Efficient Credit Risk Simulation by Optimal Mean-Reversion Adjustment

Optimal switching decisions under stochastic volatility with fast mean reversion

We study infinite–horizon, optimal switching problems under a general class of stochastic volatility models that exhibit “fast” mean–reversion by using techniques from homogenisation theory. This leads to perturbation theory, providing closed–form approximations to the full switching problem which is often intractable, both analytically and numerically. We apply our general results to certain, ...

An Optimal Trading Rule Under a Switchable Mean-Reversion Model

This work provides an optimal trading rule that allows buying and selling of an asset sequentially over time. The asset price follows a switchable mean-reversion model with a Markovian jump. Such model can be applied to assets with a “staircase” price behavior and yet simple enough to allow an analytic solution. The objective is to determine a sequence of trading times to maximize an overall re...

Mean-reversion Jump-diffusion

From the spot prices we have to identify the following six parameters: α , μ, σ, Km , γ, Φ. If necessary, a seventh parameter, λ, should be identified from the futures prices. The six parameters mentioned above can be identified using the maximum likelihood method (Ball and Torous, 1983; Lien and Strom, 1999; Clewlow and Strickland, 2000) or the moments method (Lien and Strom, 1999; Deng, 1999)...

What Is Optimal Risk Adjustment ?

Efficient risk/return frontiers for credit risk

FALL 2000 T he risk/return trade-off has been a central tenet of portfolio management since the seminal work of Markowitz [1952]. The basic premise, that higher (expected) returns can only be achieved at the expense of greater risk, leads naturally to the concept of an efficient frontier. The efficient frontier defines the maximum return that can be achieved for a given level of risk or, altern...