New Economics Papers
on Financial Markets
Issue of 2007‒11‒24
six papers chosen by

  1. Long-term Risk: An Operator Approach By Lars Peter Hansen; Jose A Sheinkman
  2. Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Models By Robert J Shiller
  3. Examining the bond premium puzzle with a DSGE model By Glenn D. Rudebusch; Eric T. Swanson
  4. Option Pricing When the Regime-Switching Risk is Priced By Tak Kuen Siu; Hailiang Yang Unim; John W Lau
  5. A credit risk model for Italian SMEs By B. Luppi; M. Marzo; E. Scorcu
  6. Credit risk and Basel II: Are non-profit firms financially different? By B. Luppi; M. Marzo; E. Scorcu

  1. By: Lars Peter Hansen; Jose A Sheinkman
    Date: 2007–11–15
  2. By: Robert J Shiller
    Date: 2007–11–15
  3. By: Glenn D. Rudebusch; Eric T. Swanson
    Abstract: The basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the "bond premium puzzle." We show that the term premium on long-term bonds in the canonical dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to the data. We find that introducing long-memory habits in consumption as well as labor market frictions can help fit the term premium, but only by seriously distorting the DSGE model's ability to fit other macroeconomic variables, such as the real wage; therefore, the bond premium puzzle remains.
    Keywords: Interest rates ; Econometric models
    Date: 2007
  4. By: Tak Kuen Siu; Hailiang Yang Unim; John W Lau
    Abstract: Recently, there has been considerable interest in investigating option valuation problem in the context of regime-switching models. However, most of the literature consider the case that the risk due to switching regimes is not priced. Relatively little attention has been paid to investigate the impact of switching regimes on the option price when this source of risk is priced. In this paper, we shall articulate this important problem and consider the pricing of an option when the price dynamic of the underlying risky asset is governed by a Markov-modulated geometric Brownian motion. We suppose that the drift and volatility of the underlying risky asset switch over time according to the state of an economy, which is modeled by a continuous-time hidden Markov chain. We shall develop a two-stage pricing model which can price both the diffusion risk and the regime-switching risk based on the Esscher transform and the minimization of the maximum entropy between an equivalent martingale measure and the real-world probability measure over different states. The latter is called a min-max entropy problem. We shall conduct numerical experiments to illustrate the effect of pricing regime-switching risk. The results of the numerical experiments reveal that the impact of pricing regime-switching risk on the option prices is significant.
    Keywords: Option valuation; Regime-switching risk; Two-stage pricing procedure; Esscher trans- form; Martingale restriction; Min-max entropy problem.
    JEL: G10 G12
    Date: 2007–11
  5. By: B. Luppi; M. Marzo; E. Scorcu
    Date: 2007–07
  6. By: B. Luppi; M. Marzo; E. Scorcu
    Date: 2007–07

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.