Jarrow-Yildirim model for inflation: theory and applications

This thesis deals with inflation theory, focussing on the model of Jarrow & Yildirim, which is nowadays used when pricing inflation derivatives. After recalling main results about short and forward interest rate models, the dynamics of the main components of the market are derived. Then the most important inflation-indexed derivatives are explained (zero coupon swap, year-on-year, cap and floor), and their pricing proceeding is shown step by step. Calibration is explained and performed with a common method and an heuristic and non standard one. The model is enriched with credit risk, too, which allows to take into account the possibility of bankrupt of the counterparty of a contract. In this context, the general method of pricing is derived, with the introduction of defaultable zero-coupon bonds, and the Monte Carlo method is treated in detailed and used to price a concrete example of contract. Appendixes: A: martingale measures, Girsanov's theorem and the change of numeraire. B: some aspects of the theory of Stochastic Differential Equations; in particular, the solution for linear EDSs, and the Feynman-Kac Theorem, which shows the connection between EDSs and Partial Differential Equations. C: some useful results about normal distribution.

Three Essays in Empirical Asset Pricing

The financial crisis of 2007-2008 led to extraordinary government intervention in firms and markets. The scope and depth of government action rivaled that of the Great Depression. Many traded markets experienced dramatic declines in liquidity leading to the existence of conditions normally assumed to be promptly removed via the actions of profit seeking arbitrageurs. These extreme events motivate the three essays in this work. The first essay seeks and fails to find evidence of investor behavior consistent with the broad 'Too Big To Fail' policies enacted during the crisis by government agents. Only in limited circumstances, where government guarantees such as deposit insurance or U.S. Treasury lending lines already existed, did investors impart a premium to the debt security prices of firms under stress. The second essay introduces the Inflation Indexed Swap Basis (IIS Basis) in examining the large differences between cash and derivative markets based upon future U.S. inflation as measured by the Consumer Price Index (CPI). It reports the consistent positive value of this measure as well as the very large positive values it reached in the fourth quarter of 2008 after Lehman Brothers went bankrupt. It concludes that the IIS Basis continues to exist due to limitations in market liquidity and hedging alternatives. The third essay explores the methodology of performing debt based event studies utilizing credit default swaps (CDS). It provides practical implementation advice to researchers to address limited source data and/or small target firm sample size.

Numerical simulation for the 3D seepage flow with fractional derivatives in porous media

In this paper, the numerical simulation of the 3D seepage flow with fractional derivatives in porous media is considered under two special cases: non-continued seepage flow in uniform media (NCSFUM) and continued seepage flow in non-uniform media (CSF-NUM). A fractional alternating direction implicit scheme (FADIS) for the NCSF-UM and a modified Douglas scheme (MDS) for the CSF-NUM are proposed. The stability, consistency and convergence of both FADIS and MDS in a bounded domain are discussed. A method for improving the speed of convergence by Richardson extrapolation for the MDS is also presented. Finally, numerical results are presented to support our theoretical analysis.

Modified alternating direction methods for solving a two-dimensional non-continuous seepage flow with fractional derivatives

In this paper, a two-dimensional non-continuous seepage flow with fractional derivatives (2D-NCSF-FD) in uniform media is considered, which has modified the well known Darcy law. Using the relationship between Riemann-Liouville and Grunwald-Letnikov fractional derivatives, two modified alternating direction methods: a modified alternating direction implicit Euler method and a modified Peaceman-Rachford method, are proposed for solving the 2D-NCSF-FD in uniform media. The stability and consistency, thus convergence of the two methods in a bounded domain are discussed. Finally, numerical results are given.

Numerical methods for fractional partial differential equations with Riesz space fractional derivatives

In this paper, we consider the numerical solution of a fractional partial differential equation with Riesz space fractional derivatives (FPDE-RSFD) on a finite domain. Two types of FPDE-RSFD are considered: the Riesz fractional diffusion equation (RFDE) and the Riesz fractional advection–dispersion equation (RFADE). The RFDE is obtained from the standard diffusion equation by replacing the second-order space derivative with the Riesz fractional derivative of order αset membership, variant(1,2]. The RFADE is obtained from the standard advection–dispersion equation by replacing the first-order and second-order space derivatives with the Riesz fractional derivatives of order βset membership, variant(0,1) and of order αset membership, variant(1,2], respectively. Firstly, analytic solutions of both the RFDE and RFADE are derived. Secondly, three numerical methods are provided to deal with the Riesz space fractional derivatives, namely, the L1/L2-approximation method, the standard/shifted Grünwald method, and the matrix transform method (MTM). Thirdly, the RFDE and RFADE are transformed into a system of ordinary differential equations, which is then solved by the method of lines. Finally, numerical results are given, which demonstrate the effectiveness and convergence of the three numerical methods.

