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How should financial institutions hedge their balance sheets against interest rate risk when managing long-term assets and liabilities? We address this question by proposing a bond portfolio solution based on ambiguity-averse preferences,…

We study optimal investment in a financial market having a finite number of assets from a signal processing perspective. We investigate how an investor should distribute capital over these assets and when he should reallocate the…

Foundation models - already transformative in domains such as natural language processing - are now starting to emerge for time-series tasks in finance. While these pretrained architectures promise versatile predictive signals, little is…

We consider infinite dimensional optimization problems motivated by the financial model called Arbitrage Pricing Theory. Using probabilistic and functional analytic tools, we provide a dual characterization of the super-replication cost.…

We consider a general local-stochastic volatility model and an investor with exponential utility. For a European-style contingent claim, whose payoff may depend on either a traded or non-traded asset, we derive an explicit approximation for…

We give a comprehensive review of credit term structure modeling methodologies. The conventional approach to modeling credit term structure is summarized and shown to be equivalent to a particular type of the reduced form credit risk model,…

The paper discusses capital allocation using the Euler formula and focuses on the risk measures Value-at-Risk (VaR) and Expected shortfall (ES). Some new results connected to this capital allocation is known. Two examples illustrate that…

In order to properly manage risk, practitioners must understand the aggregate risks they are exposed to. Additionally, to properly price policies and calculate bonuses the relative riskiness of individual business units must be well…

We consider the problem of optimal consumption from labor income and investment in a general incomplete semimartingale market. The economic agent cannot borrow against future income, so the total wealth is required to be positive at (all or…

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…

We consider a financial market in which two securities are traded: a stock and an index. Their prices are assumed to satisfy the Black-Scholes model. Besides assuming that the index is a tradable security, we also assume that it is…

Based on a recent theorem due to the authors, it is shown how the extreme tail dependence between an asset and a factor or index or between two assets can be easily calibrated. Portfolios constructed with stocks with minimal tail dependence…

The purpose of this paper is to utilize statistical methodologies to infer from market prices of assets and their derivatives the magnitude of the set of a measure M that defines acceptance sets of risky future cash flows. Specifically, we…

The paper studies an oligopolistic equilibrium model of financial agents who aim to share their random endowments. The risk-sharing securities and their prices are endogenously determined as the outcome of a strategic game played among all…

We consider a portfolio with call option and the corresponding underlying asset under the standard assumption that stock-market price represents a random variable with lognormal distribution. Minimizing the variance (hedging risk) of the…

We consider an insurance company which faces financial risk in the form of insurance claims and market-dependent surplus fluctuations. The company aims to simultaneously control its terminal wealth (e.g. at the end of an accounting period)…

Forward-looking correlations are of interest in different financial applications, including factor-based asset pricing, forecasting stock-price movements or pricing index options. With a focus on non-FX markets, this paper defines necessary…

The frequent occurrence of natural disasters has posed significant challenges to society, necessitating the urgent development of effective risk management strategies. From the early informal community-based risk sharing mechanisms to…

In this article we consider the Merton problem in a market with a single risky asset and transaction costs. We give a complete solution of the problem up to the solution of a free-boundary problem for a first-order differential equation,…

We study hedging and pricing of unattainable contingent claims in a non-Markovian regime-switching financial model. Our financial market consists of a bank account and a risky asset whose dynamics are driven by a Brownian motion and a…