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## Market bubbles and crashes

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 12/12/2008
Português

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Episodes of market crashes have fascinated economists for centuries. Although
many academics, practitioners and policy makers have studied questions related
to collapsing asset price bubbles, there is little consensus yet about their
causes and effects. This review and essay evaluates some of the hypotheses
offered to explain the market crashes that often follow asset price bubbles.
Starting from historical accounts and syntheses of past bubbles and crashes, we
put the problem in perspective with respect to the development of the efficient
market hypothesis. We then present the models based on heterogeneous agents and
the limits to arbitrage that prevent rational agents from bursting bubbles
before they inflate. Then, we explore another set of explanations of why
rational traders would be led to actually profit from and surf on bubbles, by
anticipating the behavior of noise traders or by realizing the difficulties in
synchronizing their actions. We then end by discussing a complex system
approach of social imitation leading to collective market regimes like herding
and the phenomenon of bifurcation (or phase transition) that rationalize what
crash can occur in unstable market regimes. The key insight is that diagnosing
bubbles may be feasible when taking into account the positive feedback
mechanisms that give rise to transient "super-exponential" price growth...

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## Bank Networks from Text: Interrelations, Centrality and Determinants

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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In the wake of the still ongoing global financial crisis, bank
interdependencies have come into focus in trying to assess linkages among banks
and systemic risk. To date, such analysis has largely been based on numerical
data. By contrast, this study attempts to gain further insight into bank
interconnections by tapping into financial discourse. We present a
text-to-network process, which has its basis in co-occurrences of bank names
and can be analyzed quantitatively and visualized. To quantify bank importance,
we propose an information centrality measure to rank and assess trends of bank
centrality in discussion. For qualitative assessment of bank networks, we put
forward a visual, interactive interface for better illustrating network
structures. We illustrate the text-based approach on European Large and Complex
Banking Groups (LCBGs) during the ongoing financial crisis by quantifying bank
interrelations and centrality from discussion in 3M news articles, spanning
2007Q1 to 2014Q3.; Comment: Quantitative Finance, forthcoming in 2015

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## The Zeeman Effect in Finance: Libor Spectroscopy and Basis Risk Management

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 27/10/2012
Português

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#Quantitative Finance - Pricing of Securities#Physics - Popular Physics#Quantitative Finance - Risk Management#Quantum Physics

Once upon a time there was a classical financial world in which all the
Libors were equal. Standard textbooks taught that simple relations held, such
that, for example, a 6 months Libor Deposit was replicable with a 3 months
Libor Deposits plus a 3x6 months Forward Rate Agreement (FRA), and that Libor
was a good proxy of the risk free rate required as basic building block of
no-arbitrage pricing theory. Nowadays, in the modern financial world after the
credit crunch, some Libors are more equal than others, depending on their rate
tenor, and classical formulas are history. Banks are not anymore too "big to
fail", Libors are fixed by panels of risky banks, and they are risky rates
themselves. These simple empirical facts carry very important consequences in
derivative's trading and risk management, such as, for example, basis risk,
collateralization and regulatory pressure in favour of Central Counterparties.
Something that should be carefully considered by anyone managing even a single
plain vanilla Swap. In this qualitative note we review the problem trying to
shed some light on this modern animal farm, recurring to an analogy with
quantum physics, the Zeeman effect.

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## On the new central bank strategy toward monetary and financial instabilities management in finances: Econophysical analysis of nonlinear dynamical financial systems

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 08/11/2012
Português

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#Quantitative Finance - General Finance#Quantitative Finance - Computational Finance#Quantitative Finance - Risk Management

We describe the innovations in finances, introduced over the recent decades,
and analyze most of the business and regulatory challenges, faced by the
financial industry, because of the present disruptive changes in the global
capital markets. We use the integrative thinking approach to formulate the new
central bank strategy and propose that the new strategy has to be focused on
the constant management of the monetary and financial instabilities, using the
knowledge base in the field of econophysics. We propose the new theoretical
model of economics, which is called the Nonlinear Dynamic Stochastic General
Equilibrium (NDSGE), which takes to the account the nonlinearities, appearing
during the interaction between the business cycles. We show that the central
banks, which will apply the knowledge gained from the econophysical analysis to
understand the complex processes in the national financial systems in the time
of high volatility in global capital markets, will be able to govern the
national financial systems successfully.; Comment: 8 pages, 1 table

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## A unified approach to pricing and risk management of equity and credit risk

