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Bank of Israel Keeps Interest Rate on Hold at 2.50%

March 27, 2012 by CentralBankNews   Comments (0)

The Bank of Israel kept its benchmark interest on hold at 2.50%.  The Bank said "The decision to leave the interest rate for April 2012 unchanged at 2.5 percent is consistent with an interest rate policy that is intended to entrench the inflation rate within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel, the global economy, monetary policies of major central banks, and developments in the exchange rate of the shekel."

Previously the bank cut its monetary policy interest rate 25 basis points in January, November and September, leaving it unchanged at its June, July, and August meetings, and increasing the interest rate by 25 basis points to 3.25% at its May meeting this year.  Israel recorded annual inflation of 2.2% in December, 2.6% in November, 2.7% in October, 2.9% in September, 3.4% in August and July, 4.2% in June, 4.1% in May, and 4.0% in April and just inside the Bank's inflation target range of 1-3%.

The Bank expects the Israeli economy to grow about 3.1 percent this year and 3.5 percent next year.  The Israeli Shekel (ILS) has weakened about 6% against the US dollar over the past year, while the USDILS exchange rate last traded around 3.71.  The Bank next meets on the 23rd of April 2012.

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Blog Post: Falkenblog: Hedge Fund Profits Near Zero

March 27, 2012 by MoneyScience   Comments (0)

The graph above shows the portion of hedge fund profits that go to the hedge funds, the fund-of-funds, and the investors, using total dollars from 1998-2010. This is from Simon Lack's presentation, which is derived from his book Hedge Fund Mirage. Notice 97% go to insiders, 3% to investors. Like most strategies or asset classes, the money made on a percent basis is large because it basically grows until it can't work, at which point it loses more money than it made and then some more (see...

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Published / Preprint: The Wishart short rate model. (arXiv:1203.5513v1 [q-fin.PR])

March 27, 2012 by MoneyScience   Comments (0)

We consider a short rate model, driven by a stochastic process on the cone of positive semidefinite matrices. We propose a new closed form solution for the pricing of zero-coupon bonds and interest-rate derivatives, based on the Cameron-Martin approach outlined in Gnoatto and Grasselli (2011). Moreover, we derive sufficient conditions ensuring that the model replicates normal, inverse or humped yield curves.

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Published / Preprint: Heavy-Tail Distribution from Correlation of Discrete Stochastic Process. (arXiv:1203.5581v1 [math.ST])

March 27, 2012 by MoneyScience   Comments (0)

We propose a stochastic process driven by the memory effect with novel distributions which include both exponential and leptokurtic heavy-tailed distributions. A class of the distributions is analytically derived from the continuum limit of the discrete binary process with the renormalized auto-correlation. The moment generating function with a closed form is obtained, thus the cumulants are calculated and shown to be convergent. The other class of the distributions is numerically investigated....

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Published / Preprint: Asset Pricing under uncertainty. (arXiv:1203.5664v1 [q-fin.PR])

March 27, 2012 by MoneyScience   Comments (0)

We study the effect of parameter uncertainty on a stochastic diffusion model, in particular the impact on the pricing of contingent claims, using methods from the theory of Dirichlet forms. We apply these techniques to hedging procedures in order to compute the sensitivity of SDE trajectories with respect to parameter perturbations. We show that this analysis can justify endogenously the presence of a bid-ask spread on the option prices. We also prove that if the stochastic differential...

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Published / Preprint: We've walked a million miles for one of these smiles. (arXiv:1203.5703v1 [q-fin.PR])

March 27, 2012 by MoneyScience   Comments (0)

We derive a new, exact and transparent expansion for option smiles, which lends itself both to analytical approximation and, probably more importantly, to congenial numerical treatments. We show that the skew and the curvature of the smile can be computed as exotic options, for which the Hedged Monte Carlo method is particularly well suited. When applied to options on the S&P index, we find that the skew and the curvature of the smile are very poorly reproduced by the standard Edgeworth...

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Published / Preprint: Quantile Mechanics 3: Series Representations of some Distributions appearing in Finance. (arXiv:1203.5729v1 [q-fin.CP])

March 27, 2012 by MoneyScience   Comments (0)

It has long been agreed by academics that the inversion method is the method of choice for generating random variates, given the availability of the quantile function. However for several probability distributions arising in practice a satisfactory method of approximating these functions is not available. The main focus of this paper will be to develop Taylor and asymptotic series representations for quantile functions of the following probability distributions; Variance Gamma, Generalized...

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