Thomas S Y Ho

Thomas S Y Ho
Independent Researcher

PhD Mathematics

About

96
Publications
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5,569
Citations

Publications

Publications (96)
Book
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Article
Full-text available
The COVID 19 crisis has challenged balance sheet managers to re-define interest rate risk and re-examine interest rate models while trying to understand the impact of many unanswered questions. In this article, I try to answer these questions.
Article
Full-text available
The coronavirus has disrupted the interest rate markets seeing negative interest rates has become a possibility. Some questions that you can find answered in this article “Local Volatilities Model of interests rates”: “Is Lognormal or normal interest rate model applicable?”, “How should the balance sheet be managed if negative rates prevail?”, “How...
Article
Full-text available
We all know the Coronavirus has disrupted the interest rate markets. But do we know what the market expects going forward? How can we price a floating rate note or adjustable-rate mortgage when we do not know how rates (and hence interest payments) will evolve, even becoming negative if implied by the market pricing? Of course, today economists hav...
Article
This paper proposes an equity index contingent claim model. The model assumes that the equity broad-based market indices’ stochastic movements are contingent to macroeconomic risk factors that are derived from Ho, Palacios and Stoll (2012, 2013) and Ho and Lee (2015 b, c) theoretical models. The results show that these factors can explain the equit...
Article
This paper provides a dynamic stochastic macro-financial model that describes the impact of the credit market on real production risk and provides some empirical evidence of the reasonableness of the model. Our model shows that the uncertain real sector output affects the performance of the credit market, which in turn, impacts the real production...
Article
This paper provides a structural macro-financial model that can be used for the cost and benefit analysis of alternative financial regulatory regimes. The model solves for the optimal financial sector size to the real aggregate asset (household leverage) and to the aggregate capital (financial leverage) that maximize the expected real output. This...
Chapter
Interest movement models are important to financial modeling because they can be used for valuing any financial instruments whose values are affected by interest rate movements. Specifically, we can classify the interest rate movement models into two categories: equilibrium models and no-arbitrage models. The equilibrium models emphasize the equili...
Article
A financial system improves the allocation of real resources and enhances the performance of the production economy, but these benefits are offset in part by the risk of financial distress and the associated deadweight loss resulting from bankruptcy costs. We argue that “tiers” of financial claims increase complexity and fragility of the financial...
Chapter
Even though risk management is the quality control of finance to ensure the smooth functioning of the business model and the corporate model, this chapter takes a more focused approach to risk management. We begin by describing the methods to calculate risk measures. We then describe how these risk measures may be reported. Reporting provides feedb...
Article
This paper presents a one-factor and a two-factor arbitrage-free interest rate models with parsimonious implied volatility functions. The models are empirically tested on the entire swaption surface in three currencies (US dollar, Euro, and Japanese yen) over a 5-year period. They are shown to be robust in explaining the swaption values, and the im...
Article
This paper describes a business model in a contingent claim modeling framework. The model defines a “primitive firm” as the underlying risky asset of a firm. The firm’s revenue is generated from a fixed capital asset and the firm incurs both fixed operating costs and variable costs. In this context, the shareholders hold a retention option (paying...
Article
The authors have used an interest rate stochastic movement model, or the Ho-Lee model, to evaluate interest contingent claims. Once the interest rate binomial process can be specified under the condition that there are no arbitrage opportunities in the binomial process, any interest contingent claims can be evaluated in a manner similar to the pric...
Article
This study extends the generalized Ho–Lee model to the credit derivative swap (CDS) curve movements that ensures the hazard rate movement is arbitrage-free for any given CDS curve. This study shows that the generalized Ho–Lee model is not limited to pricing the interest contingent claims. The Ho–Lee model can be equally applicable to pricing the cr...
Article
Full-text available
There are three integral components to value a fixed rate mortgage loan: (1) the mortgagors' American straddle option on the underling loan, (a call option to refinance and a put option to default); (2) the mortgagors' heterogeneous behavior in exercising the options inefficiently; and (3) the market price of risk, (the option adjusted spread (OAS)...
Chapter
Interest movement models are important to financial modeling because they can be used for valuing any financial instruments whose values are affected by interest rate movements. Specifically, we can classify the interest rate movement models into two categories: equilibrium models and no-arbitrage models. The equilibrium models emphasize the equili...
Chapter
Even though risk management is the quality control of finance to ensure the smooth functioning of the business model and the corporate model, this chapter takes a more focused approach to risk management. We begin by describing the methods to calculate risk measures. We then describe how these risk measures may be reported. Reporting provides feedb...
Article
The market of variable annuities has grown tremendously in recent years and has become a significant part of our capital markets. These equity and interest rate structured products offer a broad range of guarantees, whose risks are typically borne by the insurers' balance sheets. The limited risk capital of the life insurance industry may constrain...
