Philip Protter, ORIE, Cornell University
Liquidity Risk and Arbitrage Pricing Theory
Classical theories of financial markets assume an infinitely liquid
market and that all traders act as price takers. This theory is a good
approximation for highly liquid stocks, although even there it does
not apply well for large traders or for modelling transaction costs.
We extend the classical approach by formulating a new model that takes
into account illiquidities. Our approach hypothesizes a stochastic supply
curve for a security's price as a function of trade size. This leads
to a new definition of a self-financing trading strategy, additional
restrictions on hedging strategies, and some interesting mathematical
issues. The talk will be based on joint work with Umut Cetin and Robert
The paper itself can be found at the URL: http://www.orie.cornell.edu/~protter/finance.html
It is paper number 4.
John Hull, Rotman School of Management, University
Valuation of a CDO and an nth to Default CDS Without Monte Carlo
In this paper we develop a fast procedure for valuing collateralized
debt obligations and nth to default swaps. The procedure is based on
a factor copula default correlation model. We show how many different
copula models can be generated by using different distributional assumptions
within the factor model. We examine the impact on valuations of default
probabilities, correlations, and the copula model chosen.
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