Related papers: On a Stochastic Model of Diversification
In this paper, we propose a market model with returns assumed to follow a multivariate normal tempered stable distribution defined by a mixture of the multivariate normal distribution and the tempered stable subordinator. This distribution…
There is a duality theory connecting certain stochastic orderings between cumulative distribution functions F_1,F_2 and stochastic orderings between their inverses F_1^(-1),F_2^(-1). This underlies some theories of utility in the case of…
Financial structures such as securitisations, insurance contracts, and other hierarchical claims systems can be interpreted as deterministic allocation mechanisms acting on stochastic inflow processes. This paper develops a general…
We introduce diversified risk parity embedded with various reward-risk measures and more generic allocation rules for portfolio construction. We empirically test the proposed reward-risk parity strategies and compare their performance with…
We introduce a new stochastic duration model for transaction times in asset markets. We argue that widely accepted rules for aggregating seemingly related trades mislead inference pertaining to durations between unrelated trades: while any…
To find a trade-off between profitability and prudence, financial practitioners need to choose appropriate risk measures. Two key points are: Firstly, investors' risk attitudes under uncertainty conditions should be an important reference…
The benefits of diversifying risks are difficult to estimate quantitatively because of the uncertainties in the dependence structure between the risks. Also, the modelling of multidimensional dependencies is a non-trivial task. This paper…
It is well known that a random vector with given marginal distributions is comonotonic if and only if it has the largest sum with respect to the convex order [ Kaas, Dhaene, Vyncke, Goovaerts, Denuit (2002), A simple geometric proof that…
In complex systems, the interplay between nonlinear and stochastic dynamics, e.g., J. Monod's necessity and chance, gives rise to an evolutionary process in Darwinian sense, in terms of discrete jumps among attractors, with punctuated…
For the past two decades investors have observed long memory and highly correlated behavior of asset classes that does not fit into the framework of Modern Portfolio Theory. Custom correlation and standard deviation estimators consider…
We introduce a new approach for prudent risk evaluation based on stochastic dominance, which will be called the model aggregation (MA) approach. In contrast to the classic worst-case risk (WR) approach, the MA approach produces not only a…
We study continuous-time portfolio choice with nonlinear payoffs under smooth ambiguity and Bayesian learning. We develop a general framework for dynamic, non-concave asset allocation that accommodates nonlinear payoffs, broad utility…
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…
Robust and distributionally robust optimization are modeling paradigms for decision-making under uncertainty where the uncertain parameters are only known to reside in an uncertainty set or are governed by any probability distribution from…
The paper concerns primal and dual representations as well as time consistency of set-valued dynamic risk measures. Set-valued risk measures appear naturally when markets with transaction costs are considered and capital requirements can be…
In this note, we give an explicit expression for the quantile of a mixture of two random variables. We carefully examine all possible cases of discrete and continuous variables with possibly unbounded support. The result is useful for…
Portfolio optimization (PO) is a core tool in financial and operational decision-making, typically balancing expected profit and risk. In real-world applications, particularly in the energy sector, decision variables can be expressed as…
When the available statistical information is imperfect, it is dangerous to follow standard optimisation procedures to construct an optimal portfolio, which usually leads to a strong concentration of the weights on very few assets. We…
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…
As financial instruments grow in complexity more and more information is neglected by risk optimization practices. This brings down a curtain of opacity on the origination of risk, that has been one of the main culprits in the 2007-2008…