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A system for Operational Risk management based on the computational paradigm of Bayesian Networks is presented. The algorithm allows the construction of a Bayesian Network targeted for each bank using only internal loss data, and takes into…
Systemic risk is the risk that a company- or industry-level risk could trigger a huge collapse of another or even the whole institution. Various systemic risk measures have been proposed in the literature to quantify the domino and…
A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II.…
Regulatory requirements dictate that financial institutions must calculate risk capital (funds that must be retained to cover future losses) at least annually. Procedures for doing this have been well-established for many years, but recent…
Stochastic approximation (SA) is a key method used in statistical learning. Recently, its non-asymptotic convergence analysis has been considered in many papers. However, most of the prior analyses are made under restrictive assumptions…
Stochastic optimization problems often involve the expectation in its objective. When risk is incorporated in the problem description as well, then risk measures have to be involved in addition to quantify the acceptable risk, often in the…
Sharpe Ratio (SR) is a critical parameter in characterizing financial time series as it jointly considers the reward and the volatility of any stock/portfolio through its variance. Deriving online algorithms for optimizing the SR is…
Given the continuous global degradation of the Earth's ecosystem due to unsustainable human activity, it is increasingly important for enterprises to evaluate the effects they have on the environment. Consequently, assessing the impact of…
Recently the European Union Agency for Railways (ERA) has received a mandate for 'the development of common safety methods for assessing the safety level and the safety performance of railway operators at national and Union level'.…
We formulate banks' capital optimization problem as a classic mean variance optimization, by leveraging an accurate linear approximation to the Shapely or Constrained Aumann-Shapley (CAS) allocation of max or nested max cost functions. This…
Basel II and Solvency 2 both use the Value-at-Risk (VaR) as the risk measure to compute the Capital Requirements. In practice, to calibrate the VaR, a normal approximation is often chosen for the unknown distribution of the yearly log…
The credit crisis of 2007 and 2008 has thrown much focus on the models used to price mortgage backed securities. Many institutions have relied heavily on the credit ratings provided by credit agency. The relationships between management of…
In this paper we present results on scalar risk measures in markets with transaction costs. Such risk measures are defined as the minimal capital requirements in the cash asset. First, some results are provided on the dual representation of…
Identifying and mitigating safety risks is paramount in a number of industries. In addition to guidelines and best practices, many industries already have safety management systems (SMSs) designed to monitor and reinforce good safety…
The classical Method of Successive Approximations (MSA) is an iterative method for solving stochastic control problems and is derived from Pontryagin's optimality principle. It is known that the MSA may fail to converge. Using careful…
Many extensions and modifications have been made to standard process monitoring methods such as the exponentially weighted moving average (EWMA) chart and the cumulative sum (CUSUM) chart. In addition, new schemes have been proposed based…
We show that any objective risk measurement algorithm mandated by central banks for regulated financial entities will result in more risk being taken on by those financial entities than would otherwise be the case. Furthermore, the risks…
A new methodology for incorporating LGD correlation effects into the Basel II risk weight functions is introduced. This methodology is based on modelling of LGD and default event with a single loss variable. The resulting formulas for…
Following several episodes of financial market turmoil in recent decades, changes in systemic risk have drawn growing attention. Therefore, we propose surveillance schemes for systemic risk, which allow to detect misspecified systemic risk…
In this research, starting from a widely accepted definition of risk, we support the idea that risk reduction is a more realistic objective than risk minimization, which represents a theoretical utopia. Furthermore, significant risk…