Search results for "interest rate"
showing 10 items of 139 documents
Ruin probabilities in the presence of heavy tails and interest rates
1997
Abstract We study the infinite time ruin probability for the classical Cramer-Lundberg model, where the company also receives interest on its reserve. We consider the large claims case, where the claim size distribution F has a regularly varying tail. Hence our results apply for instance to Pareto, loggamma, certain Benktander and stable claim size distributions. We prove that for a positive force of interest δ the ruin probability ψδ (u) ∼ κδ (1 - F(u)) as the initial risk reserve u→∞. This is quantitatively different from the non-interest model, where ψ(u) ∼ κ (1 – F(y)) dy.
Pricing of Asian exchange rate options under stochastic interest rates as a sum of options
2002
The aim of the paper is to develop pricing formulas for long term European type Asian options written on the exchange rate in a two currency economy. The exchange rate as well as the foreign and domestic zero coupon bond prices are assumed to follow geometric Brownian motions. The emphasis is devoted to the discretely sampled Asian option. It is shown how the value of this option can be approximated as the sum of Black-Scholes options. The formula is obtained under the extension of results developed by Rogers and Shi (1995) and Jamshidian (1991). In addition bounds for the pricing error are determined. Comparing with Monte Carlo simulation the pricing is found to be very precise.
Can fiscal policy stimulus boost economic recovery
2011
We assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, we show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. Consequently, the attempts of fiscal policy to mitigate stock price developments (e.g. via taxes on capital gains) may severely de-stabilize housing markets. The empirical findings also point to significant fiscal multiplier effects in the context of severe housing busts, which gives rise to the importance of the im…
Closed Form Approximation of Swap Exposures
2013
This paper provides closed form lower and upper bounds for the price of European swaption on cross currency basis swap with the presence of dynamic basis spreads. Cross currency basis spreads are treated as integrals of spot spreads, approach familiar from interest rate models. The spot spread is modelled by two-factor mean reverting Gaussian model that is equivalent to two-factor Hull-White model introduced by [Hull and White(1994)]. This model allows closed form approximations and relatively well fitting and simple calibration to the spread term structure.
Macroeconomic Fluctuations as a Source of Luck in CEO Compensation
2010
Macroeconomic fluctuations such as interest rate and exchange rate can be considered sources of good or bad “luck” for corporate performance. Incentive effects of performance-based compensation for management may be weakened or biased by macroeconomic influences depending on the ability of management to adjust for operations. We decompose the impacts on CEO compensation to distinguish between macroeconomic (anticipated and unanticipated) and “intrinsic” sources. Total CEO compensation is measured by including options awarded or options exercised. Both measures depend strongly on variations in macro factors but the time patterns differ. The macroeconomic factors increased total awarded compe…
Debating Sound Money in Early Modern Europe: From Dualist to Metallic Monetary Systems
2019
International audience; In this paper, we present the monetary debates in Europe from the XVIth to the XVIIIth centuries from the viewpoint of the problem of good and sound money. The framework of the paper is built on a typology of monetary systems, by which a dualist system is distinguished from a metallic one. Under the dualist system, the value in units of account of the specie in circulation was defined by monetary proclamations (Einaudi locates this era from Charlemagne to the French Revolution). Metallist proponents aimed at preventing any kind of manipulations with a radical transformation of the system of payment, which gave birth to a metallic monetary system from the very end of …
THE CARMA INTEREST RATE MODEL
2014
In this paper, we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This model is able to present an adequate statistical description of the short and forward rate dynamics. We show that this is a tractable term structure model and provides closed-form solutions to bond prices, yields, bond option prices, and the term structure of forward rate volatility. We demonstrate the capabilities of our model by calibrating it to a panel of spot rates and the empirical volatility of forward rates simultaneously, making the model consistent with both the spot rate dynamics and forward rate volatility structure.
Sequential Warrant Exercise in Large Trader Economies
2007
It is well known that the sequential (premature) exercise of American-type warrants "may" be advantageous for large warrantholders, even in the absence of regular dividends, because using exercise proceeds to expand the firm's scale increases the riskiness of an equity share. We present sufficient conditions for the non-optimality of sequential exercise implying that for realistic interest rate levels even large warrantholders are better off not to exercise long before maturity. This result, however, does not justify in general the simplifying restriction that warrants or convertible securities are valued as if exercised as a block.
A Reconsideration of the Role of Forward-Market Arbitrage in Keynes’s and Hicks’s Theories of the Term Structure of Interest Rates
2014
International audience; This paper develops the relationship between Hicks’s and Keynes’s writings on the theory of the term structure of interest rates, and shows in detail how Hicks built on and extended Keynes’s account. According to this theory, the level of the long-term interest rate is determined by expectations of future short-term rates. Keynes’s thinking contained several notions – such as the preferred habitat of lenders, the theory of forward markets, and risk-premiums – which Hicks used to give a more complete theory of the term structure of interest rates. Besides implementing these notions in his own theory, Hicks introduced the concepts of the preferred habitat of borrowers,…
Holes in the Dike: The Global Savings Glut, U.S. House Prices and the Long Shadow of Banking Deregulation
2016
We explore empirically how capital inflows into the US and financial deregulation within the United States interacted in driving the run-up (and subsequent decline) in US housing prices over the period 1990-2010. To obtain an ex ante measure of financial liberalization, we focus on the history of interstate-banking deregulation during the 1980s, i.e. prior to the large net capital inflows into the US from China and other emerging economies. Our results suggest a long shadow of deregulation: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to capital inflows. We provide evidence that global imbalances were a major positive funding sh…