Do derivatives have a role in the risk-shifting behaviour of fund managers?

In this paper we examine the extent to which derivatives are used to affect the risk-shifting behaviour of Australian equity fund managers. We find, after periods of good and poor performance, the risk-shifting behaviour of fund managers is different between derivative users and non-users. Our results support the gaming and active competition hypotheses but there is little support for the cash flow hypothesis. The study also allows for a complex reporting environment by analysing data across three alternate time periods: the calendar year, financial year and quarterly frames. Given that our results are not consistent across time periods for users and non-users of derivatives, some caution in interpretation is required.

A political economy perspective on persistent inequality, inflation, and redistribution

In this paper we examine the dynamics of the link between inequality and inflation from a political economy perspective. We consider a simple dynamic general equilibrium model in which agents vote over the desired inflation rate in each period, and inequality is persistent. Inflation in our model is a mechanism of redistribution, and we find that the link between inequality and inflation within any period or over time depends on institutional and preference related parameters. Furthermore, we find that differences in the initial distributions of wealth can yield a diverse set of patterns for the evolution of the inflation and inequality link. Relative to existing literature, our model leads to more precise predictions about the inflation-inequality correlation. To that end, results in the extant empirical literature on the inflation and inequality link need to be interpreted with caution.

Hydrogen-bonding in cyclic imides and amide carboxylic acid derivatives from the facile reaction of cis-cyclohexane-1,2-carboxylic anhydride with o- and p-anisidine and m- and p-aminobenzoic acids

The structures of the open chain amide carboxylic acid rac-cis-[2-(2-methoxyphenyl)carbamoyl]cyclohexane-1-carboxylic acid, C15H19NO4, (I) and the cyclic imides rac-cis-2-(4-methoxyphenyl)-3a,4,5,6,7,7-hexahydroisoindole-1,3-dione,C15H17NO3, (II), chiral cis-2-(3-carboxyphenyl)-3a,4,5,6,7,7a-hexahydroisoindole-1,3-dione, C15H15NO4,(III) and rac-cis-2-(4-carboxyphenyl)- 3a,4,5,6,7,7a-hexahydroisoindole-1,3-dione monohydrate, C15H15NO4. H2O) (IV), are reported. In the amide acid (I), the phenylcarbamoyl group is essentially planar [maximum deviation from the least-squares plane = 0.060(1)Ang. for the amide O atom], the molecules form discrete centrosymmetric dimers through intermolecular cyclic carboxy-carboxy O-H...O hydrogen-bonding interactions [graph set notation R2/2(8)]. The cyclic imides (II)--(IV) are conformationally similar, with comparable phenyl ring rotations about the imide N-C(aromatic) bond [dihedral angles between the benzene and isoindole rings = 51.55(7)deg. in (II), 59.22(12)deg. in (III) and 51.99(14)deg. in (IV). Unlike (II) in which only weak intermolecular C-H...O(imide) hydrogen bonding is present, the crystal packing of imides (III) and (IV) shows strong intermolecular carboxylic acid O-H...O hydrogen-bonding associations. With (III), these involve imide O-atom acceptors, giving one-dimensional zigzag chains [graph set C(9)], while with the monohydrate (IV), the hydrogen bond involves the partially disordered water molecule which also bridges molecules through both imide and carboxyl O-atom acceptors in a cyclic R4/4(12) association, giving a two-dimensional sheet structure. The structures reported here expand the structural data base for compounds of this series formed from the facile reaction of cis-cyclohexane-1,2-dicarboxylic anhydride with substituted anilines, in which there is a much larger incidence of cyclic imides compared to amide carboxylic acids.