Related papers: Profit and loss attribution: An empirical study
We present an algorithm for the decomposition of periodic financial return data into orthogonal factors of expected return and "systemic", "productive", and "nonproductive" risk. Generally, when the number of funds does not exceed the…
We study the gain of an insider having private information which concerns the default risk of a counterparty. More precisely, the default time \tau is modelled as the first time a stochastic process hits a random barrier L. The insider…
We discuss the foundations of factor or regression models in the light of the self-consistency condition that the market portfolio (and more generally the risk factors) is (are) constituted of the assets whose returns it is (they are)…
Confounding bias and selection bias bring two significant challenges to the validity of conclusions drawn from applied causal inference. The latter can stem from informative missingness, such as in cases of attrition. We introduce the…
This paper investigates performance attribution measures as a basis for constraining portfolio optimization. We employ optimizations that minimize expected tail loss and investigate both asset allocation (AA) and the selection effect (SE)…
Employee's knowledge is an organization asset. Turnover may impose apparent and hidden costs and irreparable damages. To overcome and mitigate this risk, employee's condition should be monitored. Due to high complexity of analyzing…
The aim of this paper is to compare two asset allocation methods for a pension scheme during the decumulation phase in the simplified portfolio selection between a risky asset following a geometric Brownian motion and a riskless asset. The…
Transaction costs and regime shifts are major reasons why paper portfolios fail in live trading. We introduce FR-LUX (Friction-aware, Regime-conditioned Learning under eXecution costs), a reinforcement learning framework that learns…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
Volatility is the language in which finance often describes risk, but it is not the language in which institutions experience risk. Allocators live through drawdowns, liquidity needs, spending rules, rebalance decisions, board oversight,…
Despite the fact that the Euler allocation principle has been adopted by many financial institutions for their internal capital allocation process, a comprehensive description of Euler allocation seems still to be missing. We try to fill…
To quantify an operational risk capital charge under Basel II, many banks adopt a Loss Distribution Approach. Under this approach, quantification of the frequency and severity distributions of operational risk involves the bank's internal…
We use the P&L on a particular class of swaps, representing variance and higher moments for log returns, as estimators in our empirical study on the S&P500 that investigates the factors determining variance and higher-moment risk premia.…
We estimate the rate of aftershocks triggered by a heterogeneous stress change, using the rate-and-state model of Dieterich [1994].We show that an exponential stress distribution Pt(au) ~exp(-tautau_0) gives an Omori law decay of…
Traditional approaches to financial asset allocation start with returns forecasting followed by an optimization stage that decides the optimal asset weights. Any errors made during the forecasting step reduce the accuracy of the asset…
A basic assumption of traditional reinforcement learning is that the value of a reward does not change once it is received by an agent. The present work forgoes this assumption and considers the situation where the value of a reward decays…
We consider a central trading desk which aggregates the inflow of clients' orders with unobserved toxicity, i.e. persistent adverse directionality. The desk chooses either to internalise the inflow or externalise it to the market in a cost…
We investigate the quantification of demographic risk in a framework consistent with the market-consistent valuation imposed by Solvency II. We provide compact formulas for evaluating inflows and outflows of a portfolio of insurance…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
Fault tolerance is essential for building reliable services; however, it comes at the price of redundancy, mainly the "replication factor" and "diversity". With the increasing reliance on Internet-based services, more machines (mainly…