Related papers: Introduction to Risk Parity and Budgeting
Providing a measure of market risk is an important issue for investors and financial institutions. However, the existing models for this purpose are per definition symmetric. The current paper introduces an asymmetric capital asset pricing…
We present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems. Building on [Corsi et al., 2016], we model a set of financial institutions having Value at Risk…
The frequent occurrence of natural disasters has posed significant challenges to society, necessitating the urgent development of effective risk management strategies. From the early informal community-based risk sharing mechanisms to…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
Network theory proved recently to be useful in the quantification of many properties of financial systems. The analysis of the structure of investment portfolios is a major application since their eventual correlation and overlap impact the…
Designing an optimum portfolio that allocates weights to its constituent stocks in a way that achieves the best trade-off between the return and the risk is a challenging research problem. The classical mean-variance theory of portfolio…
As financial instruments grow in complexity more and more information is neglected by risk optimization practices. This brings down a curtain of opacity on the origination of risk, that has been one of the main culprits in the 2007-2008…
The last twenty-five years have seen the development of a significant literature within the subfield of econophysics which attempts to model economic inequality as an emergent property of stochastic interactions among ensembles of agents.…
The standard approach for constructing a Mean-Variance portfolio involves estimating parameters for the model using collected samples. However, since the distribution of future data may not resemble that of the training set, the…
The paper summarizes key results of the benchmark approach with a focus on the concept of benchmark-neutral pricing. It applies these results to the pricing of an extreme-maturity European put option on a well-diversified stock index. The…
Common asset holding by financial institutions, namely portfolio overlap, is nowadays regarded as an important channel for financial contagion with the potential to trigger fire sales and thus severe losses at the systemic level. In this…
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient…
We develop a unified valuation theory that incorporates credit risk (defaults), collateralization and funding costs, by expanding the replication approach to a generality that has not yet been studied previously and reaching valuation when…
With the rise of emerging risks, model uncertainty poses a fundamental challenge in the insurance industry, making robust pricing a first-order question. This paper investigates how insurers' robustness preferences shape competitive…
The instability of historical risk factor correlations renders their use in estimating portfolio risk extremely questionable. In periods of market stress correlations of risk factors have a tendency to quickly go well beyond estimated…
This paper examines optimal risk sharing for empirically realistic risk attitudes, providing results on Pareto optimality, competitive equilibria, utility frontiers, and the first and second theorems of welfare. Contrary to common…
Models to price long term loans in the securities lending business are developed. These longer horizon deals can be viewed as contracts with optionality embedded in them. This insight leads to the usage of established methods from…
This paper studies the optimal investment problem for a hybrid pension plan under model uncertainty, where both the contribution and the benefit are adjusted depending on the performance of the plan. Furthermore, an age and time-dependent…
Financial portfolio management investment policies computed quantitatively by modern portfolio theory techniques like the Markowitz model rely on a set on assumptions that are not supported by data in high volatility markets. Hence,…
In a Markovian stochastic volatility model, we consider financial agents whose investment criteria are modelled by forward exponential performance processes. The problem of contingent claim indifference valuation is first addressed and a…