Ground breaking original work by Tom Fischer on pricing crowss-ownership.
In the current Greece madness this is more important than ever and allows
for a first time to price these common constructs. Cross-ownership is a
real, structural problem!
If you are a rating company or investment bank and interested in these
algorithms please contact us at armin @ approximity dot com. Existing
models do not attempt multi-firm, multi-liability and multi-priority
cross-ownership in a structural way.
The general case:
- Models the XOS of assets and liabilities for groups of firms.
- Multiple different classes of liabilities, e.g. debt and derivatives.
- Multiple different priorities of claims are allowed.
- Directly incorporates counterparty risk at the multi-firm level into
derivatives pricing and general asset pricing.
- Underlying exogenous assets can be stochastically dependent.
- Situations where valuation is impossible (no equilibria/multiple
- It should be possible to extend any model based on the original Mer- ton
Model (for instance the Moody’s KMV model) to incorporate
cross-ownership along the lines of this paper.
Tom Fischer’s latest slides: statistik.mathematik.uni-wuerzburg.de/~fischer/papers/DGVFM_Fischer_XOS.pdf
The full article: arxiv.org/abs/1005.0768
The image below from the NY Times shows a good application of Tom’s