Related papers: Endogenous Representation of Asset Returns
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…
Financial stock returns correlations have been studied in the prism of random matrix theory, to distinguish the signal from the "noise". Eigenvalues of the matrix that are above the rescaled Marchenko Pastur distribution can be interpreted…
Price changes are induced by aggressive market orders in stock market. We introduce a bivariate marked Hawkes process to model aggressive market order arrivals at the microstructural level. The order arrival intensity is marked by an…
The Fama-French three factor models are commonly used in the description of asset returns in finance. Statistically speaking, the Fama-French three factor models imply that the return of an asset can be accounted for directly by the…
This paper develops a dynamic factor model in which common level and volatility factors evolve jointly, allowing conditional means and variances to interact endogenously within a large-information setting. The joint evolution of these…
Systemic risk arises as a multi-layer network phenomenon. Layers represent direct financial exposures of various types, including interbank liabilities, derivative- or foreign exchange exposures. Another network layer of systemic risk…
For this special issue, the article aims at discussing a few econophysics problems studied so far rather successfully. The following "applications" in micro-econo-physics are considered : (i) financial crashes; it is emphasized that one can…
Managing a portfolio to a risk model can tilt the portfolio toward weaknesses of the model. As a result, the optimized portfolio acquires downside exposure to uncertainty in the model itself, what we call "second order risk." We propose a…
A structural causal model is made of endogenous (manifest) and exogenous (latent) variables. We show that endogenous observations induce linear constraints on the probabilities of the exogenous variables. This allows to exactly map a causal…
Individual risk models need to capture possible correlations as failing to do so typically results in an underestimation of extreme quantiles of the aggregate loss. Such dependence modelling is particularly important for managing credit…
Most people are risk-averse (risk-seeking) when they expect to gain (lose). Based on a generalization of ``expected utility theory'' which takes this into account, we introduce an automaton mimicking the dynamics of economic operations.…
We introduce a new paradigm for risk sharing that generalizes earlier models based on discrete agents and extends them to allow for sharing risk within a continuum of agents. Agents are represented by points of a measure space and have…
We develop a unified model in which AI adoption in financial markets generates systemic risk through three mutually reinforcing channels: performative prediction, algorithmic herding, and cognitive dependency. Within an extended rational…
We discuss the use of saddlepoint methods in the analysis of portfolios, with particular reference to credit portfolios. The objective is to proceed from a model of the loss distribution, given through probabilities, correlations and the…
In this paper we study the effect of network structure between agents and objects on measures for systemic risk. We model the influence of sharing large exogeneous losses to the financial or (re)insuance market by a bipartite graph. Using…
High-dimensional tensor-valued data have recently gained attention from researchers in economics and finance. We consider the estimation and inference of high-dimensional tensor factor models, where each dimension of the tensor diverges.…
The capital asset pricing model (CAPM) is readily used to capture a linear relationship between the daily returns of an asset and a market index. We extend this model to an intraday high-frequency setting by proposing a functional CAPM…
We address a portfolio selection problem that combines active (outperformance) and passive (tracking) objectives using techniques from convex analysis. We assume a general semimartingale market model where the assets' growth rate processes…
How do inter-organizational networks emerge? Accounting for interdependence among ties while studying tie formation is one of the key challenges in this area of research. We address this challenge using an equilibrium framework where firms'…
The main contribution of the paper is to employ the financial market network as a useful tool to improve the portfolio selection process, where nodes indicate securities and edges capture the dependence structure of the system. Three…