Related papers: Model risk on credit risk
I develop a dynamic model of how internal capital markets in conglomerates respond to liquidity shocks when affiliated firms vary in innovation potential. A two-stage framework defines cutoff rules for when the conglomerate should liquidate…
Suppose an investor aims at Delta hedging a European contingent claim $h(S(T))$ in a jump-diffusion model, but incorrectly specifies the stock price's volatility and jump sensitivity, so that any hedging strategy is calculated under a…
We consider the spreading dynamics of two nested invasion clusters on an infinite tree. This model was defined as the chase-escape model by Kordzakhia and it admits a limit process, the birth-and-assassination process, previously introduced…
Risk contagion concerns any entity dealing with large scale risks. Suppose (X,Y) denotes a risk vector pertaining to two components in some system. A relevant measurement of risk contagion would be to quantify the amount of influence of…
Stochastic modelling of fatigue (and other material's deterioration), as well as of cumulative damage in risk theory, are often based on compound sums of independent random variables, where the number of addends is represented by an…
Effective credit risk management is fundamental to financial decision-making, requiring robust models to predict default probabilities and classify financial entities. Traditional machine learning approaches face significant challenges when…
In the Vasicek credit portfolio model, tail risk is driven primarily by the asset-correlation parameter, yet empirically is subject to correlation risk. We propose a stochastic correlation extension of the Vasicek framework in which the…
In this paper we study the implications of contingent payments on the clearing wealth in a network model of financial contagion. We consider an extension of the Eisenberg-Noe financial contagion model in which the nominal interbank…
Credit risk default prediction remains a cornerstone of risk management in the financial industry. The task involves estimating the likelihood that a borrower will fail to meet debt obligations, an objective critical for lending decisions,…
We introduce a probabilistic framework that represents stylized banking networks with the aim of predicting the size of contagion events. Most previous work on random financial networks assumes independent connections between banks, whereas…
We study investment and insurance demand decisions for an agent in a theoretical continuous-time expected utility maximization model that combines risky assets with an (exogenous) insurable background risk. This risk takes the form of a…
We consider a mean-variance portfolio selection problem in a financial market with contagion risk. The risky assets follow a jump-diffusion model, in which jumps are driven by a multivariate Hawkes process with mutual-excitation effect. The…
Accurately assessing financial risk requires capturing both individual asset volatility and the complex, asymmetric dependence structures that emerge during extreme market events. While modern diffusion-based models have advanced…
We suggest a natural approach that leads to a modification of classical quasispecies models and incorporates the possibility of population extinction in addition to growth. The resulting modified models are called open. Their essential…
Credit risk stress testing has become an important risk management device which is used both by banks internally and by regulators. Stress testing is complex because it essentially means projecting a bank's full balance sheet conditional on…
We consider the qualitative behavior of a mathematical model for transmission dynamics with two nonlinear stages of contagion. The proposed model is inspired by phenomena occurring in epidemiology (spread of infectious diseases) or social…
The threshold model has been widely adopted as a classic model for studying contagion processes on social networks. We consider asymmetric individual interactions in social networks and introduce a persuasion mechanism into the threshold…
We compare two models of corporate default by calculating the Jeffreys-Kullback-Leibler divergence between their predicted default probabilities when asset correlations are either high or low. Our main results show that the divergence…
In this paper we analyze the resilience of a network of banks to joint price fluctuations of the external assets in which they have shared exposures, and evaluate the worst-case effects of the possible default contagion. Indeed, when the…
A simple banking network model is proposed which features multiple waves of bank defaults and is analytically solvable in the limiting case of an infinitely large homogeneous network. The model is a collection of nodes representing…