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We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of…
There are some statistical anomalies in the Chinese stock market, i.e., positive return skewness, anti-leverage effect (positive returns induce higher volatility than negative returns); and reverse volatility asymmetry (contemporaneous…
Voluntary insurance contracts constitute a puzzle because they increase the expectation value of one party's wealth, whereas both parties must sign for such contracts to exist. Classically, the puzzle is resolved by introducing non-linear…
We study a robust contract design problem with deferred inspection, in which a principal allocates a scarce resource to an agent, observes the agent's realized outcome ex post at negligible cost, and conditions transfers on this information…
This paper considers an optimal dividend distribution problem for an insurance company where the dividends are paid in a foreign currency. In the absence of dividend payments, our risk process follows a spectrally negative L\'evy process.…
Interconnected agents such as firms in a supply chain make simultaneous preparatory investments to increase chances of honouring their respective bilateral agreements. Failures cascade: if one fails their agreement, then so do all who…
We consider the dividend maximization problem including a ruin penalty in a diffusion environment. The additional penalty term is motivated by a constraint on dividend strategies. Intentionally, we use different discount rates for the…
The paper introduces benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as numeraire and the new benchmark-neutral pricing measure for pricing. For a realistic…
The recent crisis and the following flight to simplicity put most derivative businesses around the world under considerable pressure. We argue that the traditional modeling techniques must be extended to include product design. We propose a…
The notion of a credit spread curve is fundamental in fixed income investing, but in practice it is not `given' and needs to be constructed from bond prices either for a particular issuer, or for a sector rating-by-rating. Rather than…
Risk-neutral pricing dictates that the discounted derivative price is a martingale in a measure equivalent to the economic measure. The residual ambiguity for incomplete markets is here resolved by minimising the entropy of the price…
This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Under fairly general assumptions for the distribution of the total net…
In the classical principal-agent problem, a principal must design a contract to incentivize an agent to perform an action on behalf of the principal. We study the classical principal-agent problem in a setting where the agent can be of one…
Sequential learning problems are common in several fields of research and practical applications. Examples include dynamic pricing and assortment, design of auctions and incentives and permeate a large number of sequential treatment…
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 investigates two optimal insurance contracting problems under distributional uncertainty from the perspective of a potential policyholder, utilizing a Bregman-Wasserstein (BW) ball to characterize the ambiguity set of loss…
We consider an insurance company whose surplus is represented by the classical Cramer-Lundberg process. The company can invest its surplus in a risk free asset and in a risky asset, governed by the Black-Scholes equation. There is a…
We show that stochastic recovery always leads to counter-intuitive behaviors in the risk measures of a CDO tranche - namely, continuity on default and positive credit spread risk cannot be ensured simultaneously. We then propose a simple…
We consider a risk model where deficits after ruin are covered by a new type of reinsurance contract that provides capital injections. To allow the insurance company's survival after ruin, the reinsurer injects capital only at ruin times…
In this paper, we propose a method that provides a useful technique to compare relationship between risks involved that takes customer become defaulter and debt collection process that might make this defaulter recovered. Through estimation…