Risk Management
We consider the effect of recovery rates on a pool of credit assets. We allow the recovery rate to depend on the defaults in a general way. Using the theory of large deviations, we study the structure of losses in a pool consisting of a…
In this paper we look at the efficacy of different risk measures on energy markets and across several different stock market indices. We use both the Value at Risk and the Tail Conditional Expectation on each of these data sets. We also…
The benefits of diversifying risks are difficult to estimate quantitatively because of the uncertainties in the dependence structure between the risks. Also, the modelling of multidimensional dependencies is a non-trivial task. This paper…
Hedging methods to mitigate the exposure of variable annuity products to market risks require the calculation of market risk sensitivities (or "Greeks"). The complex, path-dependent nature of these products means these sensitivities…
Inspired by the bankruptcy of Lehman Brothers and its consequences on the global financial system, we develop a simple model in which the Lehman default event is quantified as having an almost immediate effect in worsening the credit…
Karl Menger's 1934 paper on the St. Petersburg paradox contains mathematical errors that invalidate his conclusion that unbounded utility functions, specifically Bernoulli's logarithmic utility, fail to resolve modified versions of the St.…
The problem of stock hedging is reconsidered in this paper, where a put option is chosen from a set of available put options to hedge the market risk of a stock. A formula is proposed to determine the probability that the potential loss…
A simple example shows that losing all money is compatible with a very high Sharpe ratio (as computed after losing all money). However, the only way that the Sharpe ratio can be high while losing money is that there is a period in which all…
We analyze the counterparty risk embedded in CDS contracts, in presence of a bilateral margin agreement. First, we investigate the pricing of collateralized counterparty risk and we derive the bilateral Credit Valuation Adjustment (CVA),…
Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures…
A simple, yet reasonably accurate, analytical technique is proposed for multi-factor structural credit portfolio models. The accuracy of the technique is demonstrated by benchmarking against Monte Carlo simulations. The approach presented…
We estimate generic statistical properties of a structural credit risk model by considering an ensemble of correlation matrices. This ensemble is set up by Random Matrix Theory. We demonstrate analytically that the presence of correlations…
This research presents an analysis of the demographic risk related to future membership patterns in pension funds with restricted entrance, financed under a pay-as-you-go scheme. The paper, therefore, proposes a stochastic model for…
The classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are…
Recent academic work has developed a method to determine, in real time, if a given stock is exhibiting a price bubble. Currently there is speculation in the financial press concerning the existence of a price bubble in the aftermath of the…
In this paper we present a theoretical framework for studying coherent acceptability indices in a dynamic setup. We study dynamic coherent acceptability indices and dynamic coherent risk measures, and we establish a duality between them. We…
This paper presents two cases of random banking data generators based on migration matrices and scoring rules. The banking data generator is a new hope in researches of finding the proving method of comparisons of various credit scoring…
The problem behind this paper is the proper measurement of the degree of quality/acceptability/distance to arbitrage of trades. We are narrowing the class of coherent acceptability indices introduced by Cherny and Madan (2007) by imposing…
This paper discusses the financial risks faced by the UK Pension Protection Fund (PPF) and what, if anything, it can do about them. It draws lessons from the regulatory regimes under which other financial institutions, such as banks and…
A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is encapsulated in the form of the hedgers' utility function. However, the literature typically uses only one form of utility function such as the…