Related papers: The dynamics of the leverage cycle
We solve an expected utility-maximization problem with a Value-at-risk constraint on the terminal portfolio value in an incomplete financial market due to stochastic volatility. To derive the optimal investment strategy, we use the dynamic…
In this work we study the individual strategies carried out by agents undergoing transactions in wealth exchange models. We analyze the role of risk propensity in the behavior of the agents and find a critical risk, such that agents with…
Different models of capital exchange among economic agents have been proposed recently trying to explain the emergence of Pareto's wealth power law distribution. One important factor to be considered is the existence of risk aversion. In…
We show that financial correlations exhibit a non-trivial dynamic behavior. We introduce a simple phenomenological model of a multi-asset financial market, which takes into account the impact of portfolio investment on price dynamics. This…
We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the…
We model investor heterogeneity using different required returns on an investment and evaluate the impact on the valuation of an investment. By assuming no disagreement on the cash flows, we emphasize how risk preferences in particular, but…
Economic variables play important roles in any economic model, and sudden and dramatic changes exist in the financial market and economy. For this reason, to price and hedge equity-linked life insurance products, including segregated funds…
This paper discusses a novel explanation for asymmetric volatility based on the anchoring behavioral pattern. Anchoring as a heuristic bias causes investors focusing on recent price changes and price levels, which two lead to a belief in…
We study the estimation of leverage effect and volatility of volatility by using high-frequency data with the presence of jumps. We first construct spot volatility estimator by using the empirical characteristic function of the…
We consider a two-sided singular stochastic control problem with a risk-sensitive ergodic criterion. In particular, we consider a stochastic system whose uncontrolled dynamics are modelled by a linear diffusion. The control that can be…
This work develops an agent-based model for the study of how the leverage through the use of repurchase agreements can function as a mechanism for the propagation and amplification of financial shocks in a financial system. Based on the…
We study the disequilibrium dynamics of a stylised model of production networks in which firms use perishable and non-substitutable intermediate inputs, so that adverse idiosyncratic productivity shocks can trigger downstream shortages and…
Auto-deleveraging (ADL) mechanisms are a critical yet understudied component of risk management on cryptocurrency futures exchanges. When available margin and other loss-absorbing resources are insufficient to cover losses following large…
The paper analyzes the cryptocurrency ecosystem at both the aggregate and individual levels to understand the factors that impact future volatility. The study uses high-frequency panel data from 2020 to 2022 to examine the relationship…
Evaluation of systemic risk in networks of financial institutions in general requires information of inter-institution financial exposures. In the framework of Debt Rank algorithm, we introduce an approximate method of systemic risk…
Why do companies choose particular capital structures? A compelling answer to this question remains elusive despite extensive research. In this article, we use double machine learning to examine the heterogeneous causal effect of credit…
This paper studies a systemic risk control problem by the central bank, which dynamically plans monetary supply to stabilize the interbank system with borrowing and lending activities. Facing both heterogeneity among banks and the common…
We study risk-aware linear policy approximations for the optimal operation of an energy system with stochastic wind power, storage, and limited fuel. The resulting problem is a sequential decision-making problem with rolling forecasts. In…
We study the ex-ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner's perspective. Prices are pressured from exogenous trading actions of…
In this article, we present a discrete time modeling framework, in which the shape and dynamics of a Limit Order Book (LOB) arise endogenously from an equilibrium between multiple market participants (agents). We use the proposed modeling…