The following titles/abstracts have been submitted by the speakers:

Gurdip Bakshi
Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies
We develop dynamic models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. The source of stochastic risk premiums and stochastic skewness can be stochastic volatility in the uncertainty of the economy or stochastic market price of the uncertainty, or both. We estimate these models using the joint time-series of option prices on dollar-yen, dollar-pound, and pound-yen exchange rates, and the underlying currency returns. The estimation reveals several results about the structure of risk premiums in the international economy. First, the average risk premium in Japan is significantly larger than the risk premium in the US or the UK. Second, the risk premium on the global risk factor is both more persistent and more volatile than the risk premiums on country-specific risks. Third, investors respond to shocks differently depending on whether the origins of the shocks are global or country-specific. The risk premium increases when the global (domestic) risk factor receives a positive (negative) shock, suggesting that investors demand a risk premium when their wealth declines relative to the global portfolio. Finally, the uncertainty in each economy contains a jump component that arrives an infinite number of times within any finite interval, but only downside jumps appear to be priced. [Paper in pdf]

David S. Bates
Maximum Likelihood Estimation of Latent Affine Processes
(The paper can be downloaded at www.biz.uiowa.edu/faculty/dbates
This article develops a direct filtration-based maximum likelihood methodology for estimating the parameters and realizations of latent affine processes. Filtration is conducted in the transform space of characteristic functions, using a version of Bayes' rule for recursively updating the joint characteristic function of latent variables and the data conditional upon past data. An application to daily stock market returns over 1953-96 reveals substantial divergences from EMM-based estimates; in particular, more substantial and time-varying jump risk. The implications for pricing stock index options are examined.

Nick Bollen
Screening for Fraud in the Hedge Fund Industry
This paper constructs a test for fraudulent managerial reporting in the hedge fund industry. We develop a model in which a manager reports satisfactory returns more readily than losses. This asymmetric smoothing generates conditional serial correlation and provides a red flag for fraud. Simulation evidence indicates that the statistical power of the test may be sufficient to deter fraudulent reporting. Empirical evidence shows that the probability of triggering a red flag is significantly related to the volatility and magnitude of investor cash flows, consistent with managerial smoothing in response to the risk of capital flight.

Robert Jarrow
Liquidity Risk and Option Pricing Theory
This talk summarizes some recent advances on the inclusion of liquidity risk into option pricing theory. This research provides new insights into the relevance of the classical techniques used in continuous time finance for practical risk management. [Paper in pdf]

Alex Szimayer
Flying to Quality
(Paper to be presented is joint work with Robert Durand and Markus Junker)
We derive and estimate a copula combining the features of the Frank and Gumbel copulas to analyze the relationship of equity and long-term bond returns. Our analysis of quarterly returns from 1952 to 2003 finds that, in general, there is a positive relationship of equity returns to bond returns. In extreme situations, however, there is approximately a one-in-eight chance of a flight-to-quality effect where large negative equity returns are associated with large positive bond returns. Our analysis suggests that the flight-to-quality is driven by large capitalization stocks; this is consistent with flights-to-quality being driven by institutional investors. [Paper in pdf]