The papers in this issue of The Journal of Risk offer analytical as well as numerical and empirical approaches to problems related to financial risk management, derivatives hedging, credit risk and corporate finance.
In the issue's first paper, "A simple normal inverse Gaussian-type approach to calculate value-at-risk based on realized moments", Christian Lau proposes estimating the parameters of the normal inverse Gaussian distribution using realized variance, kurtosis and skewness. He then shows empirically that the resulting value-at-risk is very competitive against parametric and semiparametric alternatives that make use of high-frequency volatility and filtered historical simulation.
In our second paper, "First- and second-order Greeks in the Heston model", Jiun Hong Chan, Mark Joshi and Dan Zhu address the issue of estimating, via Monte Carlo simulation, the first two hedge parameters that are critical to derivatives hedging. They present evidence that algorithmic differentiation, which involves a sequence of simple arithmetic operations and elementary functions, is particularly well-suited to pathwise differentiation under Lipschitz continuity.
The third paper in the issue, "The signalling properties of the shape of the credit default swap term structure" by Jenny Castellanos, Nick Constantinou and Wing Lon Ng, is an empirical study that assesses the predictive power of time-varying credit default swaps (CDS) spreads. They show that for a variety of firms, single-name CDS curves fitted using the Nelson-Siegel model are leading indicators of future implied and excess volatility, and they include illustrations that cover the 2007-9 financial crisis.
Finally, in "Mergers and acquisitions: collar contracts", An Chen and Christian Hilpert price a type of derivatives contract (a collar) that was introduced to protect against wide fluctuations in the equity values of both the acquirer and the target. The authors develop analytical expressions that provide evidence that collars are beneficial to target investors for both all-cash and stock-for-stock transactions. They also show that the advantage of a barrier option provision for the early termination of a merger and acquisition process can vary substantially, depending on the volatilities of both target and acquirer as well as their correlation.
University of Florida