Article
Full-text available
Risk management techniques used in banks and trading floors are generally not applicable to insurance companies. Risk measures and risk monitoring approaches must be developed to respond to the challenges to the insurance industry. This paper describes the current risk management practices for both life and general insurance businesses, and propose...
Book
A textbook that provides a coherent description of valuation models over a wide range of securities. Students can study both the theories and the practical implementations of the valuation models. Further, students can use the extensive Excel models applying to practical problems ( the cases) and exercises. The book is the only textbook that is sup...
Article
Full-text available
This paper empirically tested the one factor and two factor arbitrage-free interest rate models for swaptions in three currencies, U. S. dollar, Euro and Japanese yen. The models are shown to be robust in explaining the swaption valuation. Further, the implied volatility functions of the models are estimated. They are shown to be dynamic, exhibitin...
Article
Full-text available
This paper presents a multifactor binomial lattice arbitrage-free interest rate model that avoids negative and unreasonable high interest rate levels. It is consistent with historical interest rate experience. The model can be calibrated to the observed swaption prices quite accurately. This generalized interest rate model has broad applications in...
Article
This paper proposes a valuation model of a bond with default risk. Extending from the Brennan and Schwartz real option model of a firm, the paper treats the firm as a contingent claim on the business risk. This paper introduces the "primitive firm", which enables us to value firms with operating leverage relative to a firm without operating leverag...
Article
Abstract This paper provides a multi-factor closed form binomial interest rate model. Ho-Lee, Black-Derman-Toy,Hull-White, are some of the binomial interest ratemodels that have found broad applications in valuing interest rate contingent claims. Recently, much research is seeking to extend the one factor model to multifactor models. However, to da...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
Corporations borrow money by issuing bonds, which are debts. They can be bank loans or short-term funding, including commercial paper. Or they can be medium term notes or private placements in which debts are issued to a restricted group of lenders. However, in this book, corporate bonds refer to public bond issues, available for any investor to bu...
Chapter
Corporate management begins with understanding the firm’s business model. A business model can be described as a contingent claim on the business risk by stating the underlying risks of the business, the cost structure (variable and fixed costs) of the business, and the allocation of the operating income to the claimants. The approach is an extensi...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
Thus far, we have discussed two aspects of shareholders” value. Chapter 11 described the financial models for the assets and liabilities to determine their fair value, as opposed to the book value. Market equity value, which is the asset fair value net of the liability fair value, is a measure of the value that the shareholders would claim on the f...
Chapter
Capital markets and corporate finance are two parts that make up a whole; one cannot function completely without the other. Capital markets invest in corporations and can maintain a somewhat complete market for all contingencies by using corporation securities. Corporate finance requires capital markets to determine the optimal values of securities...
Chapter
Financial sectors are directly affected by the interest rate. As described by the dis counted cash flow model in chapter 1, the present-value concept depends on the market interest rate level. Bond markets, stock markets, futures and forward markets, and commodity markets are all affected by the interest rate level. Interest rates are also importan...
Chapter
In previous chapters we have covered vanilla options regarding two main risk sources: stock price and interest rates. Specifically, we have considered European call and put options. These options, while simple in their terms and conditions, capture the salient features of an option. And the sources of risks that we have described enable us to under...
Chapter
We have discussed many types of fixed-income securities, such as Treasury securities and corporate bonds, in the previous chapters. This chapter mainly describes three other types: convertible bonds, mortgage-backed securities (pass-through), and collateralized mortgage obligations. Convertible bonds are corporate bonds that offer bondholders the o...
Chapter
Financial modelling is an important methodology used by managers at all levels for the purpose of providing business solutions. The process must begin with understanding the business objectives and specifying the economic concepts on which the model is based. Some of the fundamental economic concepts are present-value measures, efficient capital ma...
Chapter
At the heart of financial theory is the study of the time value of money in relation to the risk premium. If we lived in a world without risk, much of finance would be reduced to the bookkeeping of cash flows, paying taxes, distributing profits, covering expenses, and reporting returns. In other words, the study of finance would be better described...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
Today, most trading operations have risk management in place where traders” risk taking activities are monitored, measured, and managed. So in early February 2002, when Allied Irish Banks PLC (AIB) disclosed that a trader at its subsidiary All first Financial, Inc., a Baltimore-based bank, had lost $691 million in currency trading, the news was a s...
Chapter
