Javier F. Navas

• PhD Purdue University, MBA, MS Ind. Engineering
• Professor (Associate) at Pablo de Olavide University

In stochastic string models, the bond market is complete if trading strategies are distribution-valued processes

In the traditional literature on firm models it is generally accepted that secured debt reduces the agency costs of debt, as it alleviates the underinvestment and overinvestment problems. We demonstrate that secured debt can also produce the opposite effects. Under the [Merton 1974, On the Pricing of Corporate Debt: The Risk Structure of Interest R...

We develop a Gaussian stochastic string model that provides exact closed-form expressions for the prices and hedging portfolios of caps and swaptions. Under certain conditions, our pricing expressions reduce to Black (1976) formulas. We also propose a stochastic string LIBOR market model that generalizes the models of Brace et al. (1997) and Longst...

In this chapter we use some recent hedging results for bond options, obtained with Malliavin calculus in the context of the stochastic string framework, to hedge different types of Asian options. In all the cases, we show that the hedging portfolio has no bank account part.

We analyze certain results on the stochastic string modeling of the term structure of interest rates and we apply them to study the sensitivities and the hedging of options with payoff functions homogeneous of degree one. Under the same framework, we use an exact multi-factor extension of Jamshidian (1989) to find the sensitivities for swaptions an...

We apply the Malliavin calculus to the stochastic string framework and obtain a Clark-Ocone-like formula. This result allows us to rewrite the hedging portfolio explicitly in terms of the Malliavin derivative of the discounted payoff. We illustrate this new result with two applications. Firstly, we obtain a closed-form expression for the hedging po...

We present a new general setting for the classical immunization problem under which we recover and generalize many of the results in the literature related to immunization of bond portfolios. We also propose a new duration measure adapted to our framework that allows us to obtain immunized portfolios by duration matching. A new concept of portfolio...

We study bond market completeness under infinite-dimensional models and show that, with stochastic string models, the market is complete if we consider strategies as generalized functions. We also obtain completeness for infinite-dimensional HJM models within the stochastic string framework. This result is not at odds with the incompleteness obtain...

We develop a Gaussian stochastic string model that provides closed-form expressions for the prices of caps and swaptions that, under certain conditions, reduce to Black (1976) formulas. We also propose a stochastic string LIBOR market model that generalizes the models of Brace et al. (1997) and Longstaff et al. (2001a) and allows us to obtain cap p...

We present the stochastic string model of Santa-Clara and Sornette (2001), as reformulated by Bueno-Guerrero et al. (2014), as a unifying theory of the continuous-time modeling of the term structure of interest rates. We provide several new results, such as: a) an orthogonality condition for the volatilities in the Heath, Jarrow, and Morton (1992)...

This paper reformulates the stochastic string model of Santa-Clara and Sornette using stochastic calculus with continuous semimartingales. We present some new results, such as: (a) the dynamics of the short-term interest rate, (b) the PDE that must be satisfied by the bond price, and (c) an analytic expression for the price of a European bond call...

We propose a valuation framework for pricing European call warrants on the issuer's own stock that allows for debt in the issuer firm. In contrast to other works that also price warrants with dilution issued by levered firms, ours uses only observable variables. Thus, we extend the models of Crouhy and Galai [J. Bank. Finance, 1994, 18, 861-880] an...

This paper analyses the robustness of Least-Squares Monte Carlo, a technique recently proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least-squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on option prices. Nume...

This chapter analyzes the empirical performance of alternative option pricing models using Black and Scholes (1973) as a benchmark. Specifically, we consider the Heston (1993) and Corrado and Su (1996) models and price call options on the S&P 500 index over the period from November 2010 to April 2011, evaluating each model by computing in- and out-...

This paper uses real option theory to asses the value of agricultural land that can be seeded with crops. We consider one- and two-factor models for the evolution of crop prices through time and derive a partial differential equation (PDE) for the land value. We model the potential selling decision of the land owner as a put option and incorporate...

Gu [Gu, Y. A. (2002). Valuing the option to purchase an asset at a proportional discount. The Journal of Financial Research, 25 (1), 99-109] introduces proportional-strike options to study a residential real estate program in China. Under this program, a state employee can buy her house at a fraction of the market price. The employee can also quali...

Ante la presencia de dificultades financieras las empresas tienen a su alcance diferentes alternativas para reestructurarse y evitar su liquidación. Estas medidas se pueden clasificar en operativas y financieras. En este artículo repasamos dichas medidas, describimos los procedimientos existentes para llevar a cabo la reorganización de la empresa y...

One of the most frequently used methods used by companies facing financial difficulties is the refinancing of the debt. In this article, we suggest a model to evaluate the resources of a company with two debts, when the possibility exists of refinancing the second of them. For this, we extend the model proposed by Geske and Johnson (1984) using the...

