Abstract: Most banks employ historical simulation for Value-at-Risk (VaR) calculations, where VaR is computed from a lower quantile of a forecast distribution for the portfolio’s profit and loss (P&L) that is constructed from a single, multivariate historical sample on the portfolio’s risk factors. The implicit assumption is that history will repeat itself for certain over the forecast horizon. Until now,Continue reading

Abstract: A comprehensive description of the trading and statistical characteristics of VIX futures and their exchange-traded notes motivates our study of their benefits to equity investors seeking to diversify their exposure. We analyze when diversification into VIX futures is ex-ante optimal for standard mean-variance investors, then extend this to include (a) skewness preference, and (b) a moderation of personal forecastsContinue reading

Abstract: This paper investigates the role of credit and liquidity factors in explaining corporate CDS price changes during normal and crisis periods. We find that liquidity risk is more important than credit risk regardless of market conditions. Moreover, in the period prior to the recent ‘Great Recession’ credit risk plays no role in explaining CDS price changes. The dominance ofContinue reading

DP2011-06 Abstract: We design average portfolio insurance (API) strategies with an investment floor and a buffer that is a power of a geometric average of the underlying asset price. We prove that API strategies are optimal for investors with hyperbolic absolute risk aversion who become progressively more risk averse over time. During the averaging period, API strategies reduce the proportionContinue reading

Abstract: We model investment opportunities with a single source of uncertainty, i.e. the market price of the investment. Investment cost can be predetermined or perfectly correlated with the market price. The common paradigm for risk-neutral real-option pricing is a special case en- compassed within our general framework, and we analyse the relationship between standard real option prices and the moreContinue reading

Abstract:In this paper, we empirically explore risk premia in mortgage covered bond markets. Using a large panel data set of covered bond asset swap spreads, we study the impact of different legal and economic environments. Conducting an in-depth analysis of this market, we find significant but small differences between countries during normal market periods. However, these differences are much strongerContinue reading

Abstract: Firms typically present a mixed picture of corporate social performance (CSP), with positive and negative indicators exhibited by the same firm. Thus, stakeholders’ judgements of corporate social responsibility (CSR) typically evaluate positives in the context of negatives, and vice versa. We present two alternative accounts of how stakeholders respond to such complexity, which provide differing implications for the financialContinue reading

Abstract: We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, great care is required when processing the relevant data and accounting for the costs of maintaining and re-balancingContinue reading