International Journal of Theoretical and Applied Finance

The default risk of listed companies not only threatens the interests of enterprises and internal staff but also leads the investors to face significant financial losses. Thus, this study attempts to establish an effective default prediction system for better corporate governance. In present times, it is not uncommon for a senior manager to serve in two or more companies. Our contribution has threefold. First, we construct an indicator system of default prediction for Chinese listed companies by considering the company relationship score. Then, we reversely infer the optimal ratios of the default and nondefault companies’ degrees of influence on their related companies with the maximum area under the curve (AUC). Third, the empirical results show that the default prediction accuracy is improved by using our indicator system that includes the company relationship score.

The collateral choice option allows a collateral-posting party the opportunity to change the type of security in which the collateral is deposited. Due to nonzero collateral basis spreads, this optionality significantly impacts asset valuation. Because of the complexity of valuing the option, many practitioners resort to deterministic assumptions on the collateral rates. In this paper, we focus on a valuation model of the collateral choice option based on stochastic dynamics. Intrinsic differences in the resulting collateral choice option valuation and its implications for collateral management are presented. We obtain sensitivities of the collateral choice option price under both the deterministic and the stochastic model, and we show that the stochastic model attributes risks to all involved collateral currencies. Besides an inability to capture volatility effects, the deterministic model exhibits a digital structure in which only the cheapest-to-deliver currency influences the valuation at a given time. We further consider hedging an asset with the collateral choice option by a portfolio of domestic and foreign zero-coupon bonds that do not carry the collateral choice option. We propose static hedging strategies based on the crossing times of the deterministic model and based on variance-minimization under the stochastic model. We show how the weights of this model can be explicitly determined with the semi-analytical common factor approach and we show in numerical experiments that this strategy offers good hedging performance under minimized variance.

To assist with the detection of bubbles and negative bubbles in financial markets, a criterion is introduced to indicate whether a market is likely to be in a superexponential regime (where growth in such a regime would correspond to an asset price bubble and decline to an negative bubble) as opposed to “normal” exponential behavior typified by a constant rate of growth or decline. The criterion is founded on the Johansen–Ledoit–Sornette model of asset dynamics in a bubble and is derived from a linear fit to observed data with a nonlinear time transformation with parameters distributed uniformly in their permitted ranges. Making use of expected values rather than the underlying distribution, the criterion is straightforward and efficient to compute and can in principle be applied in real time to intra-day markets as well as longer timescales. In some circumstances, the criterion is shown to have certain predictive qualities when applied to a portfolio of stocks, and could be used as input into algorithmic trading strategies. A simple strategy is described which is based on market reversion predictions of a portfolio of stocks and which in back-testing generates notable returns.

At each maturity a discrete return distribution is inferred from option prices. Option pricing models imply a comparable theoretical distribution. As both the transformed data and the option pricing model deliver points on a simplex, the data is statistically modeled by a Dirichlet distribution with expected values given by the option pricing model. The resulting setup allows for maximum likelihood estimation of option pricing model parameters with standard errors that enable the testing of hypotheses. Hypothesis testing is then illustrated by testing for the consistency of risk neutral return distributions being those of a Brownian motion with drift time changed by a subordinator. Models mixing processes of independent increments with processes related to solutions of Ornstein–Uhlenbeck (OU) equations are also tested for the presence of the OU component. Solutions to OU equations may be viewed as processes of perpetual motion responding continuously to their past movements. The tests support the rejection of Brownian subordination and the presence of a perpetual motion component.