Related papers: How dark is the dark side of diversification?
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…
We examine how uncertain veracity of external news influences investor beliefs, market prices and corporate disclosures. Despite assuming independence between the news' veracity and the firm's endowment with private information, we find…
Value-at-Risk is one of the most popular risk management tools in the financial industry. Over the past 20 years several attempts to include VaR in the portfolio selection process have been proposed. However, using VaR as a risk measure in…
We model investor heterogeneity using different required returns on an investment and evaluate the impact on the valuation of an investment. By assuming no disagreement on the cash flows, we emphasize how risk preferences in particular, but…
Recent studies highlight economic complexity's role in mitigating fiscal crises, often measured via an economy's trade structure. Trade, however, is just one facet of an economy's structure and omits critical innovative activities like…
The recent financial crisis have generated renewed interests in fragilities of global financial networks among economists and regulatory authorities. In particular, a potential vulnerability of the financial networks is the "financial…
The article proposes a method of designing a statistically distinguishable rating scale that is not excessive in relation to the existing observation statistics. This allows for more stable validation with a fixed maximum number of…
We uncover a close link between outside options and risk attitude: when a decision-maker gains access to an outside option, her behaviour becomes less risk-averse, and conversely, any observed decrease of risk-aversion can be explained by…
Financial crises are a recurrent phenomenon with important effects on the real economy. The financial system is inherently fragile and it is therefore of great importance to be able to measure and characterize its systemic stability.…
We propose four channels through which government guarantees affect banks' incentives to smooth income. Empirically, we exploit two complementary settings that represent plausible exogenous changes in government guarantees: the increase in…
Accurately defining, measuring and mitigating risk is a cornerstone of financial risk management, especially in the presence of financial contagion. Traditional correlation-based risk assessment methods often struggle under volatile market…
The European sovereign debt crisis has impaired many European banks. The distress on the European banks may transmit worldwide, and result in a large-scale knock-on default of financial institutions. This study presents a computer…
For centuries, national economies created wealth by engaging in international trade and production. The resulting international supply networks not only increase wealth for countries, but also create systemic risk: economic shocks,…
Consider an investor trading dynamically to maximize expected utility from terminal wealth. Our aim is to study the dependence between her risk aversion and the distribution of the optimal terminal payoff. Economic intuition suggests that…
The current global financial system forms a highly interconnected network where a default in one of its nodes can propagate to many other nodes, causing a catastrophic avalanche effect. In this paper we consider the problem of reducing the…
We analyze the relative price change of assets starting from basic supply/demand considerations subject to arbitrary motivations. The resulting stochastic differential equation has coefficients that are functions of supply and demand. We…
As impressively shown by the financial crisis in 2007/08, contagion effects in financial networks harbor a great threat for the stability of the entire system. Without sufficient capital requirements for banks and other financial…
The problem of data uncertainty has motivated the incorporation of robust optimization in various arenas, beyond the Markowitz portfolio optimization. This work presents the extension of the robust optimization framework for the…
The global financial system has become highly connected and complex. Has been proven in practice that existing models, measures and reports of financial risk fail to capture some important systemic dimensions. Only lately, advisory boards…
Financial derivatives have often been criticized as casino-style betting instruments. It turns out that many naive ways of making them are indeed equivalent to gambling. Fortunately, this inadvertent effect can be understood and prevented.…