Related papers: On decomposing risk in a financial-intermediate ma…
Stylized facts can be regarded as constraints for any modeling attempt of price dynamics on a financial market, in that an empirically reasonable model has to reproduce these stylized facts at least qualitatively. The dynamics of market…
Market makers provide liquidity to other market participants: they propose prices at which they stand ready to buy and sell a wide variety of assets. They face a complex optimization problem with both static and dynamic components. They…
In an incomplete continuous-time securities market with uncertainty generated by Brownian motions, we derive closed-form solutions for the equilibrium interest rate and market price of risk processes. The economy has a finite number of…
The paper reviews origins of the approach to pricing derivatives post-crisis by following three papers that have received wide acceptance from practitioners as the theoretical foundations for it - [Piterbarg 2010], [Burgard and Kjaer 2010]…
This paper studies an asset pricing model in a partially observable market with a large number of heterogeneous agents using the mean field game theory. In this model, we assume that investors can only observe stock prices and must infer…
We analyze multiline pricing and capital allocation in equilibrium no-arbitrage markets. Existing theories often assume a perfect complete market, but when pricing is linear, there is no diversification benefit from risk pooling and…
In the paper a problem of risk measures on a discrete-time market model with transaction costs is studied. Strategy effectiveness and shortfall risk is introduced. This paper is a generalization of quantile hedging presented in [4].
Sustainable financial markets play an important role in the functioning of human society. Still, the detection and prediction of risk in financial markets remain challenging and draw much attention from the scientific community. Here we…
Before the 2008 financial crisis, most research in financial mathematics focused on pricing options without considering the effects of counterparties' defaults, illiquidity problems, and the role of the sale and repurchase agreement (Repo)…
Systemic risk in banking systems remains a crucial issue that it has not been completely understood. In our toy model, banks are exposed to two sources of risks, namely, market risk from their investments in assets external to the banking…
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for…
Stablecoins have historically depegged due from par to large sales, possibly of speculative nature, or poor reserve asset quality. Using a global game which addresses both concerns, we show that the selling pressure on stablecoin holders…
We consider a discrete-time financial market model with finite time horizon and give conditions which guarantee the existence of an optimal strategy for the problem of maximizing expected terminal utility. Equivalent martingale measures are…
In the paper, we introduce the notion of a local regular supermartingale relative to a convex set of equivalent measures and prove for it the necessary and sufficient conditions of optional Doob decomposition in the discrete case. This…
We consider the problem of constructing an appropriate multivariate model for the study of the counterparty credit risk in credit rating migration problem. For this financial problem different multivariate Markov chain models were proposed.…
The financial industry should be involved in mitigating the risk of downturns in the financial wellbeing indices around the world by implementing well-developed financial tools such as insurance instruments on the underlying wellbeing…
We axiomatically introduce risk-consistent conditional systemic risk measures defined on multidimensional risks. This class consists of those conditional systemic risk measures which can be decomposed into a state-wise conditional…
In the context of understanding the nature of the risk transformation process of the financial system we propose an iterative risk-trading game between several agents who build their trading strategies based on a general utility setting.…
This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing…
In a fixed time horizon, appropriately executing a large amount of a particular asset -- meaning a considerable portion of the volume traded within this frame -- is challenging. Especially for illiquid or even highly liquid but also highly…