Papers by Stuart Turnbull
Journal of Econometrics, 1990
This paper investigates the consequences of stochastic volatility for pricing spot foreign curren... more This paper investigates the consequences of stochastic volatility for pricing spot foreign currency options. A diffusion model for exchange rates with stochastic volatility is proposed and estimated. The parameter estimates are then used to price foreign currency options and the predictions are compared to observed market prices. We find that allowing volatility to be stochastic results in a much better fit to the empirical distribution of the Canada-U.S. exchange rate, and that this improvement in fit results in more accurate predictions of observed option prices.
This article provides a new methodology for pricing and hedging derivative securities involving c... more This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. The authors apply the foreign currency analogy of R. Jarrow and S. Turnbull (1991)
Abstract: This article provides a Markov model for theterm structure of credit risk spreads. The ... more Abstract: This article provides a Markov model for theterm structure of credit risk spreads. The modelis based on Jarrow and Turnbull (1995), with thebankruptcy process following a discrete statespace Markov chain in credit ratings. The parametersof this process are easily estimatedusing observable data. This model is useful forpricing and hedging corporate debt with imbeddedoptions, for pricing and hedging OTCderivatives with
Management Science, 2008
1 We thank Josh Lerner for helpful comments. Tian Zhao and Guowei Zhang provided excellent resear... more 1 We thank Josh Lerner for helpful comments. Tian Zhao and Guowei Zhang provided excellent research assistance. All remaining shortcomings are our responsibility.
Journal of Banking & Finance, 2000
Economic theory tells us that market and credit risks are intrinsically related to each other and... more Economic theory tells us that market and credit risks are intrinsically related to each other and not separable. We describe the two main approaches to pricing credit risky instruments: the structural approach and the reduced form approach. It is argued that the standard ...
Journal of Econometrics, 1990
This paper investigates the consequences of stochastic volatility for pricing spot foreign curren... more This paper investigates the consequences of stochastic volatility for pricing spot foreign currency options. A diffusion model for exchange rates with stochastic volatility is proposed and estimated. The parameter estimates are then used to price foreign currency options and the predictions are compared to observed market prices. We find that allowing volatility to be stochastic results in a much better fit to the empirical distribution of the Canada-U.S. exchange rate, and that this improvement in fit results in more accurate predictions of observed option prices.
This article presents a simple model for valuing risky debt that explicitly incorporates a firm's... more This article presents a simple model for valuing risky debt that explicitly incorporates a firm's credit rating as an indicator of the likelihood of default. As such, this article presents an arbitrage-free model for the term structure of credit risk spreads and their evolution through time. This model will prove useful for the pricing and hedging of corporate debt with We would like to thank John Tierney of Lehman Brothers for providing the bond index price data, and Tal Schwartz for computational assistance. We would also like to acknowledge helpful comments received from an anonymous referee. Send all correspondence to
Journal of Empirical Finance, 2009
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Papers by Stuart Turnbull