Related papers: Discounting with Imperfect Collateral
Based on supermodularity ordering properties, we show that convex risk measures of credit losses are nondecreasing w.r.t. credit-credit and, in a wrong-way risk setup, credit-market, covariances of elliptically distributed latent factors.…
Conformal Prediction methods have finite-sample distribution-free marginal coverage guarantees. However, they generally do not offer conditional coverage guarantees, which can be important for high-stakes decisions. In this paper, we…
This paper generalizes the framework for arbitrage-free valuation of bilateral counterparty risk to the case where collateral is included, with possible re-hypotecation. We analyze how the payout of claims is modified when collateral…
In this article, we employ a principal-agent model to analyze optimal contract design in a monopolistic reinsurance market under adverse selection with a continuum of insurer types. Instead of using the classical expected utility framework,…
This paper describes a consistent and arbitrage-free pricing methodology for bespoke CDO tranches. The proposed method is a multi-factor extension to the (Li 2009) model, and it is free of the known flaws in the current standard pricing…
We study a discrete-time multi-period portfolio optimization problem under an explicit constraint on the Deviation Conditional Value-at-Risk (DCVaR), defined as the excess of Conditional Value-at-Risk over expected terminal wealth. The…
In a context of illiquidity, the reservation price is a well-accepted alternative to the usual martingale approach which does not apply. However, this price is not available in closed form and requires numerical methods such as Monte Carlo…
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear…
We show how the cost of funding the collateral in a particular set up can be equal to the Bilateral Valuation Adjustment with the "funded" probability of default, leading to the definition of a Funded Bilateral Valuation Adjustment (FBVA).…
We consider an investor who seeks to maximize her expected utility derived from her terminal wealth relative to the maximum performance achieved over a fixed time horizon, and under a portfolio drawdown constraint, in a market with local…
We introduce capital flow constraints, loss of good will and loan to the lot sizing problem. Capital flow constraint is different from traditional capacity constraints: when a manufacturer launches production, its present capital should not…
A linear program with linear complementarity constraints (LPCC) requires the minimization of a linear objective over a set of linear constraints together with additional linear complementarity constraints. This class has emerged as a…
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for…
Ridge leverage scores provide a balance between low-rank approximation and regularization, and are ubiquitous in randomized linear algebra and machine learning. Deterministic algorithms are also of interest in the moderately big data…
Compound interest as well as inflation grows exponentially with time, whereas other means to repay debt grow polynomially. For this and other, mostly political, reasons, debt without inflation is unsustainable. We suggest a discontinuous…
Invoice or payment dilution is the gap between the approved invoice amount and the actual collection is a significant source of non credit risk and margin loss in supply chain finance. Traditionally, this risk is managed through the buyer's…
A key driver of Credit Value Adjustment (CVA) is the possible dependency between exposure and counterparty credit risk, known as Wrong-Way Risk (WWR). At this time, addressing WWR in a both sound and tractable way remains challenging:…
We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear-rational in the factors.…
We consider a collection of derivatives that depend on the price of an underlying asset at expiration or maturity. The absence of arbitrage is equivalent to the existence of a risk-neutral probability distribution on the price; in…
The recent "correlation breakdown" in the modeling of credit default swaps, in which model correlations had to exceed 100% in order to reproduce market prices of supersenior tranches, is analyzed and argued to be a fundamental market…