Related papers: How many independent bets are there?
Geographic diversification is fundamental to risk mitigation among investors and insurers of housing, mortgages, and mortgage-related derivatives. To characterize diversification potential, we provide estimates of integration, spatial…
We discuss price variations distributions in foreign exchange markets, characterizing them both in calendar and business time frameworks. The price dynamics is found to be the result of two distinct processes, a multi-variance diffusion and…
As financial instruments grow in complexity more and more information is neglected by risk optimization practices. This brings down a curtain of opacity on the origination of risk, that has been one of the main culprits in the 2007-2008…
Many important economic outcomes result from the combined effects of several choices, so the best option is not determined from each choice in isolation, but depends on how each choice alters total outcomes. We formally show that narrow…
The classical mean-variance framework characterizes portfolio risk solely through return variance and the covariance matrix, implicitly assuming that all relevant sources of risk are captured by second moments. In modern financial markets,…
Risk assessment under different possible scenarios is a source of uncertainty that may lead to concerning financial losses. We address this issue, first, by adapting a robust framework to the class of spectral risk measures. Second, we…
Equity basket correlation can be estimated both using the physical measure from stock prices, and also using the risk neutral measure from option prices. The difference between the two estimates motivates a so-called "dispersion strategy''.…
In this paper, we argue that, once the costs of maintaining the hedging portfolio are properly taken into account, semi-static portfolios should more properly be thought of as separate classes of derivatives, with non-trivial,…
We examine the possibility of incorporating information or views of market movements during the holding period of a portfolio, in the hedging of European options with respect to the underlying. Given a fixed holding period interval, we…
Financial networks help firms manage risk but also enable financial shocks to spread. Despite their importance, existing models of financial networks have several limitations. Prior works often consider a static network with a simple…
Oil is perceived as a good diversification tool for stock markets. To fully understand this potential, we propose a new empirical methodology that combines generalized autoregressive score copula functions with high frequency data and…
We study the optimal decisions and equilibria of agents who aim to minimize their risks by allocating their positions over extremely heavy-tailed (i.e., infinite-mean) and possibly dependent losses. The loss distributions of our focus are…
We propose a game-theoretic framework that incorporates both incomplete information and general ambiguity attitudes on factors external to all players. Our starting point is players' preferences on payoff-distribution vectors, essentially…
A major challenge in sparsity pattern estimation is that small modes are difficult to detect in the presence of noise. This problem is alleviated if one can observe samples from multiple realizations of the nonzero values for the same…
Financial markets, with their vast range of different investment opportunities, can be seen as a system of many different simultaneous games with diverse and often unknown levels of risk and reward. We introduce generalizations to the…
This paper presents a novel approach for optimizing betting strategies in sports gambling by integrating Von Neumann-Morgenstern Expected Utility Theory, deep learning techniques, and advanced formulations of the Kelly Criterion. By…
Betting markets are gaining in popularity. Mean beliefs generally differ from prices in prediction markets. Logarithmic utility is employed to study the risk and return adjustments to prices. Some consequences are described. A modified…
We consider an equity-linked contract whose payoff depends on the lifetime of policy holder and the stock price. We assume the limited capital for hedging and we provide with the best strategy for an insurance company in the meaning of so…
The purpose of this work is to explore the role that arbitrage opportunities play in pricing financial derivatives. We use a non-equilibrium model to set up a stochastic portfolio, and for the random arbitrage return, we choose a stationary…
This paper studies an equity market of stochastic dimension, where the number of assets fluctuates over time. In such a market, we develop the fundamental theorem of asset pricing, which provides the equivalence of the following statements:…