Applications of Arbitrage-free Models: New Frontiers in Interest Rate, Credit and Energy Risks Third Annual Bloomberg Lecture in Finance THOMAS S. Y. HO PhD PRESIDENT THC OCTOBER 26, 2009
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Arbitrage-free Term Structure Models 2
Valuation models
Derivative pricing (relative valuation) under interest rate, credit and other risk drivers
Applications
Trading Portfolio management Enterprise risk management
Impacts on the markets
Price discovery process Regulatory policies in the financial markets
Introduction
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Questions Addressed 3
What are the model’s economic principles that make
the model popular and fundamental? What are the frontiers of applications of the model in going forward? What are my cautionary notes on the use of the model? Detail discussions are available in the references
Introduction
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References 4 Amin,
Kaushik I., and Andrew J. Morton, 1994, “ Implied Volatility Functions in Arbitrage-free Term Structure Models, “ Journal of Financial Economics, 35 (2), 141-180 Benth, Fred Espen, Lars Ekeland, Ragner Hauger and Bjorn Fredrik Nielsen 2003 “A Note on Arbitrage-free Pricing of Forward Contracts in Energy Market” Applied Mathematical Finance 10, 325-336 Eydeland, Alexander and Krzysztof Wolyniec 2003 Energy and Power Risk Management, Wiley Finance Harrison, J Michael, and David M. Kreps, 1979 “Martingales and Arbitrage in Multiperiod Securities Markets
