This paper presents an analytic approximation formula for pricing zero-coupon bonds, when the dynamics of the short-term interest rate are driven by a one-factor mean-reverting process in which changes in the volatility of the interest rate are a function of the level of the interest rate

An option is a financial instrument that allows the holder to buy or sell an underlying security in the future at an agreed strike or price set today. European options are often priced under the assumption of constant interest rates as seen in the Black-Scholes (1973) model.In interest rate...

Throughout the paper, investment portfolios which consist of assets with variance-gamma, gamma and deterministically distributed returns are considered. We derive formulas which characterize the impact of a particular asset on the risks and gains of the portfolio. Namely, we obtain analytical...

Assuming that probabilities (capacities) of events are random, this paper introduces a novel model of decision making under ambiguity, called Shadow probability theory, a generalization of the Choquet expected utility. In this model, probabilities of observable events in a subordinated...

We propose a simple non-equilibrium model of a financial market as an open system with a possible exchange of money with an outside world and market frictions (trade impacts) incorporated into asset price dynamics via a feedback mechanism. Using a linear market impact model, this produces a...

Can consumption-based mechanisms generate positive and time-varying real term premia as we see in the data? I show that only models with time-varying risk aversion or models with high consumption risk can independently produce these patterns. The latter explanation has not been analysed before...

The capital asset pricing model (CAPM) for a security is a linear relationship between the expected excess return of the security and the expected excess return of the market. It was developed by William Sharpe, John Lintner and Jan Mossin. It is a useful framework to discuss idiosyncratic and...

In this paper, we show that the calibration to an implied volatility surface and the pricing of contingent claims can be as simple in a jump-diffusion framework as in a diffusion one. Indeed, after defining the jump densities as those of diffusions sampled at independent and exponentially...

We present conditions under which positive alpha exists in the realm of active portfolio management - in contrast to the controversial result in (Jarrow (2010) which implicates delegated portfolio management by surmising that positive alphas are illusionary. Specifically, we show that the...

For years, research has been conducted to correctly model and predict the risk and return structures of Private Equity (PE) funds. Although past research has revealed valuable insight into the features of those funds, most risk and return model struggle with the dispersion of PE funds' returns,...