Hersh Shefrin Volume 6, Number 4, Fourth Quarter 2008 Behavioral finance has profound implications for the pricing of all assets, from standard fixed income securities and equity to complex derivatives. This paper describes a general, unified framework for analyzing the impact of sentiment on asset prices. The approach brings together the psychological assumptions favored by… Read more
Special Issues
BOOK REVIEWS: Fortune’s Formula
Volume 5, Number 4, Fourth Quarter 2007 Fortune’s Formula William Poundstone Reviewed by Javier Estrada View PDF… Read more
CASE STUDIES: Dependable Trust
Jack L. Treynor Volume 5, Number 4, Fourth Quarter 2007 View PDF… Read more
Interest Rate Models Implied Volatility Function Stochastic Movements
Thomas S. Y. Ho and Blessing Mudavanhu Volume 5, Number 4, Fourth Quarter 2007 This paper presents a one-factor and a two-factor arbitrage-free interest rate models with parsimonious implied volatility functions. The models are empirically tested on the entire swaption surface in three currencies (US dollar, Euro, and Japanese yen) over a 5-year period. They… Read more
The Pricing of Credit Default Swaps During Distress
Jochen R. Andritzky and Manmohan Singh Volume 5, Number 4, Fourth Quarter 2007 Credit default swaps (CDS) provide the buyer with insurance against certain types of credit events by entitling him to exchange any of the bonds permitted as deliverable against their par value. Unlike bonds, whose risk spreads are assumed to be the product… Read more
What Happened to the Quants in August 2007
Amir E. Khandani and Andrew W. Lo Volume 5, Number 4, Fourth Quarter 2007 During the week of August 6, 2007, a number of quantitative long/short equity hedge funds experienced unprecedented losses. Based on TASS hedge-fund data and simulations of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid… Read more
Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk
Dale F. Gray, Robert C. Merton and Zvi Bodie Volume 5, Number 4, Fourth Quarter 2007 This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign… Read more
INSIGHTS: A Brief Review of “The Basis”
James Batterman Volume 5, Number 4, Fourth Quarter 2007 Credit derivatives provide an alternative to the cash market, allowing investors to manage exposure to a wide range of entities. In a brief case study looking at several relatively volatile corporate names, we set out to describe, in general terms, the nature and behavior of the… Read more
BOOK REVIEWS: Financial Modeling of the Equity Market: From CAPM to Cointegration
Volume 5, Number 2, Second Quarter 2007 Financial Modeling of the Equity Market: From CAPM to Cointegration Frank J. Fabozzi, Sergio M. Facardi and Peter N. Kolm Reviewed by Cel Kulasekaran View PDF… Read more
CASE STUDIES: Common Sense Investing
Jack L. Treynor Volume 5, Number 1, First Quarter 2007 View PDF… Read more