Related papers: The Impossible Trio in CDO Modeling

The safe linear bandit problem is a version of the classical stochastic linear bandit problem where the learner's actions must satisfy an uncertain constraint at all rounds. Due its applicability to many real-world settings, this problem…

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…

While defaults are rare events, losses can be substantial even for credit portfolios with a large number of contracts. Therefore, not only a good evaluation of the probability of default is crucial, but also the severity of losses needs to…

A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II.…

In this paper, we consider the chance constrained based uncertain portfolio optimization problem in which the uncertain parameters are stochastic in nature. The primary goal of the work is to formulate the uncertain problem into a…

Counterfactual reasoning from logged data has become increasingly important for many applications such as web advertising or healthcare. In this paper, we address the problem of learning stochastic policies with continuous actions from the…

While deep learning models often achieve high predictive accuracy, their predictions typically do not come with any provable guarantees on risk or reliability, which are critical for deployment in high-stakes applications. The framework of…

In this paper, we consider a mean-reverting stochastic volatility equation with regime switching, and present some sufficient conditions for the existence of global positive solution, asymptotic boundedness in pth moment, positive…

We investigate model risk and distributionally robust optimization (DRO) under marginal and martingale constraints. Building on our previous work, we address the previously open case of static hedging with second-period maturity vanilla…

The notion of a credit spread curve is fundamental in fixed income investing, but in practice it is not `given' and needs to be constructed from bond prices either for a particular issuer, or for a sector rating-by-rating. Rather than…

This paper extends the classical dividend problem by incorporating a novel, path-dependent mechanism of firm default. In the traditional framework, ruin occurs when the surplus process first reaches zero. In contrast, default in our model…

Working in a continuous time setting, we extend to the general case of dynamic risk measures continuous from above the characterization of time consistency in terms of ``cocycle condition'' of the minimal penalty function. We prove also the…

This paper considers nonlinear regular-singular stochastic optimal control of large insurance company. The company controls the reinsurance rate and dividend payout process to maximize the expected present value of the dividend pay-outs…

Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…

We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be…

We consider the problem of governing systemic risk in a banking system model. The banking system model consists in an initial value problem for a system of stochastic differential equations whose dependent variables are the log-monetary…

Diffusion in a linear potential in the presence of position-dependent killing is used to mimic a default process. Different assumptions regarding transport coefficients, initial conditions, and elasticity of the killing measure lead to…

In this paper, we investigate constrained control of continuous-time linear stochastic systems. We show that for certain system parameter settings, constrained control policies can never achieve stabilization. Specifically, we explore a…

In recent years, real-world external controls have grown in popularity as a tool to empower randomized placebo-controlled trials, particularly in rare diseases or cases where balanced randomization is unethical or impractical. However, as…

As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and…