There are many examples of interest rate derivatives that are actively traded in over-the counter markets and in organized exchanges. Caps, floors, Treasury bond options, Treasury bond futures options, Eurodollar futures options, and swaptions are just some examples of this important class of derivatives in financial markets. They are classified as...
Chapter
Financial institutions are issuers of a broad range of financial contracts. Banks” savings, such as time deposits and savings accounts, are examples of financial contracts. Property and casualty insurers” financial products may include auto insurance and workers” compensation insurance. Life insurer’s policies, such as term insurance and whole life...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Article
We have described binomial lattices for modelling a security or interest rate movements, and we have shown how these models are used for valuing securities in the capital markets and for determining optimal decisions in corporate finance. In the capital markets, we can use binomial lattices to value a broad range of securities, such as securities”...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
Credit risk is an important determinant of the value of a corporate bond. It is important because credit risk is prevalent in corporate bonds and may affect the bond value significantly. Few corporate entities (if any) have investment grade ratings which could match the creditworthiness of the U.S. government. One can then say all corporate bond is...
Chapter
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Chapter
Commercial banks, property and casualty insurance companies, and life insurance companies are examples of financial institutions. Commercial banks sell loans and/or borrow from depositors. They provide the immediacy of borrowing and lending to the markets. Property and casualty companies sell insurance such as workers” compensation, auto insurance,...
Article
We would like to thank Yoonseok Choi, Hanki Seong, Yuan Su and Blessing Mudavanhu for the assistance in developing the models and in our research. We also would like to thank Owen School, Vanderbilt University, seminar participants for the valuable comments. Any remaining errors are ours.
Article
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents...
Article
Perhaps one of the most important challenges facing insurers to date is the market valuation of the assets and liabilities in one consistent framework. This research is important because by using one consistent framework an insurer can implement asset-liability management strategies, report risk exposure in terms of value-at-risk measures, and sati...
Article
This paper provides a model for allocating capital and measuring performances for financial institutions. The methodology relates the economic valuation of the balance sheet to the market value of the firm. In so doing, each business unit is evaluated on an economic basis, and the capital allocated to these units is related to the risk premiums tha...
Article
Derivatives based on interest-sensitive securities are very widespread and extremely important, but their prices cannot be adequately modeled using the Black-Scholes equation. Numerous approaches have been introduced over the years, culminating in today's arbitrage-free models that are tuned to match the initial term structure exactly. This article...
Article
This paper extends the vast body of research literature on financial modeling to business control. Though important business mangement, this area is often ignored by the field of financial research. The author also recommends that VaR not be confined to merely assessing the risk of a single portfolio or a trading floor, but be applied to an entire...
Article
Full-text available
Through the application of a VaR analysis to the balance sheet of a hypothetical bank this paper will address several issues important to bank managers. We will establish which balance sheet accounts lend themselves to meaningful VaR measures and the kind of information needed for input to these measures. We explain how depositor and borrower behav...
Article
Full-text available
A variety of derivative instruments—ranging from generic cross-currency swaps to basket swaptions—help investors and portfolio managers manage fixed-income and equity exposure in global portfolios. Understanding the risk of each instrument is important, but including derivatives in a portfolio requires analyzing exposure in terms of overall portfol...
Article
his article describes a new approach to determining the value-at-risk (VAR) of a portfolio and using the VAR numbers to manage T risks. It begins with grouping the holdings by type of risk. These holdings are “blocks” that define the portfolio structure. We then calculate the VAR numbers for the entire portfolio (the total risk) and for all the blo...
Article
Convertible bonds provide investors an option to convert the bond into the underlying equity. For this reason, a convertible bond is exposed to both equity and interest rate risk. Incorporating these two sources of risk into the model is particularly important for callable issues. In this study, a two-factor model is used to analyze a sample of bon...
Article
In this article, the author proposes the use of quality assurance to manage investment risks and proposes the integration of business control aspects with the operational aspects of investment management. He also demonstrates how the investment cycle has broad applications beyond risk management.
Article
Derivatives based on interest-sensitive securities are very widespread and extremely important, but their prices cannot be adequately modeled using the Black-Scholes equation. Numerous approaches have been introduced over the years, culminating in today's arbitrage-free models that are tuned to match the initial term structure exactly. This article...
Article
This article describes a methodology of term structure estimation incorporating callable Treasury bonds using a bond-option valuation model. This article also examines whether some simple approximation of the option value suffice for providing a useful estimation procedure. The authors find that the errors in estimating the option value can generat...
Article
