set...

This article studies the pricing of options in an extended Black Scholes economy in which the underlying asset is not perfectly liquid. The resulting liquidity risk is modeled as a stochastic supply curve, with the transaction price being a function of the trade size. Consistent with the market...

A parameterized family of financial market models is presented. These models have jumps intrinsic to the price processes yet have strict completeness, equivalent martingale measures, and no arbitrage. For each value of the parameter $\beta (-2\leq\beta 0)$ the model is just as rich as the...

A strict local martingale is a local martingale which is not a martingale. There are few explicit examples of “naturally occurring” strict local martingales with jumps available in the literature. The purpose of this paper is to provide such examples, and to illustrate how they might arise...

This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly...