Time-Varying Skew in VIX Derivatives Pricing

This paper proposes a new reduced-form model for the pricing of VIX derivatives that includes an independent stochastic jump intensity factor and cojumps in the level and variance of VIX, while allowing the mean of VIX variance to be time varying. I fit the model to daily prices of futures and European options from April 2007 through December 2017. The empirical results indicate that the model significantly outperforms all other nested models and improves on benchmark by 21.6% in sample and 31.2% out of sample. The model more accurately portrays the tail behavior of VIX risk-neutral distribution for both short and long maturities, as it better captures the time-varying skew found to be largely independent of the level of the VIX smile. This paper was accepted by Kay Giesecke, finance.

Monte Carlo Valuation of Corporate Bonds Using Price Data

<p>Corporate debt securities play a large part in financial markets and hence accurate modeling of the prices of these securities is integral. Ericsson and Reneby (2005) state that the corporate bond market in the US doubled between 1995 and 2005 and is now larger than the market for US treasuries. Although the theoretical corporate bond pricing literature is vast, very little empirical research to test the effectiveness of these models has been published. Corporate bond pricing models are split into two families of models. The first, are the structural models which endogenise default by modeling it as an event that may eventuate due to the insolvency of the underlying firm. The second family of models is the newer class of reduced-form models that exogenise default by modeling it as some random process (default intensity). The reduced-form models have been formulated largely due to the empirical failures of the structural family to accurately model prices and spreads. However as Ericsson and Reneby (2005) point out, an inadequate estimation approach may explain the poor performance of the structural models. Structural models are, therefore, the focus of this paper. We, however, do estimate a reduced-form model in order to make a comparison between the two types of model. There are no published papers (to my knowledge) in which both types of model are implemented ...</p>

Monte Carlo Valuation of Corporate Bonds Using Price Data

<p>Corporate debt securities play a large part in financial markets and hence accurate modeling of the prices of these securities is integral. Ericsson and Reneby (2005) state that the corporate bond market in the US doubled between 1995 and 2005 and is now larger than the market for US treasuries. Although the theoretical corporate bond pricing literature is vast, very little empirical research to test the effectiveness of these models has been published. Corporate bond pricing models are split into two families of models. The first, are the structural models which endogenise default by modeling it as an event that may eventuate due to the insolvency of the underlying firm. The second family of models is the newer class of reduced-form models that exogenise default by modeling it as some random process (default intensity). The reduced-form models have been formulated largely due to the empirical failures of the structural family to accurately model prices and spreads. However as Ericsson and Reneby (2005) point out, an inadequate estimation approach may explain the poor performance of the structural models. Structural models are, therefore, the focus of this paper. We, however, do estimate a reduced-form model in order to make a comparison between the two types of model. There are no published papers (to my knowledge) in which both types of model are implemented ...</p>

An Economic Analysis of Tropical Forest Resource Conservation in a Protected Area

In this paper, we develop a reduced form model for factors influencing the conservation of forest resources. We then estimate it using a bivariate negative binomial regression model with cases of illegal farming and illegal cattle grazing in the W Reserve in West Africa. Our results show that population size and farm area in the periphery of the W Reserve are associated with an increase of 2.4% and 7.1% of the illegal farming, respectively. On the other hand, income level, the existence of a checkpoint, and the distance between the villages and the reserve decrease the illegal grazing activities by 7.3%, 63.2%, and 2.3%, respectively.

INSTABILITY OF SUNSPOT EQUILIBRIA IN REAL BUSINESS CYCLE MODELS UNDER INFINITE HORIZON LEARNING

This paper examines the stability of sunspot equilibria in one-sector RBC models under infinite horizon learning. We present general conditions under which the reduced-form model can possess E-stable sunspot equilibria and apply these conditions to three prominent one-sector RBC models. We find that the rational expectations sunspot equilibria are generally unstable under learning.

PRICING INTEREST RATE DERIVATIVES UNDER MONETARY CHANGES

The goal of this paper is to develop a reduced-form model for pricing derivatives on the overnight rate. The model incorporates jumps around central bank (CB) meetings. More specifically, rate changes are decomposed into fluctuations between CB meetings and deterministic timed jumps following CB meetings. This approach is useful for practitioners, since it allows the extraction of expectations regarding central bank decisions embedded in liquid instruments, as well as the use of these expectations for the pricing of less liquid derivatives, such as options, in a consistent manner. We discuss applications to 30-Day Fed funds options and IDI options traded in Brazil.