Related papers: Capital requirements with defaultable securities
This paper considers an insurer with two collaborating business lines that faces three critical decisions: (1) dividend payout, (2) reinsurance coverage, and (3) capital injection between the lines, in the presence of model uncertainty. The…
We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear-rational in the factors.…
In an incomplete semimartingale model of a financial market, we consider several risk-averse financial agents who negotiate the price of a bundle of contingent claims. Assuming that the agents' risk preferences are modelled by convex…
Securitization has become prevalent in many countries, and has substantial impact on government monetary policy and fiscal policy which have not yet been adequately analyzed in the existing literature. This article develops optimal…
The use of absolute return volatility has many modelling benefits says John Cotter. An illustration is given for the market risk measure, minimum capital requirements.
In regulatory proceedings, few issues are more hotly debated than the cost of capital. This article formalises the theoretical foundation of cost of capital estimation for regulatory purposes. Several common regulatory practices lack a…
Contract theory typically assumes full commitment by the principal, but many contracts fix some payoff-relevant decisions while leaving others discretionary. We ask when imperfect commitment is equivalent to full commitment. For contracts…
The paper discusses capital allocation using the Euler formula and focuses on the risk measures Value-at-Risk (VaR) and Expected shortfall (ES). Some new results connected to this capital allocation is known. Two examples illustrate that…
In the literature on risk measures, cash subadditivity was proposed to replace cash additivity, motivated by the presence of stochastic or ambiguous interest rates and defaultable contingent claims. Cash subadditivity has been traditionally…
This paper sets out a framework for the valuation of insurance liabilities that is intended to be economically realistic, elementary, reasonably practically applicable, and as a special case to provide a basis for the valuation in…
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…
We consider a problem of optimal investment with intermediate consumption in the framework of an incomplete semimartingale model of a financial market. We show that a necessary and sufficient condition for the validity of key assertions of…
We introduce the formalism of generalized Fourier transforms in the context of risk management. We develop a general framework to efficiently compute the most popular risk measures, Value-at-Risk and Expected Shortfall (also known as…
Regulatory and contractual constraints on individual exposures are standard in insurance and reinsurance markets, but a poorly designed constraint can distort the economic incentives of risk-averse agents. In the unconstrained problem, the…
Put-call parity is risk-neutral at terminal payoff, but its enforcement is path-dependent and capital-using. I test whether the SPX and RUT carry gap is explained by OIS-based funding, volatility, trading-friction, and financial-condition…
Many high-stakes AI deployments proceed only if every stakeholder deems the system acceptable relative to their own minimum standard. With randomization over a finite menu of options, this becomes a feasibility question: does there exist a…
In this paper we develop a novel methodology for estimation of risk capital allocation. The methodology is rooted in the theory of risk measures. We work within a general, but tractable class of law-invariant coherent risk measures, with a…
Financial institutions are currently required to meet more stringent capital requirements than they were before the recent financial crisis; in particular, the capital requirement for a large bank's trading book under the Basel 2.5 Accord…
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…
We perform a detailed theoretical study of the value of a class of participating policies with four key features: $(i)$ the policyholder is guaranteed a minimum interest rate on the policy reserve; $(ii)$ the contract can be terminated by…