Related papers: Risk Premia: Asymmetric Tail Risks and Excess Retu…
Portfolio diversification is a cornerstone of modern finance, while risk aversion is central to decision theory; both concepts are long-standing and foundational. We investigate their connections by studying how different forms of…
We reconsider a classical, well-studied problem from applied probability. This is the max-sum equivalence of randomly weighted sums, and the originality is because we manage to include interdependence among the primary random variables, as…
The Sharpe ratio, which is defined as the ratio of the excess expected return of an investment to its standard deviation, has been widely cited in the financial literature by researchers and practitioners. However, very little attention has…
Risk control and optimal diversification constitute a major focus in the finance and insurance industries as well as, more or less consciously, in our everyday life. We present a discussion of the characterization of risks and of the…
This work studies the dynamic risk management of the risk-neutral value of the potential credit losses on a portfolio of derivatives. Sensitivities-based hedging of such liability is sub-optimal because of bid-ask costs, pricing models…
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…
We generalize Quasi-Linear Means by restricting to the tail of the risk distribution and show that this can be a useful quantity in risk management since it comprises in its general form the Value at Risk, the Tail Value at Risk and the…
In this letter, we present an improved hazard rate twisting technique for the estimation of the probability that a sum of independent but not necessarily identically distributed subexponential Random Variables (RVs) exceeds a given…
In this paper, we consider a generic interest rate market in the presence of roll-over risk, which generates spreads in spot/forward term rates. We do not require classical absence of arbitrage and rely instead on a minimal market viability…
In this paper, we investigate the features and the performance of the Risk Parity (RP) portfolios using the Mean Absolute Deviation (MAD) as a risk measure. The RP model is a recent strategy for asset allocation that aims at equally sharing…
We consider the problem of optimal risk sharing in a pool of cooperative agents. We analyze the asymptotic behavior of the certainty equivalents and risk premia associated with the Pareto optimal risk sharing contract as the pool expands.…
We give an explicit formula for the probability distribution based on a relativistic extension of Brownian motion. The distribution 1) is properly normalized and 2) obeys the tower law (semigroup property), so we can construct martingales…
While the estimation of risk is an important question in the daily business of banking and insurance, many existing plug-in estimation procedures suffer from an unnecessary bias. This often leads to the underestimation of risk and…
Typical risk classification procedure in insurance is consists of a priori risk classification determined by observable risk characteristics, and a posteriori risk classification where the premium is adjusted to reflect the policyholder's…
Risk aversion and insurance are two prominent and interconnected concepts in economics and finance. To explore their fundamental connection, we introduce risk-insurance parity, which associates various classes of insurance contracts with…
The tail of the distribution of a sum of a random number of independent and identically distributed nonnegative random variables depends on the tails of the number of terms and of the terms themselves. This situation is of interest in the…
We study portfolio selection in a complete continuous-time market where the preference is dictated by the rank-dependent utility. As such a model is inherently time inconsistent due to the underlying probability weighting, we study the…
Risk and uncertainty will always be a matter of experience, luck, skills, and modelling. Leverage is another concept, which is critical for the investor decisions and results. Adaptive skills and quantitative probabilistic methods need to…
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…
This paper investigates short-term behaviors of implied volatility of derivatives written on indexes in equity markets when the index processes are constructed by using a ranking procedure. Even in simple market settings where stock prices…