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The instability of historical risk factor correlations renders their use in estimating portfolio risk extremely questionable. In periods of market stress correlations of risk factors have a tendency to quickly go well beyond estimated…
This work proposes a unified framework for portfolio allocation, covering both asset selection and optimization, based on a multiple-hypothesis predict-then-optimize approach. The portfolio is modeled as a structured ensemble, where each…
This paper considers the problem of measuring the credit risk in portfolios of loans, bonds, and other instruments subject to possible default under multi-factor models. Due to the amount of the portfolio, the heterogeneous effect of…
Many real-world optimization problems involve uncertain parameters with probability distributions that can be estimated using contextual feature information. In contrast to the standard approach of first estimating the distribution of…
This paper develops a flexible and computationally efficient multivariate volatility model, which allows for dynamic conditional correlations and volatility spillover effects among financial assets. The new model has desirable properties…
Copulas have become an important tool in the modern best practice Enterprise Risk Management, often supplanting other approaches to modelling stochastic dependence. However, choosing the `right' copula is not an easy task, and the…
This work addresses integrating probabilistic propositional logic constraints into the distribution encoded by a probabilistic circuit (PC). PCs are a class of tractable models that allow efficient computations (such as conditional and…
In causal inference, and specifically in the \textit{Causes of Effects} problem, one is interested in how to use statistical evidence to understand causation in an individual case, and so how to assess the so-called {\em probability of…
Model risk measures consequences of choosing a model in a class of possible alternatives. We find analytical and simulated bounds for payoff functions on classes of plausible alternatives of a given discrete model. We measure the impact of…
We show that financial correlations exhibit a non-trivial dynamic behavior. We introduce a simple phenomenological model of a multi-asset financial market, which takes into account the impact of portfolio investment on price dynamics. This…
This paper generalizes Moody's correlated binomial default distribution for homogeneous (exchangeable) credit portfolio, which is introduced by Witt, to the case of inhomogeneous portfolios. As inhomogeneous portfolios, we consider two…
We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of…
Consider an insurance company exposed to a stochastic economic environment that contains two kinds of risk. The first kind is the insurance risk caused by traditional insurance claims, and the second kind is the financial risk resulting…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
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…
Recent financial disasters have emphasised the need to accurately predict extreme financial losses and their consequences for the institutions belonging to a given financial market. The ability of econometric models to predict extreme…
We investigate the portfolio selection problem against the systemic risk which is measured by CoVaR. We first demonstrate that the systemic risk of pure stock portfolios is essentially uncontrollable due to the contagion effect and the…
This study examines portfolio selection using predictive models for portfolio returns. Portfolio selection is a fundamental task in finance, and a variety of methods have been developed to achieve this goal. For instance, the mean-variance…
We employ and examine vine copulas in modeling symmetric and asymmetric dependency structures and forecasting financial returns. We analyze the asset allocations performed during the 2008-2009 financial crisis and test different portfolio…
We derive simple return models for several classes of bond portfolios. With only one or two risk factors our models are able to explain most of the return variations in portfolios of fixed rate government bonds, inflation linked government…