Related papers: Taming the Basel Leverage Cycle
Background: For complex financial systems, the negative and positive return-volatility correlations, i.e., the so-called leverage and anti-leverage effects, are particularly important for the understanding of the price dynamics. However,…
We develop a novel stress-test framework to monitor systemic risk in financial systems. The modular structure of the framework allows to accommodate for a variety of shock scenarios, methods to estimate interbank exposures and mechanisms of…
To meet the Basel II regulatory requirements for the Advanced Measurement Approaches in operational risk, the bank's internal model should make use of the internal data, relevant external data, scenario analysis and factors reflecting the…
We analyze the linear response of a market network to shocks based on the bipartite market model we introduced in an earlier paper, which we claimed to be able to identify the time-line of the 2009-2011 Eurozone crisis correctly. We show…
This paper brings together divergent approaches to time inconsistency from macroeconomic policy and behavioural economics. Behavioural discount functions from behavioural microeconomics are embedded into a game-theoretic analysis of…
We introduce the Lyapunov approach to optimal control problems of average risk-sensitive Markov control processes with general risk maps. Motivated by applications in particular to behavioral economics, we consider possibly non-convex risk…
The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. ("Individual versus systemic risk and the regulator's dilemma", Proc Natl Acad…
In this paper, we consider a class of stochastic optimal control problems with risk constraints that are expressed as bounded probabilities of failure for particular initial states. We present here a martingale approach that diffuses a risk…
For a long investment time horizon, it is preferable to rebalance the portfolio weights at intermediate times. This necessitates a multi-period market model in which portfolio optimization is usually done through dynamic programming.…
We study a rational expectation model of bubbles and crashes. The model has two components : (1) our key assumption is that a crash may be caused by local self-reinforcing imitation between noise traders. If the tendency for noise traders…
Banks in the interbank network can not assess the true risks associated with lending to other banks in the network, unless they have full information on the riskiness of all the other banks. These risks can be estimated by using network…
Behavioral parameters such as loss aversion, herding, and extrapolation are central to asset pricing models but remain difficult to measure reliably. We develop a framework that treats large language models (LLMs) as calibrated measurement…
Managing risk at the aggregate level is crucial for banks and financial institutions as required by the Basel III framework. In this paper, we introduce discrete time Bayesian state space models with Poisson measurements to model aggregate…
We develop efficient algorithms to construct utility maximizing mechanisms in the presence of risk averse players (buyers and sellers) in Bayesian settings. We model risk aversion by a concave utility function, and players play…
We develop an averaging approach to robust risk measurement under payoff uncertainty. Instead of taking a worst-case value over an uncertainty neighborhood, we weight nearby payoffs more heavily under a chosen metric and average the…
Economic and financial models -- such as vector autoregressions, local projections, and multivariate volatility models -- feature complex dynamic interactions and spillovers across many time series. These models can be integrated into a…
When trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment…
We study the problem of optimal risk policies and dividend strategies for an insurance company operating under the constraint that the timing of shareholder payouts is governed by the arrival times of a Poisson process. Concurrently, risk…
In biology and ecology, individuals or communities of individuals living in unpredictable environments often alternate between different evolutionary strategies to spread and reduce risks. Such behavior is commonly referred to as…
We study a class of heterogeneous agent-based models which are based on a basic set of principles, and the most fundamental operations of an economic system: trade and product transformations. A basic guiding principle is scale invariance,…