English, Article edition: FIRST PASSAGE TIMES FOR RISK-TRACKING PROXIES VICTOR VAUGIRARD

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Physical Description
  • article
Language
  • English

Edition details

Title
  • FIRST PASSAGE TIMES FOR RISK-TRACKING PROXIES
Author
  • VICTOR VAUGIRARD
Physical Description
  • article
Notes
  • This paper determines first passage time distributions with a two-fold emphasis. The focus is first set on interest rate randomness. It derives a closed-form solution in the case of moving boundaries, indexed on risk-free bonds, and where interest rates obey mean-reverting processes and underlyings follow lognormal diffusion processes. It turns next to the underlyings, which may not be exchange-traded and whose dynamics obey jump-diffusion processes. It builds an equilibrium valuation framework and determines the rational-expectations equilibrium price of digital options. As those underlyings may be risk-tracking indices, the article can be applied to pricing insurance-linked securities, such as catastrophe bonds.
  • Hitting time, soft barrier, time change, jump-diffusion, shadow price
  • RePEc:wsi:ijtafx:v:08:y:2005:i:04:p:445-462
Language
  • English
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