Subscribe to the gold package and get unlimited access to Shamra Academy
Register a new userA Unified Framework for Pricing Credit and Equity Derivatives
105
0
0.0
(
0
)
Added by
Erhan Bayraktar
Publication date
2008
fields
Informatics Engineering
and research's language is
English
Ask ChatGPT about the research
No Arabic abstract
We propose a model which can be jointly calibrated to the corporate bond term structure and equity option volatility surface of the same company. Our purpose is to obtain explicit bond and equity option pricing formulas that can be calibrated to find a risk neutral model that matches a set of observed market prices. This risk neutral model can then be used to price more exotic, illiquid or over-the-counter derivatives. We observe that the model implied credit default swap (CDS) spread matches the market CDS spread and that our model produces a very desirable CDS spread term structure. This is observation is worth noticing since without calibrating any parameter to the CDS spread data, it is matched by the CDS spread that our model generates using the available information from the equity options and corporate bond markets. We also observe that our model matches the equity option implied volatility surface well since we properly account for the default risk premium in the implied volatility surface. We demonstrate the importance of accounting for the default risk and stochastic interest rate in equity option pricing by comparing our results to Fouque, Papanicolaou, Sircar and Solna (2003), which only accounts for stochastic volatility.
rate research
Read More
We propose a novel credit default model that takes into account the impact of macroeconomic information and contagion effect on the defaults of obligors. We use a set-valued Markov chain to model the default process, which is the set of all defaulted obligors in the group. We obtain analytic characterizations for the default process, and use them to derive pricing formulas in explicit forms for synthetic collateralized debt obligations (CDOs). Furthermore, we use market data to calibrate the model and conduct numerical studies on the tranche spreads of CDOs. We find evidence to support that systematic default risk coupled with default contagion could have the leading component of the total default risk.
When they are damaged or injured, soft biological tissues are able to self-repair and heal. Mechanics is critical during the healing process, as the damaged extracellular matrix (ECM) tends to be replaced with a new undamaged ECM supporting homeostatic stresses. Computational modeling has been commonly used to simulate the healing process. However, there is a pressing need to have a unified thermodynamics theory for healing. From the viewpoint of continuum damage mechanics, some key parameters related to healing processes, for instance, the volume fraction of newly grown soft tissue and the growth deformation, can be regarded as internal variables and have related evolution equations. This paper is aiming to establish this unified framework inspired by thermodynamics for continuum damage models for the healing of soft biological tissues. The significant advantage of the proposed model is that no textit{ad hoc} equations are required for describing the healing process. Therefore, this new model is more concise and offers a universal approach to simulate the healing process. Three numerical examples are provided to demonstrate the effectiveness of the proposed model, which is in good agreement with the existing works, including an application for balloon angioplasty in an arteriosclerotic artery with a fiber cap.
Despite the great promise of the physics-informed neural networks (PINNs) in solving forward and inverse problems, several technical challenges are present as roadblocks for more complex and realistic applications. First, most existing PINNs are based on point-wise formulation with fully-connected networks to learn continuous functions, which suffer from poor scalability and hard boundary enforcement. Second, the infinite search space over-complicates the non-convex optimization for network training. Third, although the convolutional neural network (CNN)-based discrete learning can significantly improve training efficiency, CNNs struggle to handle irregular geometries with unstructured meshes. To properly address these challenges, we present a novel discrete PINN framework based on graph convolutional network (GCN) and variational structure of PDE to solve forward and inverse partial differential equations (PDEs) in a unified manner. The use of a piecewise polynomial basis can reduce the dimension of search space and facilitate training and convergence. Without the need of tuning penalty parameters in classic PINNs, the proposed method can strictly impose boundary conditions and assimilate sparse data in both forward and inverse settings. The flexibility of GCNs is leveraged for irregular geometries with unstructured meshes. The effectiveness and merit of the proposed method are demonstrated over a variety of forward and inverse computational mechanics problems governed by both linear and nonlinear PDEs.
In a multi-dimensional diffusion framework, the price of a financial derivative can be expressed as an iterated conditional expectation, where the inner conditional expectation conditions on the future of an auxiliary process that enters into the dynamics for the spot. Inspired by results from non-linear filtering theory, we show that this inner conditional expectation solves a backward SPDE (a so-called `conditional Feynman-Kac formula), thereby establishing a connection between SPDE and derivative pricing theory. The benefits of this representation are potentially significant and of both theoretical and practical interest. In particular, this representation leads to an alternative class of so-called mixed Monte-Carlo / PDE numerical methods.
We shall study backward stochastic differential equations and we will present a new approach for the existence of the solution. This type of equation appears very often in the valuation of financial derivatives in complete markets. Therefore, the identification of the solution as the unique element in a certain Banach space where a suitably chosen functional attains its minimum becomes interesting for numerical computations.
Log in to be able to interact and post comments
comments
Fetching comments
Sign in to be able to follow your search criteria
