nep-rmg 2012-02-15 papers

on Risk Management

Issue of 2012‒02‒15
two papers chosen by
Stan Miles
Thompson Rivers University

A tractable LIBOR model with default risk By Zorana Grbac; Antonis Papapantoleon
On return-volatility correlation in financial dynamics By J. Shen; B. Zheng

A tractable LIBOR model with default risk

By:	Zorana Grbac; Antonis Papapantoleon
Abstract:	We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.
Date:	2012–02
URL:	http://d.repec.org/n?u=RePEc:arx:papers:1202.0587&r=rmg

On return-volatility correlation in financial dynamics

By:	J. Shen; B. Zheng
Abstract:	With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the return-volatility correlation of the time series, while other characteristics, such as the probability distribution of returns and long-range time-correlation of volatilities etc., remain essentially unchanged. This suggests that the leverage effect or anti-leverage effect in financial markets arises from a kind of feedback return-volatility interactions, rather than the long-range time-correlation of volatilities and asymmetric probability distribution of returns. Further, we show that large volatilities dominate the return-volatility correlation in financial dynamics.
Date:	2012–02
URL:	http://d.repec.org/n?u=RePEc:arx:papers:1202.0342&r=rmg

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