This article presents the theory of option pricing with random volatilities in complete markets. As such, it makes two contributions. First, the newly developed martingale measure technique is used to synthesize results dating from Merton (1973) through Eisenberg, (1985, 1987). This synthesis...

This paper proposes and estimates a tractable, arbitrage-free valuation model for corporate coupon bonds that includes a more realistic recovery rate process. The existing empirical literature uses a recovery rate process that is misspecified because it includes recovery rates for coupons due...

The paper proposes a new algorithm for the high-dimensional financial data -- the Groupwise Interpretable Basis Selection (GIBS) algorithm, to estimate a new Adaptive Multi-Factor (AMF) asset pricing model, implied by the recently developed Generalized Arbitrage Pricing Theory, which relaxes the...

When I was I thinking about what to discuss in this address, my mind wandered across many topics. I first thought about discussing martingale probability measures and the topologies of asset pricing. I quickly discarded this topic for obvious reasons(and one not so obvious). The not so obvious...

Statistical arbitrage enables tests of market efficiency which circumvent the joint-hypotheses dilemma. This paper makes several contributions to the statistical arbitrage framework. First, we enlarge the set of statistical arbitrage opportunities in Hogan, Jarrow, Teo, and Warachka (2004) to...

This paper examines the different factors that have contributed to the subprime mortgage credit crisis: the search for yield enhancement, agency problems, lax underwriting standards, failure by the rating agencies to identify a changing environment, poor risk management by financial...

This paper proposes an aggregate deposit insurance premium design that is risk-based in the sense that the premium structure ensures the deposit insurance system has a target of survival over the longer term. Such a premium system naturally exceeds the actuarily fair value and leads to a growth...

We analyze the effect various delivery options embedded in commodity futures contracts have on the futures price. The two embedded options considered are the timing and location options. We show that early delivery is always optimal when only a timing option is present, but not so with joint...