The end of the risk-free rate

The risk-free myth


In his corner study on the fifth floor of King’s College, London, Damiano Brigo is unsettled – and only partly because he’s still getting used to the shift from the City to academia. His main concern is that the financial crisis has destroyed well-accepted concepts central to quantitative theory and derivatives pricing.

“Anything can default,” he says. “All the theory of valuation at the moment is based on the existence of a risk-free asset to be associated with the basic pricing measure. If

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