We describe a two factor valuation model for convertible bonds when the firm may default. We endogenize both default and the recovery value of a defaulted bond. A sophisticated numerical framework enables us to specify numerically and financially consistent boundary conditions and inequality constraints. We investigate the affect of changing the default, recovery and loss specification. The aff...

This paper examines the interaction between default risk and interest-rate risk in determining the term structure of credit default swap spreads at different industry sectors and credit rating classes. The paper starts with a parsimonious three-factor interest-rate dynamic term structure and projects the credit spread at each industry sector and rating class to these interest-rate factors while...

I analyze annual returns of the S&P 500 from 1993 – 1998. Future returns of the market are predicted using current dividend yield levels, past risk free returns and a standard deviation variable over the preceding five years. Evidence from the article suggests that future returns can be predicted when combing dividend yields with recent volatility in the market. This article suggests that recen...

We develop a tractable and flexible stochastic volatility multifactor model of the term structure of interest rates. It features unspanned stochastic volatility factors, correlation between innovations to forward rates and their volatilities, quasi-analytical prices of zerocoupon bond options, and dynamics of the forward rate curve, under both the actual and risk-neutral measures, in terms of a...

Closed solutions to the problem of pricing a Russian option when the stock is modeled by a diffusion with negative jumps are obtained. The Russian option is a perpetual American option on the maximum value of the stock. That stock is assumed to have the form of a Wiener process with drift and negative mixed–exponentially distributed jumps driven by a Poisson process. This result generalizes tho...

We derive representations for optimal martingale measures in a two-factor Markovian model, by seeking ramifications of a distortion power solution (Zariphopoulou (2001)) of the primal utility maximisation problem, for the dual problem. This provides an alternative to existing methods in the literature for characterising optimal measures, and gives new results in the form of a novel representati...

This paper studies equilibrium in the futures market for a commodity in a single good economy, which is populated by heterogeneous producers and speculators. The commodity is traded only in the spot market at harvest whereas futures contracts written on the commodity are traded continuously. The model illustrates the role of heterogeneity and non-tradeness in a futures market equilibrium. The r...

We develop a tractable and flexible stochastic volatility multi-factor model of the term structure of interest rates. It features correlations between innovations to forward rates and volatilities, quasi-analytical prices of zero-coupon bond options and dynamics of the forward rate curve, under both the actual and risk-neutral measure, in terms of a finite-dimensional affine state vector. The m...

We study the returns to investing in VIX futures and VIX Exchange Traded Notes (ETNs). We document a substantial negative return premium for both ETNs and the futures. For example, the a constant maturity portfolio of one-month VIX futures loses about 30% per year over our sample period (2006-2013). We propose an equilibrium model to explain these negative returns. In this model, increases in v...