Contributions published at Quantitative Finance (Marc Chesney)

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We introduce a real options model in order to quantify the moral hazard impact of credit default swap (CDS) positions on the corporate default probabilities. Moral hazard is widely addressed in the insurance literature, where the insured agent may become less cautious about preventing the risk from occurring. Importantly, with CDS the moral hazard problem may be magnified since one can buy multiple protections for the same bond. To illustrate this issue, we consider a firm with the possibility of switching from an investment to another one. An investor can influence the strategic decisions of the firm and can also trade CDS written on the firm. We analyze how the decisions of the investor influence the firm value when he is allowed to trade credit default contracts on the firm’s debt. Our model involves a time-dependent optimal stopping problem, which we study analytically and numerically, using the Longstaff–Schwartz algorithm. We identify the situations where the investor exercises the switching option with a loss, and we measure the impact on the firm’s value and firm’s default probability. Contrary to the common intuition, the investors’ optimal behavior does not systematically consist in buying CDSs and increase the default probabilities. Instead, large indifference zones exist, where no arbitrage profits can be realized. As the number of the CDSs in the position increases to exceed several times the level of a complete insurance, we enter in the zone where arbitrage profits can be made. These are obtained by implementing very aggressive strategies (i.e., increasing substantially the default probability by producing losses to the firm). The profits increase sharply as we exit the indifference zone.

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Die Weltbevölkerung wächst. Doch obwohl der Bedarf an Grundnahrungsmitteln steigt, gelangen immer mehr Agrarrohstoffe in die Industrie. Da wird aus Mais Biosprit, und Soja wandert in die Tierfutterverarbeitung. Doch nicht nur auf diese Weise verursacht die industrialisierte Welt Probleme. Agrarrohstoffe sind mittlerweile auch ein begehrtes Handelsgut an der Börse. Die Spekulation mit Nahrungsmitteln steht im Verdacht, für Hungerkrisen mitverantwortlich zu sein.

In this paper, a new technique for pricing of European and American Parisian options, that we call the québécoisation method, is developed. We study the pricing of Parisian options in a hyper-exponential jump-diffusion model using the double Laplace-Carson transform with respect to the time to maturity and the residual Parisian time (time to expiration of the Parisian window) of the system of two partial integro-differential equations describing the option price dynamics. The transformed, i.e., québécoised, option price and hedging parameters delta and gamma are computed in a closed form, and the final results are obtained via the two-dimensional Gaver-Stehfest inversion algorithm. Our pricing method is analytically tractable, and it provides important economic insights for pricing and hedging of European and American Parisian options in the presence of jumps.

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Sustainable finance has been attracting increasing attention in recent years. In this White Paper, the authors take stock of sustainable finance in Switzerland. They characterize potential drivers of sustainability and also discuss business interests and challenges related to incorporating sustainability considerations into the activities of Swiss financial sector players. Their analysis suggests that, apart from a range of specialized institutions and initiatives, the Swiss financial sector as a whole is currently not an international leader in terms of sustainable finance. An important implication of their study is that more high-level endorsement, leadership, and decisive action by all the major players of the Swiss financial sector is needed in order to strengthen Switzerland’s international position in the sustainable finance world.

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