Related papers: Model Risk in Real Option Valuation
We propose a novel strategy for multivariate extreme value index estimation. In applications such as finance, volatility and risk present in the components of a multivariate time series are often driven by the same underlying factors, such…
We focus on two particular aspects of model risk: the inability of a chosen model to fit observed market prices at a given point in time (calibration error) and the model risk due to recalibration of model parameters (in contradiction to…
We investigate the value of extending the completeness of a decision model along different dimensions of refinement. Specifically, we analyze the expected value of quantitative, conceptual, and structural refinement of decision models. We…
We develop a complete analysis of a general entry-exit-scrapping model. In particular, we consider an investment project that operates within a random environment and yields a payoff rate that is a function of a stochastic economic…
Dual risk models are popular for modeling a venture capital or high tech company, for which the running cost is deterministic and the profits arrive stochastically over time. Most of the existing literature on dual risk models concentrated…
Measuring model risk is required by regulators on financial and insurance markets. We separate model risk into parameter estimation risk and model specification risk, and we propose expected shortfall type model risk measures applied to…
Existing approaches to asset-pricing under model-uncertainty adapt classical utility-maximization frameworks and seek theoretical comprehensiveness. We move toward practice by considering binary model-risks and by emphasizing 'constraints'…
I revisit the standard moral-hazard model, in which an agent's preference over contracts is rooted in costly effort choice. I characterise the behavioural content of the model in terms of empirically testable axioms, and show that the…
Penalized regression has become a standard tool for model building across a wide range of application domains. Common practice is to tune the amount of penalization to tradeoff bias and variance or to optimize some other measure of…
We study the problem of option pricing and hedging strategies within the frame-work of risk-return arguments. An economic agent is described by a utility function that depends on profit (an expected value) and risk (a variance). In the…
Several real-world classification problems are example-dependent cost-sensitive in nature, where the costs due to misclassification vary between examples and not only within classes. However, standard classification methods do not take…
Assessing climate risk and its potential impacts on our cities and economies is of fundamental importance. Extreme weather events, such as hurricanes, floods, and storm surges can lead to catastrophic damages. We propose a flexible approach…
The downside risk of a portfolio of (equity)assets is generally substantially higher than the downside risk of its components. In particular in times of crises when assets tend to have high correlation, the understanding of this difference…
In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the…
In this paper we introduce a new approach to model-free path-dependent option pricing. We first introduce a general duality result for linear optimisation problems over signed measures introduced in [3] and show how the the problem of…
We study the modelling and valuation of surrender and other behavioural options in life insurance and pension. We place ourselves in between the two extremes of completely arbitrary intervention and optimal intervention by the policyholder.…
Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account…
We consider the portfolio optimization with risk measured by conditional value-at-risk, based on the stress event of chosen asset being equal to the opposite of its value-at-risk level, under the normality assumption. Solvability conditions…
Portfolio selection in the periodic investment of securities modeled by a multivariate Merton model with dependent jumps is considered. The optimization framework is designed to maximize expected terminal wealth when portfolio risk is…
In many insurance contexts, dependence between risks of a portfolio may arise from their frequencies. We investigate a dependent risk model in which we assume the vector of count variables to be a tree-structured Markov random field with…