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This study explores the arbitrage profitability of box spread strategies to test the KOSPI200 options market efficiency. using minute-by-minute data for the December 2003 - June 2004 period. The sample consists of 39.445 and 38.318 observations for small discrepancy and large discrepancy in exercise prices. respectively.

In the case of credit box spreads, there were 681 (2%) and 2.293 (6%) arbitrage observations for small and large discrepancies, while debit box spreads showed 831 (2%) and 3.098 (8%) observations for small and large discrepancies. In general, mean profit and median profit were different, and the arbitrage profit varied over time. The time to option expiration did not impact the arbitrage profit.

Also, the arbitrage profit of box spreads was significantly higher on Fridays for large discrepancy, and it varied across weekdays except the case of small-discrepancy debit box spread. Both arbitrage opportunities and profits substantially decreased as execution time increased. Our overall results suggest that the KOSPI200 options market has been efficient.

The KOSPI 200 options at its initial stage generated a significant number of violations in no-arbitrage conditions which involve both options and the underlying index. However, when the arbitrage conditions are formed independent of the underlying index, the average size of violation is not large and few arbitrage opportunities exist. There are more frequent violations on near-maturity days, with in-the-money options and larger violation sizes during opening and closing hours. The arbitrage opportunities remain intact even after realistic transaction costs are taken into account and index futures prices are used instead of the stock index in an alternative specification.

This study develops an equilibrium model of credit spreads on Japanese yen Eurobonds based on a model proposed by Collin-Dufresne, Goldstein and Martin (2001). We find the asset factor, as proxied by the change in the stock market index, has only a limited effect, while the interest rate factor has the over-riding influence. There is also evidence that currency volatility and changes in the term structure occasionally have an effect on spread behaviour. Analysis over several subperiods, based around key economic events, demonstrates that the relative weight of these explanatory variables change over time.

Knight's Industrial Law Reports goes into a new style and format as Managerial Law This issue of KILR is restyled Managerial Law and it now appears on a continuous updating basis rather than as a monthly routine affair.

The purpose of this paper is to study the volatility spillover among 33 worldwide sovereign Credit Default Swap (CDS) markets and their underlying bond markets.

In contrast to prior studies, the authors incorporate heteroscedasticity, asymmetric leverage effects and long-memory features of sovereign credit spreads simultaneously through a bivariate FIEGARCH model and a Bayesian cointegrated vector autoregressive model.

Similar to the literature, the findings confirm that strong evidence of credit risk spillover between credit markets is accentuated during two recent crisis periods. However, the country-by-country analysis indicates that countries exhibit different sensitivity levels and divergent reactions to financial shocks. Further, the authors show that the bidirectional interrelationship evolves over time and across countries emphasizing the necessity of time-varying national regulatory policies and trading positions.

Based on a large data set that covers the recent two financial crises and using complex methods, the work focuses on sovereign tensions that have repercussions on banks’ solvency and refinancing conditions. Yet, the study is a hot topic since that during crisis periods in the financial markets, direct and indirect interconnections increase between sovereign risk and banking risk. Using new econometric approaches, the results show that each country exhibits a different behavior toward the credit risk which is relevant to both portfolio managers and policy makers. The time-varying spillover effects detected between markets are an accurate indicator of financial stability, allowing policy makers to put in place personalized economic policies. On the other hand, markets’ participants could take advantages of the results by adjusting their trading and hedging positions on the dynamic co-movements. The findings reveal, as well, that the sovereign crisis has more weakened the global financial and banking system than the subprime crisis. The authors previously tackled the cross-country contagion phenomenon in the CDS markets, and this manuscript builds on the prior study to enhance the obtained results.

The purpose of this paper is to model a credit card market where the retailers may charge differential prices depending on the instrument of payment used by the consumer. According to the research agenda proposed by Rochet and Wright (2010), the authors find conditions for the existence of differential prices equilibrium and analyze the effects of that price differentiation on the consumer’s welfare.

This is done when the consumer has also the store credit as an alternative of payment. The equilibrium prices are computed assuming a Hotelling competition among retailers in both scenarios, when the cost of the store credit provided by the retailer is greater than that provided by the credit card and vice versa.

From this, the authors prove that the average price under the price differentiation is lower than the single price under the no-surcharge rule; nevertheless, the retailer’s margins remain the same in both situations. Furthermore, some cross-subsidies are expunged when price differentiation is allowed. The authors also conclude that the consumers’ welfare is greater when the no-surcharge rule is abolished. Finally, if the retailers face menu costs whenever they differentiate prices, the authors provide sufficient conditions for differential prices remain as equilibrium.

This is an important input for discussions among regulators and players of the credit card market.

From the analysis the authors can conclude that price differentiation, according to the instrument of payment, is a welfare improving policy. The authors explicitly determine the average price in that setting and the differentiated prices even in presence of costs that arise from price differentiation. The obtained theoretical results can be used as an input for econometric modeling purposes.

Interest rate risk, i.e. the risk of changes in the interest rate term structure, is of high relevance in insurers' risk management. Due to large capital investments in interest rate sensitive assets such as bonds, interest rate risk plays a considerable role for deriving the solvency capital requirement (SCR) in the context of Solvency II. This paper seeks to address these issues.

In addition to the Solvency II standard model, the author applies the model of Gatzert and Martin for introducing a partial internal model for the market risk of bond exposures. After introducing calibration methods for short rate models, the author quantifies interest rate and credit risk for corporate and government bonds and demonstrates that the type of process can have a considerable impact despite comparable underlying input data.

The results show that, in general, the SCR for interest rate risk derived from the standard model of Solvency II tends to the SCR achieved by the short rate model from Vasicek, while the application of the Cox, Ingersoll, and Ross model leads to a lower SCR. For low‐rated bonds, the internal models approximate each other and, moreover, show a considerable underestimation of credit risk in the Solvency II model.

The aim of this paper is to assess model risk with focus on bonds in the market risk module of Solvency II regarding the underlying interest rate process and input parameters.