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We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the…
Research capacity is critical in understanding systemic risk and informing new regulation. Banking regulation has not kept pace with all the complexities of financial innovation. The academic literature on systemic risk is rapidly…
Recently, there has been a growing interest in network research, especially in these fields of biology, computer science, and sociology. It is natural to address complex financial issues such as the European sovereign debt crisis from the…
The 2008 financial crisis illustrated the need for a thorough, functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult, most recent…
We introduce a general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the…
The research presented in this work is motivated by some recent papers regarding hedging and valuation of financial securities subject to funding costs, collateralization and counterparty credit risk. Our goal is to provide a sound…
Measurement and management of credit concentration risk is critical for banks and relevant for micro-prudential requirements. While several methods exist for measuring credit concentration risk within institutions, the systemic effect of…
Sovereign credit ratings summarize the creditworthiness of countries. These ratings have a large influence on the economy and the yields at which governments can issue new debt. This paper investigates the use of a Multilayer Perceptron…
A Value-at-Risk based model is proposed to compute the adequate equity capital necessary to cover potential losses due to operational risks, such as human and system process failures, in banking organizations. Exploring the analogy to a…
We consider conducting inference on the output of the Classification and Regression Tree (CART) [Breiman et al., 1984] algorithm. A naive approach to inference that does not account for the fact that the tree was estimated from the data…
For treatment effects - one of the core issues in modern econometric analysis - prediction and estimation are two sides of the same coin. As it turns out, machine learning methods are the tool for generalized prediction models. Combined…
On March 4th 2016 the Basel Committee on Banking Supervision published a consultative document where a new methodology, called the Standardized Measurement Approach (SMA), is introduced for computing Operational Risk regulatory capital for…
Risk measures such as Expected Shortfall (ES) and Value-at-Risk (VaR) have been prominent in banking regulation and financial risk management. Motivated by practical considerations in the assessment and management of risks, including…
We consider a control problem for a finite-state Markov system whose performance is evaluated by a coherent Markov risk measure. For each policy, the risk of a state is approximated by a function of its features, thus leading to a…
Systemic financial risk refers to the simultaneous failure or destabilization of multiple financial institutions, often triggered by contagion mechanisms or common exposures to shocks. In this paper, we present a dynamical model of bank…
We use machine learning techniques to investigate whether it is possible to replicate the behavior of bank managers who assess the risk of commercial loans made by a large commercial US bank. Even though a typical bank already relies on an…
Basel II and Solvency 2 both use the Value-at-Risk (VaR) as the risk measure to compute the Capital Requirements. In practice, to calibrate the VaR, a normal approximation is often chosen for the unknown distribution of the yearly log…
Under Solvency II, the Value-at-Risk (VaR) is applied, although there is broad consensus that the Expected Shortfall (ES) constitutes a more appropriate risk measure. Moving towards ES would necessitate specifying the corresponding ES…
Historical (Stressed-) Value-at-Risk ((S)VAR), and Expected Shortfall (ES), are widely used risk measures in regulatory capital and Initial Margin, i.e. funding, computations. However, whilst the definitions of VAR and ES are unambiguous,…
We use principle component analysis (PCA) of cross correlations in European government bonds and European stocks to investigate the systemic risk contained in the European economy. We tackle the task to visualize the evolution of risk,…