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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We propose a unified framework for equity and credit risk modeling, where the
default time is a doubly stochastic random time with intensity driven by an
underlying affine factor process. This approach allows for flexible
interactions between the defaultable stock price, its stochastic volatility and
the default intensity, while maintaining full analytical tractability. We
characterise all risk-neutral measures which preserve the affine structure of
the model and show that risk management as well as pricing problems can be
dealt with efficiently by shifting to suitable survival measures. As an
example, we consider a jump-to-default extension of the Heston stochastic
volatility model.; Comment: 18 pages, 4 figures. Revised version (remarks and references added)

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## A General Duality Relation with Applications in Quantitative Risk Management

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 03/10/2014
Português

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A fundamental problem in risk management is the robust aggregation of
different sources of risk in a situation where little or no data are available
to infer information about their dependencies. A popular approach to solving
this problem is to formulate an optimization problem under which one maximizes
a risk measure over all multivariate distributions that are consistent with the
available data. In several special cases of such models, there exist dual
problems that are easier to solve or approximate, yielding robust bounds on the
aggregated risk. In this chapter we formulate a general optimization problem,
which can be seen as a doubly infinite linear programming problem, and we show
that the associated dual generalizes several well known special cases and
extends to new risk management models we propose.

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## Price Impact

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 13/03/2009
Português

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We define what "Price Impact" means, and how it is measured and modelled in
the recent literature. Although this notion seems to convey the idea of a
forceful and intuitive mechanism, we discuss why things might not be that
simple. Empirical studies show that while the correlation between signed order
flow and price changes is strong, the impact of trades on prices is neither
linear in volume nor permanent. Impact allows private information to be
reflected in prices, but by the same token, random fluctuations in order flow
must also contribute to the volatility of markets.; Comment: Entry for the upcoming "Encyclopedia of Quantitative Finance"

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## The t copula with Multiple Parameters of Degrees of Freedom: Bivariate Characteristics and Application to Risk Management

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

Relevância na Pesquisa

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#Mathematics - Probability#Quantitative Finance - Computational Finance#Quantitative Finance - Risk Management

The t copula is often used in risk management as it allows for modelling tail
dependence between risks and it is simple to simulate and calibrate. However,
the use of a standard t copula is often criticized due to its restriction of
having a single parameter for the degrees of freedom (dof) that may limit its
capability to model the tail dependence structure in a multivariate case. To
overcome this problem, grouped t copula was proposed recently, where risks are
grouped a priori in such a way that each group has a standard t copula with its
specific dof parameter. In this paper we propose the use of a grouped t copula,
where each group consists of one risk factor only, so that a priori grouping is
not required. The copula characteristics in the bivariate case are studied. We
explain simulation and calibration procedures, including a simulation study on
finite sample properties of the maximum likelihood estimators and Kendall's tau
approximation. This new copula can be significantly different from the standard
t copula in terms of risk measures such as tail dependence, value at risk and
expected shortfall.
Keywords: grouped t copula, tail dependence, risk management.

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## Contraction or steady state? An analysis of credit risk management in Italy in the period 2008-2012

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 08/07/2013
Português

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Credit risk management in Italy is characterized, in the period June 2008 to
June 2012, by frequent (frequency=0.5 cycles per year) and intense (peak
amplitude: mean=39.2 billion Euros, s.e.=2.83 billion Euros) quarterly
contractions and expansions around the mean (915.4 billion Euros, s.e.=3.59
billion Euros) of the nominal total credit used by non-financial corporations.
Such frequent and intense fluctuations are frequently ascribed to exogenous
Basel II procyclical effects on credit flow into the economy and, consequently,
Basel III output based point in time Credit to GDP countercyclical buffering
advocated. We have tested the opposite null hypotheses that such variation is
significantly correlated to actual default rates, and that such correlation is
explained by fluctuations of credit supply around a steady state. We have found
that, in the period June 2008 to June 2012 (n=17), linear regression of credit
growth rates on default rates reveals a negative correlation of r=minus 0.6903
with R squared=0.4765, and that credit supply fluctuates steadily around the
default rate with an Internal Steady State Parameter SSP=0.00245 with chi
squared=37.47 (v=16, P<.005). We conclude that fluctuations of the total credit
used by non-financial corporations are exhaustively explained by variation of
the independent variable default rate...

