Search results for "regime switching"

showing 3 items of 3 documents

Portfolio diversification in the sovereign credit swap markets

2018

We develop models for portfolio diversification in the sovereign credit default swaps (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified. However, we identify regime switching in the times series of CDS spreads and spread returns, and the optimal diversified strategies can be regime dependent. The developed models trade off the CVaR risk measure against expected return, consistently with the statistical properties of spreads. We consider three investment strategies suited for different CDS market participants: for investors with long positions, speculators that hold unco…

Credit default swapInvestment strategyFinancial economicsDiversification (finance)Portfolio diversificationGeneral Decision SciencesMonetary economicsManagement Science and Operations ResearchCDS spreadConditional Value-at-RiskSettore SECS-S/06 -Metodi Mat. dell'Economia e d. Scienze Attuariali e Finanz.Swap (finance)Eurozone crisi0502 economics and businessSystematic riskEconomics050207 economicsSpeculation050208 finance05 social sciencesCredit derivativeCDS spreads; Conditional Value-at-Risk; Credit derivatives; Eurozone crisis; Portfolio diversification; Regime switching; Decision Sciences (all); Management Science and Operations ResearchRegime switchingCredit default swap indexExpected shortfallDecision Sciences (all)Active managementSovereign creditPortfolioCredit derivative
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Pricing sovereign contingent convertible debt

2018

We develop a pricing model for Sovereign Contingent Convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's Credit Default Swap (CDS) spread. We model CDS spread regime switching, which is prevalent during crises, as a hidden Markov process, coupled with a mean-reverting stochastic process of spread levels under fixed regimes, in order to obtain S-CoCo prices through simulation. The paper uses the pricing model in a Longstaff-Schwartz American option pricing framework to compute future state contingent S-CoCo prices for risk management. Dual trigger pricing is also discussed using the idiosyncratic CDS spread for the sovereign debt together with a broad market index. …

Credit default swapmedia_common.quotation_subjectMonetary economicsregime switchingFOS: Economics and businesssovereign debtSettore SECS-S/06 -Metodi Mat. dell'Economia e d. Scienze Attuariali e Finanz.Sovereignty0502 economics and business050207 economicsSovereign debtConvertible bondmedia_commonContingent bond050208 finance05 social sciencesRegime switchingPaymentcredit default swapDebt restructuringdebt restructuringBusinessPricing of Securities (q-fin.PR)General Economics Econometrics and FinanceQuantitative Finance - Pricing of SecuritiesFinance
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Asset Return Dynamics under Alternative Learning Schemes

2009

In this paper we design an artificial financial market where endogenous volatility is created assigning to the agents diverse prior beliefs about the joint distribution of returns, and, over time, making agents rationally update their beliefs using common public information. We analyze the asset price dynamics generated under two learning environments: one where agents assume that the joint distribution of returns is IID, and another where agents believe in the existence of regimes in the joint distribution of asset returns. We show that the regime switching learning structure can generate all the most common stylized facts of financial markets: fat tails and long-range dependence in volati…

Public informationStylized factlearningFinancial economicsregime switching modelheterogeneous beliefsFinancial marketAsset allocationRegime switchingAsset returnSettore SECS-S/06 -Metodi Mat. dell'Economia e d. Scienze Attuariali e Finanz.Joint probability distributionEconomicsEconometricsVolatility (finance)Agent based model
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