This article introduces a class of distortion operators, gα (u) = Φ Φ [ ( ) ] − + 1 u α , where Φ is the standard normal cumulative distribution. For any loss (or asset) variable X with a probability distribution SX(x) = 1– FX(x), gα [SX(x)] defines a distorted probability distribution whose mean value yields a risk-adjusted premium (or an asset price). The distortion operator gα can be applied...

The central part of pricing agricultural commodity futures options is to find appropriate stochastic process of the underlying assets. The Black’s (1976) futures option pricing model laid the foundation for a new era of futures option valuation theory. The geometric Brownian motion assumption girding the Black’s model, however, has been regarded as unrealistic in numerous empirical studies. Opt...

a r t i c l e i n f o JEL classification: G32 G31 G33 C61 Keywords: Counterparty effect Market incompleteness Optimal capital structure This paper builds a static contingent-claim model that allows for examining the optimal capital structure with the joint arguments of counterparty default risk and market incompleteness. A first-passage-time model with jump default barrier is adopted to capture...

The risk of financial positions is measured by the minimum amount of capital to raise and invest in eligible portfolios of traded assets in order to meet a prescribed acceptability constraint. We investigate nondegeneracy, finiteness and continuity properties of these risk measures with respect to multiple eligible assets. Our finiteness and continuity results highlight the interplay between th...

An Information-Based Framework for Asset Pricing: X-Factor Theory and its Applications. This thesis presents a new framework for asset pricing based on modelling the information available to market participants. Each asset is characterised by the cash flows it generates. Each cash flow is expressed as a function of one or more independent random variables called market factors or “X-factors”. E...

Off-Balance Sheet (OBS) activities of large u.S. commercial banks have been growing rapidly in recent years. These activities represented 58% of total bank assets in 1984 and grew to 176% of total bank assets in 1988. Bank regulators are concerned that OBS activities increase bank risk, and proposed that some OBS activities be included in the calculation of a risk-based capital requirement. Thi...

This paper examines the conditions required to guarantee positive prices in the CAPM. Positive prices imply an upper bound on the equity premium. This upper bound depends on the degree of diversity of firms’ fundamentals, and it is independent of investors’ preferences. In economies with realistically diverse assets the only positive-price CAPM equilibrium theoretically possible is a degenerate...

We consider the standard discrete-time model of a frictionless financial market and show that the law of one price holds if and only if there exists a martingale density process with strictly positive initial value. In contrast to the classical no-arbitrage criteria, this density process may change its sign. We also give an application to the CAPM.