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This article presents convenient reduced-form models of the valuation of contingent claims subject to default risk, focusing on applications to the term structure of interest rates for corporate or sovereign bonds. Examples include the valuation of a credit-spread option. This article presents a new approach to modeling term structures of bonds and other(More)
We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1/N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1/N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which(More)
A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. Using a variation of the method developed by Jackwerth and Rubinstein (1996), we estimate risk-neutral probabilities reliably from option prices. Subjective probabilities are estimated from realized returns. This paper then introduces a(More)
* We gratefully acknowledge financial support from INQUIRE UK; this article however represents the views of the authors and not of INQUIRE. We are very grateful toˇLuboš Pástor for extensive comments. We thank and the INQUIRE Fall 2003 conference for helpful suggestions. Abstract In this paper, we extend the mean-variance portfolio model where expected(More)
  • Julian Franks, Oren Sussman, +20 authors Ailsa Roell
  • 1998
In this paper we develop a corporate-finance oriented theory of financial innovations. The theory is motivated by the different corporate insolvency procedures in England and America. In the paper's empirical section we show that these procedures have emerged from different innovation regimes. English law was innovated by lenders and borrowers exercising(More)
BACKGROUND New and improved antimicrobial countermeasures are urgently needed to counteract increased resistance to existing antimicrobial treatments and to combat currently untreatable or new emerging infectious diseases. We demonstrate that computational comparative genomics, together with experimental screening, can identify potential generic (i.e.,(More)
This paper develops and tests a method of extracting expectations about default losses on corporate debt from yield spreads. It is based on calibrating the Merton (1974) model to yield spread, leverage and equity volatility. For rating classes, the approach generates forward-looking expected default loss estimates similar to historical losses, and is also(More)
We study option market design by providing a theoretical motivation and comprehensive empirical analysis of two fundamentally different option market structures, the Eurex derivatives exchange and Euwax, the world's largest market for bank-issued options. These markets exist side-by-side, offering many options with identical or similar characteristics. We(More)
Double barrier options can be statically hedged by a portfolio of single barrier knockin options. The main part of the hedge automatically turns into the desired contract along the double barrier. Its residual part has small and comfortably stable value around the double barrier because its knockin price levels lie outside the double barrier. Residual value(More)