Technical papers/Risk Management
Fat tails via utility-based entropy
Asset returns are well known to be fat-tailed, but widely used classical econometric techniques are not well suited for building such distributions. Craig Friedman, Yangyong Zhang and Wenbo Cao use a minimum...
Asset returns are well known to be fat-tailed, but widely used classical econometric techniques are not well suited for building such distributions. Craig Friedman, Yangyong Zhang and Wenbo Cao use a minimum...
It is a cliché that returns are fat-tailed, but that doesn’t make the distributions any easier to work with. However, drawing on the father of their application in finance – and some thermodynamics...
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More Technical papers/Risk Management articles
Recursive formulas for the default probability distribution with applications...
The probability distribution of the number of defaults plays an important role in pricing problems of multiple-name credit derivatives. When the group size gets large, it becomes increasingly difficult to obtain its whole distribution. We use a financial...
Sample tangency portfolio, representativeness and ambiguity: impact...
We provide a model for understanding the impact of sample-size neglect for cases where an investor uses the sample estimator of the covariance matrix in order to obtain a tangency portfolio. By assuming an erroneous hypothesis, we look for a family of...
Pricing to acceptability: with applications to valuation of one’s own...
In this paper, the theory of pricing to acceptability developed for incomplete markets is applied to marking one's own default risk. Following the work of Heckman, it is observed that assets and liabilities are not to be valued identically in financial...
Failure of the saddlepoint method in the presence of double defaults
We show that the saddlepoint approximation method for quantifying the impact of undiversified idiosyncratic risk in a credit portfolio is inappropriate in the presence of double-default effects. Specifically, we prove that an equivalent formula to the...
Calibrating risk preferences with the generalized capital asset pricing...
The generalized capital asset pricing model based on mixed conditional value-at-risk (CVaR) deviation is used for calibrating the risk preferences of investors. Risk preferences are determined by coefficients in the mixed CVaR deviation. The corresponding...
Addendum to “Partial differential equation representations of derivatives...
This addendum corrects an error in the notation of earlier versions of our paper "Partial differential equation representations of derivatives with bilateral counterparty risk and funding costs" that appeared on SSRN in 2010 and in Volume 7, Issue 3 of...
An asset drop model as an alternative to the treatment of double defaults...
In 2005 the internal-ratings-based (IRB) approach of Basel II was enhanced by a "treatment of double default effects" to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several caveats...
Using market and credit risk analytics to strengthen performance
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