This thesis consists of three parts and focuses on issues of financial market after the financial crisis. In the first part, we propose two models to capture the dynamics of CDS spreads especially during the financial crisis, and jointly estimate parameters in real-world and pricing measure using the MCMC method. The estimation result shows that jump part is a necessary component of the hazard rate process. Based on the estimated model, we implement the trading strategy for North American market. The empirical studies show that the model is suitable for most of the reference names and the strategy can be profitable, yet may not be regarded as statistical arbitrage, and the market is relatively efficient.

In the second part, we follow the framework proposed in Wu (2012a), under wh...[ Read more ]

This thesis consists of three parts and focuses on issues of financial market after the financial crisis. In the first part, we propose two models to capture the dynamics of CDS spreads especially during the financial crisis, and jointly estimate parameters in real-world and pricing measure using the MCMC method. The estimation result shows that jump part is a necessary component of the hazard rate process. Based on the estimated model, we implement the trading strategy for North American market. The empirical studies show that the model is suitable for most of the reference names and the strategy can be profitable, yet may not be regarded as statistical arbitrage, and the market is relatively efficient.

In the second part, we follow the framework proposed in Wu (2012a), under which CVA, DVA and FVA can be calculated at the same time, to study CVA and FVA in derivative trades collateralized by cash and exposed to gap risk. Gap risk is important in reality because the derivatives cannot be hedged continuously. We let the two parties of a trade hedge off market risk using repo and cash, collateral can be posted to mitigate part of the counterparty default risk, hedge ratio is derived to minimize the hedging variance. Algorithm based on iteration and multi-nomial tree is developed to calculate the CVA DVA and FVA terms.

In the third part, we continue the study of Gao (2012), in which a dual-market model is established. Instead the affine model is adopted in this dissertation. Three risk factors are included to price all the linear fixed-income products, one is the interest rate risk, one is credit risk and another one is the so-called reshuffle premium. Large basis swap spreads can be produced by our model due to the premium of panel reshuffle. Our model provides a valuable insight into the interest rate dynamics, which is supposed to have changed since the financial crisis. At last, MCMC estimation method is also applied to estimate various risk factors and the results of our empirical study is presented.