"Limits of Arbitrage" theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage-backed securities (MBS) market in this light. We show that the risk of homeowner prepayment,...

"Limits of Arbitrage" theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage-backed securities (MBS) market in this light. We show that the risk of homeowner prepayment,...

``Limits of Arbitrage" theories require that the marginal investor in a particular asset market be a specialized arbitrageur. Then the constraints faced by this arbitrageur (i.e. capital constraints) feed through into asset prices. We examine the mortgage-backed securities (MBS) market in this...

We consider the pricing of European-style structured credit payoff in a static framework, where the underlying default times are independent given a common factor. A practical application would consist of the pricing of nth-to-default baskets under the Gaussian copula model (GCM). We provide...

Uncertainty –that is, a rise in unknown and immeasurable risk rather than the measurable risk that the financial sector specializes in managing– is at the heart of the recent liquidity crisis. The financial instruments and derivative structures underpinning the recent growth in credit...

We empirically quantify the relation between trading activity—measured by the number of transactions N—and the price change G(t) for a given stock, over a time interval [t,t+Δt]. We relate the time-dependent standard deviation of price changes—volatility—to two microscopic quantities:...

In this opening talk, we discuss some of the similarities between work being done by economists, and by physicists seeking to contribute to economics. We also mention some of the differences in the approaches taken, and justify these different approaches by developing the argument that by...

We investigate the relation between trading activity - measured by the number of trades [iopmath latex="$N_{Delta t}$"] Nt [/iopmath] - and the price change [iopmath latex="$G_{Delta t}$"] Gt [/iopmath] for a given stock over a time interval [iopmath latex="$[t,~t+Delta t]$"] [t, t + t]...

We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks, and show that it has significant explanatory power for the evolution of macroeconomic volatility. We define fundamental volatility as the volatility that would arise from an...