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## On Game-Theoretic Risk Management (Part Two) - Algorithms to Compute Nash-Equilibria in Games with Distributions as Payoffs

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 27/11/2015
Português

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#Quantitative Finance - Economics#Computer Science - Computer Science and Game Theory#Mathematics - Statistics Theory#Quantitative Finance - Risk Management

The game-theoretic risk management framework put forth in the precursor work
"Towards a Theory of Games with Payoffs that are Probability-Distributions"
(arXiv:1506.07368 [q-fin.EC]) is herein extended by algorithmic details on how
to compute equilibria in games where the payoffs are probability distributions.
Our approach is "data driven" in the sense that we assume empirical data
(measurements, simulation, etc.) to be available that can be compiled into
distribution models, which are suitable for efficient decisions about
preferences, and setting up and solving games using these as payoffs. While
preferences among distributions turn out to be quite simple if nonparametric
methods (kernel density estimates) are used, computing Nash-equilibria in games
using such models is discovered as inefficient (if not impossible). In fact, we
give a counterexample in which fictitious play fails to converge for the
(specifically unfortunate) choice of payoff distributions in the game, and
introduce a suitable tail approximation of the payoff densities to tackle the
issue. The overall procedure is essentially a modified version of fictitious
play, and is herein described for standard and multicriteria games, to
iteratively deliver an (approximate) Nash-equilibrium.

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## On the Risk Management with Application of Econophysics Analysis in Central Banks and Financial Institutions

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 17/11/2012
Português

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#Quantitative Finance - General Finance#Quantitative Finance - Computational Finance#Quantitative Finance - Risk Management

The purpose of this research article is to discover how the econophysics
analysis can complement the econometrics models in application to the risk
management in the central banks and financial institutions, operating within
the nonlinear dynamical financial system. We consider the modern risk
management models and show the appropriate techniques to calculate the various
existing risks in the finances. We make a few comments on the possible
limitations in the models of statistical modeling of volatility such as the
Autoregressive Conditional Heteroskedasticity (GARCH) model, because of the
nonlinearities appearance in the nonlinear dynamical financial systems. We
propose that the various types of nonlinearities, which can originate in the
financial and economical systems, have to be taken to the detailed
consideration during the Cost of Capital calculation in the finances and
economics. We propose the new theory of nonlinear dynamic volatilities and the
new nonlinear dynamic chaos (NDC) volatility model for the statistical modeling
of financial volatility with the aim to determine the Value at Risk.; Comment: 10 pages

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## Theoretical Sensitivity Analysis for Quantitative Operational Risk Management

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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We study the asymptotic behavior of the difference between the values at risk
VaR(L) and VaR(L+S) for heavy tailed random variables L and S for application
in sensitivity analysis of quantitative operational risk management within the
framework of the advanced measurement approach of Basel II (and III). Here L
describes the loss amount of the present risk profile and S describes the loss
amount caused by an additional loss factor. We obtain different types of
results according to the relative magnitudes of the thicknesses of the tails of
L and S. In particular, if the tail of S is sufficiently thinner than the tail
of L, then the difference between prior and posterior risk amounts VaR(L+S) -
VaR(L) is asymptotically equivalent to the expectation (expected loss) of S.; Comment: 19 pages, 1 figure, 4 tables

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## An initial approach to Risk Management of Funding Costs

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 08/10/2014
Português

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In this note we sketch an initial tentative approach to funding costs
analysis and management for contracts with bilateral counterparty risk in a
simplified setting. We depart from the existing literature by analyzing the
issue of funding costs and benefits under the assumption that the associated
risks cannot be hedged properly. We also model the treasury funding spread by
means of a stochastic Weighted Cost of Funding Spread (WCFS) which helps
describing more realistic financing policies of a financial institution. We
elaborate on some limitations in replication-based Funding / Credit Valuation
Adjustments we worked on ourselves in the past, namely CVA, DVA, FVA and
related quantities as generally discussed in the industry. We advocate as a
different possibility, when replication is not possible, the analysis of the
funding profit and loss distribution and explain how long term funding spreads,
wrong way risk and systemic risk are generally overlooked in most of the
current literature on risk measurement of funding costs. As a matter of initial
illustration, we discuss in detail the funding management of interest rate
swaps with bilateral counterparty risk in the simplified setup of our framework
through numerical examples and via a few simplified assumptions.

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## A new approach for scenario generation in Risk management

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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We provide a new dynamic approach to scenario generation for the purposes of
risk management in the banking industry. We connect ideas from conventional
techniques -- like historical and Monte Carlo simulation -- and we come up with
a hybrid method that shares the advantages of standard procedures but
eliminates several of their drawbacks. Instead of considering the static
problem of constructing one or ten day ahead distributions for vectors of risk
factors, we embed the problem into a dynamic framework, where any time horizon
can be consistently simulated. Additionally, we use standard models from
mathematical finance for each risk factor, whence bridging the worlds of
trading and risk management.
Our approach is based on stochastic differential equations (SDEs), like the
HJM-equation or the Black-Scholes equation, governing the time evolution of
risk factors, on an empirical calibration method to the market for the chosen
SDEs, and on an Euler scheme (or high-order schemes) for the numerical
evaluation of the respective SDEs. The empirical calibration procedure
presented in this paper can be seen as the SDE-counterpart of the so called
Filtered Historical Simulation method; the behavior of volatility stems in our
case out of the assumptions on the underlying SDEs. Furthermore...

