In this paper, we address the crucial problems of parameters estimation of Collateralized Debt Obligation (CDO). We present a methodology for fair spread estimation of reconstituted (CDO) from European market data. A fundamental part of the pricing framework is the estimation of default probabilities and the structure of dependency. We present a copula based simulation procedure for pricing CDO...

In the insurance industry, spreadsheets have emerged as an invaluable tool to for product pricing, because it is relatively straightforward to create and maintain complex pricing models using Excel®. In fact, Excel is often preferred to “hard-code” whenever there are frequent changes to the calculations and business logic which under-pin the pricing of an insurance product. However, problems ar...

Financial derivatives written on an underlying can normally be priced and hedged accurately only after a suitable mathematical model for the underlying has been determined. This chapter explains the difficulties in finding a (unique) realistic model: model uncertainty. If the wrong model is chosen for pricing and hedging, unexpected and unwelcome financial consequences may occur. By “wrong mode...

The minimal distance equivalent martingale measure (EMM) defined in Goll and Rüschendorf (2001) is the arbitrage-free equilibrium pricing measure. This paper provides an algorithm to approximate its density and the fair price of any contingent claim in an incomplete market. We first approximate the infinite dimensional space of all EMMs by a finite dimensional manifold of EMMs. A Riemannian geo...

Financial engineering and financial innovation flourished in last decades. We have developed many new financial products to provide hedge instruments for risk management, and promoted market efficiency and completeness. The pricing problems of this financial field will try to build mathematical models and derive analytic pricing formulas. But most exotic derivatives are too complicated to deriv...

We introduce, in continuous time, an axiomatic approach to assign to any financial position a dynamic ask (resp. bid) price process. Taking into account both transaction costs and liquidity risk this leads to the convexity (resp. concavity) of the ask (resp. bid) price. Time consistency is a crucial property for dynamic pricing. Generalizing the result of Jouini and Kallal, we prove that the No...

OBJECTIVE To describe an analytical framework for quantifying the societal savings and financial consequences of a health information exchange (HIE), and to demonstrate its use in designing pricing policies for sustainable HIEs. MATERIALS AND METHODS We developed a linear programming model to (1) quantify the financial worth of HIE information to each of its participating institutions and (2)...

We examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice of debt contracts. Consistent with the theoretical predictions, we find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers debt choice. Furthermore, we also find that the intended u...

We analyze the interaction of firm product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline’s choices of quality and price as dynamic decisions that trade off current cash flows for future revenue. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, contro...

The Black-Scholes model is the standard approach used for pricing financial options. However, although being theoretically strong, option prices valued by the model often differ from the prices observed in the financial markets. This paper applies a hybrid neural network which preprocesses financial input data for improving the estimation of option market prices. This model is comprised of two ...