In the struggle between the forces of free trade and the restrictive influence of insularism the latter recently seems to have the upper hand. This is illustrated by the referendum of June 23, 2016 where the United Kingdom (UK) voted to leave the Europea+n Union (EU). In this paper we evaluate...

Building blocks -- It's dilemma -- Stochastic differential equations -- The factor model approach to arbitrage pricing -- Constructing a factor pricing framework -- Equity derivatives -- Interest and credit derivatives -- Hedging -- Computation of solutions -- The road to risk neutrality -- Index

This chapter reviews some of the academic literature that links nominal and real term structures with the macroeconomy. The main conclusion is that none of our models is consistent with basic properties of nominal yields. It is difficult to explain the average shape of the nominal yield curve,...

We consider fundamental questions of arbitrage pricing arising when the uncertainty model is given by a set of possible mutually singular probability measures. With a single probability model, essential equivalence between the absence of arbitrage and the existence of an equivalent martingale...

We estimate structurally a model of the term structure of interest rates that is consistent with no arbitrage but allows for demand pressures. The term structure in our model is determined through the interaction of risk-averse arbitrageurs and preferred-habitat investors with preferences for...

We model the yield curve in any given country as an object lying in an infinite-dimensional Hilbert space, the evolution of which is driven by what is known as a cylindrical Brownian motion. We assume that volatilities and correlations do not depend on rates (which hence are Gaussian). We prove...