This paper derives pricing models of interest rate options and interest rate futures options. The models utilize the arbitrage-free interest rate movements model of Ho and Lee. In their model, they take the initial term structures as given, and for the subsequent periods, they only require that the bond prices move relative to each other in an arbi...
Article
Full-text available
The purpose of this paper is to analyze the optimal individual behavior in acquiring information and to determine the amount of information incorporated in a stock at equilibrium, in the presence of a cost schedule in acquiring information. Our paper shows that at equilibrium the cost to acquire information that is not already incorporated in the p...
Article
This paper establishes three empirical results. The authors find positive autocorrelation in actual intraday stock returns, in intraday returns computed from quot e-midpoints, and in the arrival of buy and sell orders. They present a model of return generation which incorporates these features via la gged adjustment of the limit-order price and pos...
Article
This paper derives an arbitrage‐free interest rate movements model (AR model). This model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free. We then show that the AR model can be used to price interest rate contingent claims relative to the observ...
Article
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...
Article
This paper models an individual's trading decision, given: (1) his/her demand function to hold shares of an asset, (2) his/her expectation on what the market clearing price will be, and (3) the design of the market which determines how orders will be translated into trades. The particular market design we consider is the batched trading (periodic c...
Article
This paper, utilizing dealer's “trading book” information, presents some empirical evidence supporting the validity of a dealer pricing model. It shows that much of the transaction prices variation may be explained by the specialist's optimal determination of his bid and ask quotes. Furthermore, it demonstrates that the dealer's bid‐ask spread is a...
Article
This paper deals with the producer's optimal use of commodity futures in hedging. The framework for analysis is an intertemporal consumption and investment model. The producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval. During the period, he faces both price and output uncer...
Article
This paper develops a normative model to analyze the hedging and fee-pricing decisions of a financial institution supplying fixed rate loan commitments to its customers. In supplying fixed rate loan commitments, the financial institution (hereafter referred to as "bank") is assumed to act as an agent that transforms commitment risk through the use...
Article
The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. T...
Article
This chapter discusses the applications of catastrophe theory in banking and finance. Catastrophe theory investigates the qualitative aspects of discontinuity in natural phenomena. Thom's classification theorem for stable universal unfoldings, the main result in catastrophe theory, provides a better understanding of causes and effects of catastroph...
Article
This paper examines the effect of alternative bond indenture provisions on the allocation of risk among the firm's claimants. The approach taken here differs from that of earlier studies in that risk allocation is examined while the firm's leverage (in market value terms) is held constant. In this context, four indenture provisions are examined: (1...
Article
The paper examines the optimal behavior of a single dealer who is faced with a stochastic demand to trade (modeled by a continuous time Poisson jump process) and facing return risk on his stock and on the rest of his portfolio (modeled by diffusion processes). Using stochastic dynamic programming, we derive the optimal bid and ask prices that maxim...
Article
Most models of bank failure have assumed that the path towards bankruptcy or insolvency is smooth and continuous. As a consequence a number of early‐warning systems have been suggested in the banking and financial literature to aid regulators in the identification of potential problem banks. However, these systems may be of little use when the path...
Book
Securities Valuation: Applications of Financial Modeling is a clear, concise guide to securities valuation and the principles of financial theory. It describes state-of-the-art methods for valuing a broad range of securities: equity, equity and interest rate options, swaps and swaptions, treasuries, corporate bonds with and without credit risks, mo...
Article
Full-text available
Variable annuities have grown tremendously in recent years, offering life insurers significant growth opportunities. These equity and interest rate structured products offer a broad range of guarantees to the policyholders, and insurers must manage their risks. The insurer's risk management program must consider modeling and implementation challeng...
Article
Full-text available
Enterprise risk manager should explicitly relate the firm's business model to the risk supported by the economic capital. The economic capital, risk drivers and business model are intricately integrated. The purpose of this paper is to demonstrate this point. This business model approach has many applications. For example, in order to ensure the sa...
Article
Full-text available
The market of variable annuities has grown tremendously in recent years and has become a significant part of our capital markets. These equity and interest rate structured products offer a broad range of guarantees, whose risks are typically borne by the insurers' balance sheets. The limited risk capital of the life insurance industry may constrain...
Article
Full-text available
Risk management techniques used in banks and trading floors are not applicable to insurance companies. Risk measures and risk monitoring approaches must be developed to respond to the challenges to the industry in recent years. This paper describes the current practices in the industry, for both the life and the general insurance businesses. And th...

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