Related papers: Zero-Leverage Puzzle
The zero-inflated logistic regression model accommodates binary responses with excess zeros, which often arise from a latent mixture of susceptible and insusceptible subpopulations or asymmetric misclassification of the response. The model…
This paper studies optimal investment from the point of view of an investor with longevity-linked liabilities. The relevant optimization problems rarely are analytically tractable, but we are able to show numerically that liability driven…
In a discrete-time setting, we study arbitrage concepts in the presence of convex trading constraints. We show that solvability of portfolio optimization problems is equivalent to absence of arbitrage of the first kind, a condition weaker…
We propose a new volatility model based on two stylized facts of the volatility in the stock market: clustering and leverage effect. We calibrate our model parameters, in the leading order, with 77 years Dow Jones Industrial Average data.…
Financial speculators often seek to increase their potential gains with leverage. Debt is a popular form of leverage, and with over 39.88B USD of total value locked (TVL), the Decentralized Finance (DeFi) lending markets are thriving.…
We study a non-concave optimization problem in which a financial company maximizes the expected utility of the surplus under a risk-based regulatory constraint. For this problem, we consider four different prevalent risk constraints…
A drawdown constraint forces the current wealth to remain above a given function of its maximum to date. We consider the portfolio optimisation problem of maximising the long-term growth rate of the expected utility of wealth subject to a…
Market participants regularly send bid and ask quotes to exchange-operated limit order books. This creates an optimization challenge where their potential profit is determined by their quoted price and how often their orders are…
The introduction of leverage on prediction-market event contracts raises three structurally distinct questions that have not been addressed jointly: how leverage changes manipulation incentives, how it interacts with informed-trading rents,…
Limited liability creates a conflict of interests between policyholders and shareholders of insurance companies. It provides shareholders with incentives to increase the risk of the insurer's assets and liabilities which, in turn, might…
Return-risk models are the two pillars of modern portfolio theory, which are widely used to make decisions in choosing the loan portfolio of a bank. Banks and other financial institutions are subjected to limited liability protection.…
Autodeleveraging (ADL) is a last-resort loss socialization mechanism for perpetual futures venues. It is triggered when solvency-preserving liquidations fail. Despite the dominance of perpetual futures in the crypto derivatives market, with…
Voluntary insurance contracts constitute a puzzle because they increase the expectation value of one party's wealth, whereas both parties must sign for such contracts to exist. Classically, the puzzle is resolved by introducing non-linear…
The hypothesis that there do not exist free lunches with vanishing risk (FLVRs) in the real market underpins the popular risk-neutral pricing and hedging methodology in quantitative finance. The paper documents the fact that this hypothesis…
In this paper, both dynamic mean-variance portfolio selection problems and dynamic variance hedging problems are discussed under non-Markovian framework. Explicit closed-loop equilibrium strategies of these problems are respectively…
I study coordination failures in housing development markets with network effects, where the value of building depends on aggregate supply. When network effects are sufficiently strong and convex, multiple equilibria arise: a low-supply…
Flexibility options, such as demand response, energy storage and interconnection, have the potential to reduce variation in electricity prices between different future scenarios, therefore reducing investment risk. Moreover, investment in…
As humanity is becoming increasingly confronted by Earth's finite biophysical limits, there is increasing interest in questions about the stability and equitability of a zero-growth capitalist economy, most notably: if one maintains a…
A principal with cheap capital optimally forces her counterparty to borrow at above-market rates. The reason: the form of finance is a screening device. Advances provide liquidity but pool types; contingent transfers separate types, but,…
This memoir presents a systematic study of the utility maximization problem of an investor in a constrained and unbounded financial market. Building upon the work of Hu et al. (2005) [Ann. Appl. Probab., 15, 1691--1712] in a bounded…