2008 Series

Optimal Investment Strategies and Performance Sharing Rules for Pension Schemes with Minimum Guarantee

Reference: 2008-09
Authors: Johanna Scheller, Dr Jacques Pézier

Abstract: There is a potential conflict of interest between a pension fund sponsor and future pensioners when they share unequally in the pension fund performance. Thus when a scheme offers a yearly guaranteed minimum return to pensioners, as is presently the case with German Pensionskassen, the managers cannot afford to invest in risky assets and consequently, pensioners end up withContinue reading


Interest in medieval accounts: Examples from England, 1272-1340

Reference: 2008-07
Authors: Dr Adrian Bell, Dr Chris Brooks, Dr Tony Moore

Abstract: Research into medieval interest rates has been hampered by the diversity ofterms and methods used by historians, creating serious misconceptions in the reporting of medieval interest rates, which have then been taken at face value by later scholars. This has had important repercussions on the wider debate on the credit risk of different forms of medieval governments and theContinue reading


An analytically tractable time-changed jump-diffusion default intensity model

Reference: 2008-06
Authors: Naoufel El-Bachir, Damiano Brigo

Abstract: We present a stochastic default intensity model where the intensity follows a tractable jump-diffusion process obtained by applying a deterministic change of time to a non mean-reverting square root jump-diffusion process. The model generates higher implied volatilities for default swaptions than mean-reverting versions, consistent with volatility levels observed on the market.


Maximum Certain Equivalent Excess Returns and Equivalent Preference Criteria Part I – Theory

Reference: 2008-05
Authors: Dr Jacques Pézier

Abstract: Generalizations of traditional preference criteria such as the Sharpe ratio, the information ratio and the Jensen alpha are obtained by maximizing a certain equivalent excess return (CER) under relevant investment conditions. They are increasing functions of CERs and therefore equivalent criteria. They are consistent with utility theory and are applicable to any investment choice. That is not the caseContinue reading


An Assessment of the Internal Rating Based Approach in Basel II

Reference: 2008-04
Authors: Dr Simone Varotto

Abstract: The new bank capital regulation commonly known as Basel II includes a internal rating based approach (IRB) to measuring credit risk in bank portfolios. The IRB relies on the assumptions that the portfolio is fully diversified and that systematic risk is driven by one common factor. In this work we empirically investigate the impact of these assumptions by comparingContinue reading


Dependent jump processes with coupled levy measures

Reference: 2008-03
Authors: Naoufel El-Bachir

Abstract: I present a simple method for the modelling and simulation of dependent positive jump processes through a series representation. Each constituent process is represented by a series whose terms are equal to a transformation of the jump times of a standard Poisson process. The transformations are given by the inverses of the respective marginal Levy tail mass integral functions.Continue reading


Stochastic Local Volatility

Reference: 2008-02
Authors: Carol Alexander, Leonardo Nogueira

Abstract: There are two unique volatility surfaces associated with any arbitrage-free set of standard European option prices, the implied volatility surface and the local volatility surface. Several papers have discussed the stochastic differential equations for implied volatilities that are consistent with these option prices but the static and dynamic no-arbitrage conditions are complex, mainly due to the large (or evenContinue reading


Markov Switching GARCH Diffusion

Reference: 2008-01
Authors: Carol Alexander, Emese Lazar

Abstract: GARCH option pricing models have the advantage of a well-established econometric foundation. However, multiple states need to be introduced as single state GARCH and even Lévy processes are unable to explain the term structure of the moments of financial data. We show that the continuous time version of the Markov switching GARCH(1,1) process is a stochastic model where theContinue reading