Browsing by Author "Elliott, Robert J."

Now showing 1 - 8 of 8
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    Applications of regime switching to finance
    (2006) Chan, Leung Lung; Elliott, Robert J.
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    Asset Pricing, Capital Structure and Financial Economics: Pricing, Hedging, and Risk
    (2015-10-02) Shen, Jia; Elliott, Robert J.
    Asset Pricing is a central topic in Finance Theory. Explaining why different assets have different risk premia is a main goal of Asset Pricing Theory. In this thesis, I explore various topics in Finance Theory, including topics in asset pricing, capital structure, and financial economics. Chapter 1 investigates a regime switching Lucas economy in continuous time, with multiple dividend streams and labor income. We determine the asset prices in equilibrium in the economy with regime switching, and derive a system of partial differential equations for the asset prices and the short interest rate. In Chapter 2, I consider credit risk. Motivated by empirical findings, we propose a framework using unobservable, underlying Markov chains, to model naturally both frailty and default contagion. Chapter 3 is subsequent research based on Chapter 2. We consider a reduced-form, intensity-based credit risk model, which allows for both frailty and default contagion, using a so-called “self-exciting” intensity, in the sense that the default intensity varies not only with the risk factors, but also depends on the previous default history of all the firms. In Chapter 4, we turn our attention to an area that is related to both asset pricing and corporate finance. We investigate the optimal capital structure of a corporate when the dynamics of the assets (both growth rate and volatility) change following different states of the economy. In Chapter 5, we investigate credit risk and the credit spread of a corporate defaultable bond when the dynamics of the assets change according to different states of the economy. In Chapter 6, we investigate a model where the asset price follows hidden Markov modulated jump-diffusion dynamics. This framework incorporates two important empirically observed features: jumps and regime shifts.
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    Backward Stochastic Difference Equations for Dynamic Convex Risk Measures on a Binomial Tree
    (Applied Probability Trust, 2014-08-04) Elliott, Robert J.; Siu, Tak Kuen; Cohen, Samuel N.
    Using backward stochastic difference equations (BSDEs), this paper studies dynamic convex risk measures for risky positions in a simple discrete-time, binomial tree model. A relationship between BSDEs and dynamic convex risk measures is developed using nonlinear expectations. The time consistency of dynamic convex risk measures is discussed in the binomial tree framework. A relationship between prices and risks is also established. Two particular cases of dynamic convex risk measures, namely risk measures with stochastic distortions and entropic risk measures, and their mathematical properties are discussed.
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    Essays on continuous time finance
    (2009) Lyle, Matthew R.; Elliott, Robert J.
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    Essays on regime switching models in finance
    (2008) Miao, Hong; Elliott, Robert J.
    This dissertation consists of four essays focusing on applications of regime switching models in finance. The first essay discusses the investment timing problem in a regime switching framework. We consider a firm facing a future real investment opportunity whose investment cost depends on economic situations. Our approach considers the investment timing as a perpetual American option when the strike price switches between two possible values depending on the economic situations. It gives better optimal investment policy than the widely used standard real option method. The second essay extends the general equilibrium pricing model into an economy with two "states". Based on assumptions of a CRRA utility function, we have derived a partial differential equation satisfied by the representative agent's cost function. A form of the solution of the partial differential equation has been given in general equilibrium with intermediate consumption. In the case when the representative agent does not have intennediate consumption, we have found an explicit solution of the cost function. A closed-form expression for the riskless rate has been derived. We have also provided a partial differential equation satisfied by any contingent claim written on any risky asset in the market. The stochastic discount factor has been investigated in our framework. Based on the stochastic discount factor, we have suggested an explanation for the equity premium puzzle. The third essay studies a stochastic volatility model in a regime switching world. We have derived closed fonn expressions for all the parameters by using the filtering techniques. The fourth essay provides a new approach for computing value at risk and expected shortfall in a regime switching economy. Based on the Student-t distribution assumption, we have suggested an approach to evaluate value at risk and expected shortfall. We use the Student-t distribution to capture the fat-tail phenomenon and regime switching to model the volatility clustering. Closed form expressions for computing value at risk and expected shortfall for both a single asset and a portfolio are proposed. The approach is easy to apply.
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    Measure change and filtering
    (2011) Deng, Jia; Elliott, Robert J.; Badescu, Alexandru
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    The earnings implications of pension expense: a stochastic analysis of ten Canadian companies
    (2004) Joss, Paul Nathan; Elliott, Robert J.
    Recent challenges to the actuarial pension model and a movement to harmonize international accounting standards both suggest that the current Canadian standards for pension accounting, CICA 3461, may see substantial revision during upcoming years. To understand better the implications of these possible accounting changes, this paper presents the results of a stochastic analysis that quantify how the volatility of pension expense for a sample of ten Canadian companies sponsoring defined benefit plans will be increased by the adoption of immediate recognition accounting. For certain companies this increase is significant and is shown to have a material earnings impact. The implications of this earnings volatility for the future of defined benefit pension plans are also explored.