In the first paper, "A reduced-form contingent convertible bond model with deterministic conversion intensity", Patrick Cheridito and Zhikai Xu develop a pricing and hedging methodology for contingent convertible bonds, which have received increased attention since the 2007-9 financial crisis. The authors' approach is to rely on as few stochastic factors as possible in order to effectively calibrate their model to market data, which they illustrate with practical examples.
The second paper, "Ultra-fast scenario analysis of mortgage prepayment risk" by Alexios Theiakos, Jurgen M. C. Tas, Han van der Lem and Drona Kandhai, addresses the computational complexity inherent to mortgage prepayment hedging models. The authors show how to efficiently implement parallel computational approaches for models based on either finite differences or Monte Carlo simulation.
In our third paper, "Risk measures and the impact of asset price bubbles", Robert A. Jarrow and Felipe Bastos G. Silva show that the presence of pricing bubbles distorts standard risk measures, such as value-at-risk and conditional value-at-risk. In particular, these measures lead to inaccurately small capital requirements. The authors then show how the latter can be better addressed in the alternative risk measure that they propose.
In the issue's fourth and final paper, "Combining alpha streams with costs", Zura Kakushadze studies the effects of trading costs on the execution of optimal portfolio allocations. Specifically, the author contrasts the impact of both linear and nonlinear execution costs on internal trades, which benefit from reduced turnover, and on trades through nonoverlapping platforms.
Warrington College of Business Administration,
University of Florida