Fourth Quarter (2007)

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

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

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

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