Economics: Current and Future Developments Volume 1 (2nd Edition)

Author(s): Takashi Yasuoka

DOI: 10.2174/9781681086897118010010

Remarks On Real-World Models

Pp: 149-173 (25)

Buy Chapters

* (Excluding Mailing and Handling)

  • * (Excluding Mailing and Handling)

Abstract

SHS investigation development is considered from the geographical and historical viewpoint. 3 stages are described. Within Stage 1 the work was carried out in the Department of the Institute of Chemical Physics in Chernogolovka where the scientific discovery had been made. At Stage 2 the interest to SHS arose in different cities and towns of the former USSR. Within Stage 3 SHS entered the international scene. Now SHS processes and products are being studied in more than 50 countries.

Abstract

This chapter presents some remarks about real-world modeling. First, we examine the numerical di erences between real-world simulations and risk- neutral simulations, comparing the drift terms for the model types. Then, we investigate why the market price of risk is negative. This investigation is motivated by the following research question: Why does long-period observation tend to imply a negative value for the market price of risk? We introduce some simpli ed models (speci cally, the at yield model and the positive slope model) to answer this question. Next, we study the dynamical properties of the market price of risk. The mean price property of the market rice of risk in introduced to facilitate this. Throughout this book, we estimate the market price of risk under the assumption that it is constant during the sample period. Addressing this, we examine the validity of the constancy assumption for risk management by using a simpli ed model and the mean price property of the market price of risk. Additionally, Section 7.5 introduces the basic concepts of calculating credit exposure for counterparty credit risk management. Since some credit exposure should be calculated using the real-world probability, the real-world model bene ts from this subject. It is worth nothing here that Section 7.1 closely follows Yasuoka (2015); and Sections 7.2, 7.3, and 7.4 are newly written for this book.

Recommended Chapters

We recommend

Favorable 70-S: Investigation Branching Arrow

Authors:Bentham Science Books