Showing papers by "J.P. Morgan & Co. published in 2007"

A Quantitative Comparison of Stochastic Mortality Models Using Data from England & Wales and the United States

Abstract: We compare quantitatively eight stochastic models explaining improvements in mortality rates in England &Wales and in the US. On the basis of the Bayes Information Criterion (BIC), we find that an extension of the Cairns, Blake & Dowd (2006b) model that incorporates the cohort effect fits the England & Wales data best, while for US data, the Renshaw & Haberman (2006) extension to the Lee & Carter (1992) model that also allows for a cohort effect provides the best fit. However, we identify problems with the robustness of parameter estimates of these models over different time periods. A different extension to the Cairns, Blake & Dowd (2006b) model that allows not only for a cohort effect, but also for a quadratic age effect, while ranking below the other models in terms of the BIC, exhibits parameter stability across different time periods for both data sets. This model also shows, for both data sets, that there have been approximately linear improvements over time in mortality rates at all ages, but that the improvements have been greater at lower ages than at higher ages, and that there are significant cohort effects.

Calibration and hedging under jump diffusion

Abstract: A jump diffusion model coupled with a local volatility function has been suggested by Andersen and Andreasen (2000). By generating a set of option prices assuming a jump diffusion with known parameters, we investigate two crucial challenges intrinsic to this type of model: calibration of parameters and hedging of jump risk. Even though the estimation problem is ill-posed, our results suggest that the model can be calibrated with sufficient accuracy. Two different strategies are explored for hedging jump risk: a semi-static approach and a dynamic technique. Simulation experiments indicate that each of these methods can sharply reduce risk exposure.

Where's Tamika Catchings? A Content Analysis of Female Athlete Endorsers in Magazine Advertisements

Abstract: Despite Title IX and increased levels of females' participation in sports, the use of female athletes as product endorsers has received limited attention. Some observers have suggested that there may be a media bias against female athletes and other problems related to how female athletes are portrayed to the public. The purpose of this study is to examine the frequency and nature of portrayals of female athletes when they appear as product endorsers in magazine advertisements. Results of a content analysis of a wide range of magazines indicate that females appear in just 12% of the ads featuring celebrity athlete endorsers. While female athlete endorsers are not commonly seen in any type of magazine, they are more prone to be found in women's magazines and are virtually absent from men's magazines and teen magazines. Findings also indicate that three-quarters of the female endorsers came from individual sports, as opposed to team sports. Another key result of the study is that female athletes we...

Theory and calibration of swap market models

Abstract: This paper introduces a general framework for market models, named Market Model Approach, through the concept of admissible sets of forward swap rates spanning a given tenor structure. We relate this concept to results in graph theory by showing that a set is admissible if and only if the associated graph is a tree. This connection enables us to enumerate all admissible models for a given tenor structure. Three main classes are identified within this framework, and correspond to the co-terminal, co-initial,and co-sliding model. We prove that the LIBOR market model is the only admissible model of a co-sliding type. By focusing on the co-terminal model in a lognormal setting, we develop and compare several approximating analytical formulae for caplets, while swaptions can be priced by a simple Black-type formula. A novel calibration technique is introduced to allow simultaneous calibration to caplet and swaption prices. Empirical calibration of the co-terminal model is shown to be faster, more robust and more efficient than the same procedure applied to the LIBOR market model. We then argue that the co-terminal approach is the simplest and most convenient market model for pricing and hedging a large variety of exotic interest-rate derivatives.

Illuminating the New Dark Influence on Trading and U.S. Market Structure

Abstract: Dark Pools are alternative trading systems (ATS) that do not display quotes in a traditional sense, like a stock exchange. Dark Pools are a complementary market in which the price of the trade being determined by the National Markets Bid/Offer (NBBO) spread but the execution of the order happens elsewhere in the Dark. In the U.S., the National Market System regulations (Regulation NMS) mandates that all trades regardless of venue, exchange or Dark Pool must cross within the NBBO – typically at the mid price. Dark Pools have been swathed in hype and attention for the last few years, while accounting for about 10-15% of all the transactions in the market. Why is it then that they have garnered so much attention? Why are there so many of them? What is their impact on trading and in the US markets?

