Related papers: Incorporating exchange rate risk into PDs and asse…
Credit Valuation Adjustment captures the difference in the value of derivative contracts when the counterparty default probability is taken into account. However, in the context of a network of contracts, the default probability of a direct…
Complex non-linear interactions between banks and assets we model by two time-dependent Erd\H{o}s Renyi network models where each node, representing bank, can invest either to a single asset (model I) or multiple assets (model II). We use…
In this paper we present a Bayesian competing risk proportional hazards model to describe mortgage defaults and prepayments. We develop Bayesian inference for the model using Markov chain Monte Carlo methods. Implementation of the model is…
This article introduces a new mathematical concept of illiquidity that goes hand in hand with credit risk. The concept is not volume- but constraint-based, i.e., certain assets cannot be shorted and are ineligible as num\'eraire. If those…
We provide a general HJM framework for forward contracts written on abstract market indices with arbitrary fixing and payment adjustments, and featuring collateralization in any currency denominations. In view of this, we first provide a…
Financial markets are complex adaptive systems, and are commonly studied as complex networks. Most of such studies fall short in two respects: they do not account for non-linearity of the studied relationships, and they create one network…
We compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox and find that corporations default as if via diffusive dynamics. The model, based…
The aim of this paper is to quantify and manage systemic risk caused by default contagion in the interbank market. We model the market as a random directed network, where the vertices represent financial institutions and the weighted edges…
This paper investigates a novel behavioral feature of recursive preferences: aversion to risks that persist over time, or simply \textit{correlation aversion}. Greater persistence provides information about future consumption but reduces…
We consider an equity market subject to risk from both unhedgeable shocks and default. The novelty of our work is that to partially offset default risk, investors may dynamically trade in a credit default swap (CDS) market. Assuming…
The standard asset pricing models (the CCAPM and the Epstein-Zin non-expected utility model) counterintuitively predict that equilibrium asset prices can rise if the representative agent's risk aversion increases. If the income effect,…
An Entropic Dynamics of exchange rates is laid down to model the dynamics of foreign exchange rates, FX, and European Options on FX. The main objective is to represent an alternative framework to model dynamics. Entropic inference is an…
The investor is interested in the expected return and he is also concerned about the risk and the uncertainty assumed by the investment. One of the most popular concepts used to measure the risk and the uncertainty is the variance and/or…
We develop a model where currency issuers provide liquidity, while users in a trade network choose currency usage for trade settlement. We identify a feedback mechanism where a user's currency preference spillovers to others and increases…
A new methodology for incorporating LGD correlation effects into the Basel II risk weight functions is introduced. This methodology is based on modelling of LGD and default event with a single loss variable. The resulting formulas for…
In this article, we investigate whether exchange rate risk is priced. We use a multivariate GARCH-in-Mean specification and test alternative conditional international CAPM versions. Our results support strongly the international…
This paper builds a finite-horizon model to study the role of physical collateral in a model of strategic defaults, when the borrower can develop reputation for honesty. Asset ownership increases attractiveness of the reputational channel:…
We study multiple defaults where the global market information is modelled as progressive enlargement of filtrations. We shall provide a general pricing formula by establishing a relationship between the enlarged filtration and the…
In a system containing a large number of interacting stochastic processes, there will typically be many non-zero correlation coefficients. This makes it difficult to either visualize the system's inter-dependencies, or identify its dominant…
With negative growth in real production in many countries and debt levels which become an increasing burden on developed societies, the calls for a change in economic policy and even the monetary system become louder and increasingly…