When firms are in financial distress, they can be restructured in a number of ways to avoid liquidation. We can distinguish between operational and financial measures. In this work we review these measures, we describe the existing procedures to perform a corporate restructuring, and we analyze its effects on shareholder's wealth. We also study wha...

Ante la presencia de dificultades financieras las empresas poseen diferentes alternativas, entre las cuales se encuentra la reorganización. En este artículo valoramos los recursos propios de una empresa cuando ésta tiene la posibilidad de llevar a cabo una reorganización de su estructura financiera. Las fórmulas de valoración obtenidas se basan en...

A number of studies have analyzed the effect of voluntary corporate liquidations on shareholder wealth. Others have examined some specific aspects, such as procedural and tax differences, of voluntary liquidating firms. In this paper we perform a preliminary study of the characteristics of firms that voluntary liquidate using a logit model. The pap...

En este trabajo estudiamos el ajuste de la curva de rendimientos de la zona euro con el modelo bifactorial de equilibrio general de Longstaff y Schwartz (1992) (LS) y con el modelo bifactorial de no arbitraje de Schaefer y Schwartz (1984) (SS). Como referencia, también utilizamos el modelo unifactorial de Cox, Ingersoll, y Ross (1985b) (CIR). LS us...

This paper presents an interest rate model in which prices of fixed income assets depend on time to maturity and two factors whose sum is equal to the instantaneous interest rate. Assuming correlation between both factors and applying no-arbitrage conditions, we find a closed-form expression for bond prices. Implications for the term structure of i...

We study European options on the ratio of the stock price to its average and vice versa. Some of these options are traded in the Australian Stock Exchange since 1992, thus we call them Australian options. For geometric averages, we obtain closed-form expressions for option prices. For arithmetic means, we use different approximations that produce v...

A common way to incorporate discontinuities in asset returns is to add a Poisson process to a Brownian motion. The jump-diffusion process provides probability distributions that typically fit market data better than those of the simple diffusion process. To compare the performance of these models in option pricing, the total volatility of the jump-...

This paper analyses the robustness of Least-Squares Monte Carlo, a technique proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least-squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on option prices. Numerical res...

The paper shows that mispriced deposit insurance and capital regulation were of second order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms’ leverage carry over to banks, except for banks whose capital ratio is close to the r...

(WP16/02 Clave pdf) We compare the Longstaff & Schwartz (1992)(LS) two-factor general equilibrium model with the Schwartz (1984)(SS) two-factor arbitrage model of the term structure of interest rates.The Cox, Ingersoll, and Ross (1985)(CIR) one-factor model is also studied as a reference.LS use as state variables the short term interest rate and th...

(WP17/02 Clave pdf) In this study, one of the simplifying assumptions of the McConnell & Schwartz (1986) LYON pricing model is relaxed. We present a valuation model that incorporates stochastic interest rates. LYON prices are computed numerically.To ensure convergence, we use the modified explicit finite difference method of Hull & White (1990). Fo...

(WP18/02 Clave apdf) The jump-diffusion process provides probability distributions that typically fit market data better than those of the simple diffusion process. To compare the performance of these models in option pricing, the total volatility of the jump-diffusion process must be used in the Black-Scholes formula. A number of authors, includin...

(WP19/02 Clave pdf) This paper analyses the robustness of Least-Squares Monte Carlo, a technique recently proposed by Longstaff and Schwartz (2001) for pricing American options. This method is based on least-squares regressions in which the explanatory variables are certain polynomial functions. We analyze the impact of different basis functions on...

This paper compares the performance of «static» and «dynamic» term structure models, when pricing government bonds in the Spanish market. On the one hand, we price bonds using the yield curve constructed with the cubic spline method of McCulloch [1971], as well as the curve based on short-term interbank deposits and interest rate swaps. On the othe...

This article prices caps and swaptions in the Spanish market using the Vasicek, Cox, Ingersoll, and Ross and Hull and White (HW) models. Derivative prices obtained with the Vasicek and CIR models estimated from time series data are very similar, but they differ substantially from the values given by the HW model fitted to the term structure of inte...

This article prices caps and swaptions in the Spanish market using the Vasicek, Cox, Ingersoll, and Ross and Hull and White (HW) models. Derivative prices obtained with the Vasicek and CIR models estimated from time series data are very similar, but they differ substantially from the values given by the HW model fitted to the term structure of inte...

A number of studies have analyzed the effect of voluntary corporate liquidations on shareholder wealth. Others have examined some specific aspects, such as procedural and tax differences, of voluntary liquidating firms. In this paper we perform a preliminary study of the characteristics of firms that voluntary liquidate using a logit mo- del. The p...

The existing bibliography supports the notion that warrant prices depend on the credit risk of the warrant issuer. The purpose of this paper is to value warrants taking into account their issuer's credit risk. We distinguish two types of warrants depen-ding on whether the exercise of the warrant implies dilution of the firm's equity. On the one han...