Related papers: A factor-model approach for correlation scenarios …
Common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis. We develop a network approach to the amplification of financial contagion due to the combination of overlapping…
The Hansen-Jagannathan (HJ) distance statistic is one of the most dominant measures of model misspecification. However, the conventional HJ specification test procedure has poor finite sample performance, and we show that it can be size…
Several studies have focused on the Realized Range Volatility, an estimator of the quadratic variation of financial prices, taking into account the impact of microstructure noise and jumps. However, none has considered direct modeling and…
We present an extension of the Johansen-Ledoit-Sornette (JLS) model to include an additional pricing factor called the "Zipf factor", which describes the diversification risk of the stock market portfolio. Keeping all the dynamical…
Stress testing refers to the application of adverse financial or macroeconomic scenarios to a portfolio. For this purpose, financial or macroeconomic risk factors are linked with asset returns, typically via a factor model. We expand the…
We consider the problem of accurately measuring the credit risk of a portfolio consisting of loss exposures such as loans, bonds and other financial assets. We are particularly interested in the probability of large portfolio losses. We…
Inspired by the recent literature on aggregation theory, we aim at relating the long range correlation of the stocks return volatility to the heterogeneity of the investors' expectations about the level of the future volatility. Based on a…
We present a study on portfolio investments in financial applications. We describe a general modeling and simulation framework and study the impact on the use of different metrics to measure the correlation among assets. In particular,…
In recent years, multi-factor strategies have gained increasing popularity in the financial industry, as they allow investors to have a better understanding of the risk drivers underlying their portfolios. Moreover, such strategies promise…
Extreme volatility, nonlinear dependencies, and systemic fragility are characteristics of cryptocurrency markets. The assumptions of normality and centralized control in traditional financial risk models frequently cause them to miss these…
This paper considers the problem of measuring the credit risk in portfolios of loans, bonds, and other instruments subject to possible default under multi-factor models. Due to the amount of the portfolio, the heterogeneous effect of…
In this paper, we are interested in evaluating the resilience of financial portfolios under extreme economic conditions. Therefore, we use empirical measures to characterize the transmission process of macroeconomic shocks to risk…
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…
Machine Learning models are being extensively used in safety critical applications where errors from these models could cause harm to the user. Such risks are amplified when multiple machine learning models, which are deployed concurrently,…
An resilience optimal evaluation of financial portfolios implies having plausible hypotheses about the multiple interconnections between the macroeconomic variables and the risk parameters. In this paper, we propose a graphical model for…
In practice daily volatility of portfolio returns is transformed to longer holding periods by multiplying by the square-root of time which assumes that returns are not serially correlated. Under this assumption this procedure of scaling can…
We propose a framework for constructing factor models for alpha streams. Our motivation is threefold. 1) When the number of alphas is large, the sample covariance matrix is singular. 2) Its out-of-sample stability is challenging. 3)…
We study a simple, solvable model that allows us to investigate effects of credit contagion on the default probability of individual firms, in both portfolios of firms and on an economy wide scale. While the effect of interactions may be…
We examine machine learning and factor-based portfolio optimization. We find that factors based on autoencoder neural networks exhibit a weaker relationship with commonly used characteristic-sorted portfolios than popular dimensionality…
We consider the problem of estimating the probability of a large loss from a financial portfolio, where the future loss is expressed as a conditional expectation. Since the conditional expectation is intractable in most cases, one may…