Model Research
Should market-implied volatilities be adjusted when calibrating to government bond yields?
Posted on 17-11-2009 by Viktor Knava | 0 comments
Market-consistent economic scenario generators (ESGs) are typically calibrated to a term structure of risk-free interest rates, market-implied volatilities, and correlations between the returns on different asset classes.
In this context market-implied volatilities are those volatilities that, when combined with the banks’ assumptions about the risk-free term structure and used in…
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Is regime-switching a cure for equity fat tails?
Posted on 17-08-2009 by Viktor Knava | 0 comments
The standard textbook model for equity returns is one which assumes that the (log) equity return in excess of the risk-free rate is normally distributed with a given mean and volatility. It is well known that this model fails to capture some of the empirical properties of equity returns, in particular the observed likelihood of extremely low (and high) returns will be much higher than predicted…
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