We introduce a new approach to model the market smile for inflation-linked derivatives by defining the Quadratic Gaussian Year-on-Year inflation model -- the QGY model. We directly define the model in terms of a year-on-year ratio of the inflation index on a discrete tenor structure, which,...

In this paper we present an option pricing model based on the assumption that the underlying asset price is an exponential Mixed Tempered Stable Lévy process. We also introduce a new R package called PricingMixedTS that allows the user to calibrate this model using procedures based on loss or...

DSGE models are the main tool for analysing various questions in problems of monetary, business cycle theory and fiscal policy problems, growth and other fields in international macroeconomics and macroeconomics. Many macroeconomic publications use the DSGE framework. A consensus has been...

Discrete-time stochastic games with a finite number of states have been widely applied to study the strategic interactions among forward-looking players in dynamic environments. These games suffer from a “curse of dimensionality” when the cost of computing players’ expectations over all...

Approximating stochastic processes by finite-state Markov chains is useful for reducing computational complexity when solving dynamic economic models. We provide a new method for accurately discretizing general Markov processes by matching low order moments of the conditional distributions using...

Computing the solution to a stochastic optimal control problem is difficult. A method of approximating a solution to a given stochatic optimal problem was developed in [1]. This paper describes a suite of Matlab functions implementing this method of approximating a solution to a given continuous...

The usual derivation of the Fokker-Planck partial differential eqn. (pde) assumes the Chapman-Kolmogorov equation for a Markov process [1,2]. Starting instead with an Ito stochastic differential equation (sde), we argue that finitely many states of memory are allowed in Kolmogorov’s two pdes,...

This paper finds necessary and sufficient conditions of Nth-order stochastic dominance (SD) for risk aversion and develops linear tests for Nth-order SD. We introduce a linear FDSD (fourth-order SD and decreasing absolute risk aversion SD) test for standard risk aversion. A positive research...

This paper considers magnitude, asymptotics and duration of drawdowns for some Levy processes. First, we revisit some existing results on the magnitude of drawdowns for spectrally negative Levy processes using an approximation approach. For any spectrally negative Levy process whose scale...