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## Credit contagion and risk management with multiple non-ordered defaults

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

Relevância na Pesquisa

58.007603%

#Quantitative Finance - Risk Management#Mathematics - Probability#Quantitative Finance - Computational Finance

The classical reduced-form and filtration expansion framework in credit risk
is extended to the case of multiple, non-ordered defaults, assuming that
conditional densities of the default times exist. Intensities and pricing
formulas are derived, revealing how information driven default contagion arises
in these models. We then analyze the impact of ordering the default times
before expanding the filtration. While not important for pricing, the effect is
significant in the context of risk management, and becomes even more pronounced
for highly correlated and asymmetrically distributed defaults. Finally, we
provide a general scheme for constructing and simulating the default times,
given that a model for the conditional densities has been chosen.; Comment: This paper has been withdrawn by the authors because some of the main
results have significant overlap with others available in the literature

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## New copulas based on general partitions-of-unity and their applications to risk management

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

Relevância na Pesquisa

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We construct new multivariate copulas on the basis of a generalized infinite
partition-of-unity approach. This approach allows - in contrast to finite
partition-of-unity copulas - for tail-dependence as well as for asymmetry. A
possibility of fitting such copulas to real data from quantitative risk
management is also pointed out.; Comment: 22 pages

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## Pricing and Risk Management with High-Dimensional Quasi Monte Carlo and Global Sensitivity Analysis

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 11/04/2015
Português

Relevância na Pesquisa

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#Quantitative Finance - Risk Management#Quantitative Finance - Computational Finance#Quantitative Finance - Pricing of Securities#65C05

We review and apply Quasi Monte Carlo (QMC) and Global Sensitivity Analysis
(GSA) techniques to pricing and risk management (greeks) of representative
financial instruments of increasing complexity. We compare QMC vs standard
Monte Carlo (MC) results in great detail, using high-dimensional Sobol' low
discrepancy sequences, different discretization methods, and specific analyses
of convergence, performance, speed up, stability, and error optimization for
finite differences greeks. We find that our QMC outperforms MC in most cases,
including the highest-dimensional simulations and greeks calculations, showing
faster and more stable convergence to exact or almost exact results. Using GSA,
we are able to fully explain our findings in terms of reduced effective
dimension of our QMC simulation, allowed in most cases, but not always, by
Brownian bridge discretization. We conclude that, beyond pricing, QMC is a very
promising technique also for computing risk figures, greeks in particular, as
it allows to reduce the computational effort of high-dimensional Monte Carlo
simulations typical of modern risk management.; Comment: 43 pages, 21 figures, 6 tables

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## Fractional smoothness and applications in finance

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 20/04/2010
Português

Relevância na Pesquisa

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This overview article concerns the notion of fractional smoothness of random
variables of the form $g(X_T)$, where $X=(X_t)_{t\in [0,T]}$ is a certain
diffusion process. We review the connection to the real interpolation theory,
give examples and applications of this concept. The applications in stochastic
finance mainly concern the analysis of discrete time hedging errors. We close
the review by indicating some further developments.; Comment: Chapter of AMAMEF book. 20 pages.

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## A Non-Gaussian Approach to Risk Measures

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

Relevância na Pesquisa

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#Physics - Physics and Society#Physics - Data Analysis, Statistics and Probability#Quantitative Finance - Risk Management

Reliable calculations of financial risk require that the fat-tailed nature of
prices changes is included in risk measures. To this end, a non-Gaussian
approach to financial risk management is presented, modeling the power-law
tails of the returns distribution in terms of a Student-t distribution.
Non-Gaussian closed-form solutions for Value-at-Risk and Expected Shortfall are
obtained and standard formulae known in the literature under the normality
assumption are recovered as a special case. The implications of the approach
for risk management are demonstrated through an empirical analysis of financial
time series from the Italian stock market and in comparison with the results of
the most widely used procedures of quantitative finance. Particular attention
is paid to quantify the size of the errors affecting the market risk measures
obtained according to different methodologies, by employing a bootstrap
technique.; Comment: Latex 15 pages, 3 figures and 5 tables 68% c. levels for tail
exponents corrected, conclusions unchanged

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## Four Points Beginner Risk Managers Should Learn from Jeff Holman's Mistakes in the Discussion of Antifragile

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 11/01/2014
Português

Relevância na Pesquisa

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Using Jeff Holman's comments in Quantitative Finance to illustrate 4 critical
errors students should learn to avoid: 1) Mistaking tails (4th moment) for
volatility (2nd moment), 2) Missing Jensen's Inequality, 3) Analyzing the
hedging wihout the underlying, 4) The necessity of a numeraire in finance.

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