Estimation of physical intensity models for default risk

The estimation of physical intensity processes in the context of default risk is investigated here. Using data from Moody's Corporate Bond Default Database, a term structure of default probabilities for different rating classes is constructed each year from 1970 to 2001. Two specifications used for modeling the dynamics of the (risk‐neutral) intensity process in the bond‐pricing literature are then examined empirically: the Ornstein–Uhlenbeck and square‐root cases. The results reveal that the Ornstein–Uhlenbeck case is not an adequate modeling alternative with a rejection of this specification in five out of seven credit classes and nonsignificant mean reverting behavior for all credit classes. The square‐root case obtains better results with four credit classes out of seven for which this specification cannot be rejected and significant mean reversion parameters in many cases. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:95–113, 2009     

Improving lattice schemes through bias reduction

Lattice schemes for option pricing, such as tree or grid/partial differential equation (p.d.e.) methods, are usually designed as a discrete version of an underlying continuous model of stock prices. The parameters of such schemes are chosen so that the discrete version “best” matches the continuous one. Only in the limit does the lattice option price model converge to the continuous one. Otherwise, a discretization bias remains. A simple modification of lattice schemes which reduces the discretization bias is proposed. The modification can, in theory, be applied to any lattice scheme. The main idea is to adjust the lattice parameters in such a way that the option price bias, not the stock price bias, is minimized. European options are used, for which the option price bias can be evaluated precisely, as a template to modify and improve American option methods. A numerical study is provided. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:733–757, 2006     

Issues in European business education in the mid-nineteenth century: a comparative perspective

This article explores the emergence of European business education in the mid-nineteenth century. Drawing on archival analysis the typological study which this article proposes, attempts to show that business education before 1870 seems to have been a geographically and institutionally broader expression than has been described up to now. It identifies four organisational models of business education and reveals that higher business education was not limited to the Higher Schools of Commerce alone. It concludes that the European states took, directly or not, an interest in business education well before the end of the nineteenth century.     

Default Risk in Corporate Yield Spreads

An important research question examined in the credit risk literature focuses on the proportion of corporate yield spreads attributed to default risk. This topic is reexamined in light of the different issues associated with the computation of default probabilities obtained from historical default data. We find that the estimated default risk proportion in corporate yield spreads is sensitive to the ex ante estimated term structure of default probabilities used as inputs. This proportion can become a large fraction of the spread when sensitivity analyses are made with respect to the period over which the probabilities are estimated and the recovery rates.     

Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter

This paper proposes a unified state-space formulation for parameter estimation of exponential-affine term structure models. The proposed method uses an approximate linear Kalman filter which only requires specifying the conditional mean and variance of the system in an approximate sense. The method allows for measurement errors in the observed yields to maturity, and can simultaneously deal with many yields on bonds with different maturities. An empirical analysis of two special cases of this general class of model is carried out: the Gaussian case (Vasicek 1977) and the non-Gaussian case (Cox Ingersoll and Ross 1985 and Chen and Scott 1992). Our test results indicate a strong rejection of these two cases. A Monte Carlo study indicates that the procedure is reliable for moderate sample sizes.     

Computing American option prices in the lognormal jump–diffusion framework with a Markov chain

This note examines a numerical approach for computing American option prices in the lognormal jump–diffusion context. The approach uses the known transition density of the process to build a discrete-time, homogenous Markov chain to approximate the target jump–diffusion process. Numerical results showing the performance of the proposed method are examined.     

A Simplified Quadrature Approach for Computing Bermudan Option Prices

We examine a simple quadrature approach to compute the prices of Bermudan options when the value of the corresponding European claim can be computed in closed form, one period before maturity. Using a constant grid of stock prices at early exercise time points, the known value of the European option is used as a smoothing device to enable efficient numerical integ ration with quadrature approaches. Examples with the geometric Brownian motion context and the lognormal jump‐diffusion context are provided.