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The Wiener-Hopf factorization is obtained in closed form for a phase type approximation to the CGMY L\'{e}vy process. This allows, for the approximation, exact computation of first passage times to barrier levels via Laplace transform…
In this work we develop a tractable structural model with analytical default probabilities depending on a random default barrier and possibly random volatility ideally associated with a scenario based underlying firm debt. We show how to…
We study a practical optimization problems for venture capital investments and/or Research and Development (R&D) investments. The first problem is that, given the amount of the initial investment and the reward function at the initial…
We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process,…
Sustaining efficiency and stability by properly controlling the equity to asset ratio is one of the most important and difficult challenges in bank management. Due to unexpected and abrupt decline of asset values, a bank must closely…
This paper proposes a novel capacity credit evaluation framework to accurately quantify the contribution of generalized energy storage (GES) to resource adequacy, considering both strategic capacity withholding and decision-dependent…
This paper studies the equal risk pricing (ERP) framework for the valuation of European financial derivatives. This option pricing approach is consistent with global trading strategies by setting the premium as the value such that the…
Automated Market Makers (AMMs) are essential to decentralized finance, offering continuous liquidity and enabling intermediary-free trading on blockchains. However, participants in AMMs are vulnerable to Maximal Extractable Value (MEV)…
Financial networks raise a significant computational challenge in identifying insolvent firms and evaluating their exposure to systemic risk. This task, known as the clearing problem, is computationally tractable when dealing with simple…
We extend the now classic structural credit modeling approach of Black and Cox to a class of "two-factor" models that unify equity securities such as options written on the stock price, and credit products like bonds and credit default…
In financial risk management, Value at Risk (VaR) is widely used to estimate potential portfolio losses. VaR's limitation is its inability to account for the magnitude of losses beyond a certain threshold. Expected Shortfall (ES) addresses…
Debt recycling is an aggressive equity extraction strategy that potentially permits faster repayment of a mortgage. While equity progressively builds up as the mortgage is repaid monthly, mortgage holders may obtain another loan they could…
The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related Credit Valuation Adjustment, (CVA), Debt Valuation Adjustment (DVA), Liquidity…
Financial markets of emerging economies are vulnerable to extreme and cascading information spillovers, surges, sudden stops and reversals. With this in mind, we develop a new online early warning system (EWS) to detect what is referred to…
In the last five years, expected shortfall (ES) and stressed ES (SES) have become key required regulatory measures of market risk in the banking sector, especially following events such as the global financial crisis. Thus, finding ways to…
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.…
Historical (Stressed-) Value-at-Risk ((S)VAR), and Expected Shortfall (ES), are widely used risk measures in regulatory capital and Initial Margin, i.e. funding, computations. However, whilst the definitions of VAR and ES are unambiguous,…
A scenario in which regulators take the drastic step of requiring coverage of all venture bank investment loans using interbank borrowed funds is considered. In this scenario, a minimal amount of default insurance is used, such that Tier 1…
The 2008 financial crisis has been attributed to "excessive complexity" of the financial system due to financial innovation. We employ computational complexity theory to make this notion precise. Specifically, we consider the problem of…
In this paper, we employ Credit Default Swaps (CDS) to model the joint and conditional distress probabilities of banks in Europe and the U.S. using factor copulas. We propose multi-factor, structured factor, and factor-vine models where the…