Real Estate Comes of Age

Abstract: Real estate has gained wider acceptance as a legitimate institutional investment. The asset class continues to grow and adopt many of the features of the broader capital markets. International strategies, private equity strategies [with general partner - limited partner promoted fee structures], public REIT corporate governance, structured debt products (commercial mortgage-backed securities and commercial real estate collateralized debt obligations), hedge funds, as well as commercial real estate index-based derivatives are among the topics covered in this issue. Today real estate must compete in the alternative space with private equity, hedge funds, infrastructure and more. Yet, as several of the articles in this edition conclude, real estate retains its distinct features as an asset class; the role of real estate as a portfolio risk reducer looks sustainable over the long-term. Over long and short time periods, its return patterns are rarely in close synchronization with stocks and bonds, despite the adoption of the financial tools and techniques of the broader capital markets. This paradox-further integration with the broader capital markets, yet distinct and separate financial behavior-is the underlying theme of nearly all the articles in the issue.

On the term structure of loss distributions: a forward model approach

Abstract: We define forward copula models and introduce the concept of "chaining" such models. We discuss the use of these concepts in the calibration to the term structure of tranche quotes.

Privatisation in New Zealand and Australia: an empirical analysis

Abstract: Purpose – The paper aims to investigate the long‐run performance of privatised initial public offerings (IPOs) and their effects on the New Zealand share market (NZSE) and the Australian share market (ASX).Design/methodology/approach – The paper examines the relationship between privatisation and share market capitalisation, liquidity and share ownership. The research also evaluates long‐run risk‐return performance of the privatised companies' portfolios.Findings – The analysis reveals that privatisations have significantly increased share market capitalisation and have impacted on the market liquidity. In general, anyone investing in privatised companies' portfolios could have received significantly higher returns than investing in an aggregate market portfolio.Originality/value – The findings have significant practical implications for individual and institutional investors.

A GNSS-reflections simulator and its application to widelane observations

Abstract: This paper discusses an effort to create a fast, yet accurate GNSS-R simulator capable of spacecraft-altitude studies. A number of new techniques will be presented which were developed to significantly increase the simulation speed. The end goal of this work is to assess measurement fundamentals such as ocean altimetry accuracy as a function of altitude and antenna size. The first application of this new simulator was to evaluate the GPS L2-L5 widelane signal for altimetric applications. It has been suggested that this widelane signal could result in an accurate, coherent phase-delay height observable. Simulation results, along with a simple physical model, indicate this widelane combination does not produce a coherent phase observable under typical conditions. The incoherence appears to be due to the surface area corresponding to the signal's autocorrelation function being much larger than the widelane Fresnel zone.

On Model Selection and its Impact on the Hedging of Financial Derivatives

Abstract: The mathematical theory of derivatives pricing and risk-management is one of the most active fields of research for both academics and practitioners. The celebrated Black-Scholes-Merton (BS) pioneering work paved the way to the development of a general theory of option pricing through the concept of absence of market arbitrage and dynamic replication (Harrison and Pliska, 1981). As is well-known, the simplistic assumptions behind the BS model make it unsuitable to capture and explain the risk borne by complex (exotic) financial derivatives. The need for a departure from the BS paradigm is in fact evident from the analysis of historical time series (Bates, 1996; Pan, 2002; Chernov, Gallant, Ghysels and Tauchen, 2003; and Eraker, Johannes and Polson, 2003, among others), as well as from the observation of the volatility smile phenomenon (Heston, 1993; Dupire, 1994, among others). For these reasons a number of alternative models have been advocated by many authors. Roughly speaking, all dynamic arbitrage-free models aiming at generalizing BS theory can be divided in three main classes, according to the characteristics of the stochastic process driving the dynamics of the underlying assets.