Risks faced by traders from price movements are sometimes magnified by the actions of other traders. Riskmanagement systems which neglect this feature may give a seriously misleading picture of the true risks. The hazards arising from this potential blindspot are at their most dangerous when the prevailing conventional wisdom lulls traders into a false sense of security on the attractiveness of...

Mainly due to new capital adequacy standards for banking and insurance, an increased interest exists in the aggregation properties of risk measures like Value-atRisk (VaR). We show how VaR can change from subto superadditivity depending on the properties of the underlying model. Mainly, the switch from a finite to an infinite mean model gives a completely different asymptotic behaviour. Our mai...

An important question for corporate finance officers is whether risk management systems, such as Value at Risk (VaR), currently are producing accurate results. In contrast to previous research on assessing the accuracy of risk systems or VaR, which has focused on backtesting a large sample of historical observations, we provide tools for real-time assessment, using a time window that varies ada...

The theory of copulas provides a useful tool for modeling dependence in risk management. In insurance and finance, as well as in other applications, dependence of extreme events is particularly important, hence there is a need for the detailed study of the tail behaviour of the multivariate copulas. In this paper we investigate the class of copulas having homogeneous lower tails. We show that h...

A typical shortcoming of most current credit portfolio models is the lack of a stochastic modeling of risk factors, such as interest rates or credit spreads, during the revaluation process at the risk horizon. Within the simple credit risk model underlying the Internal Ratings-based approach of Basel II with incorporated correlated interest rate risk the effect which results from neglecting the...

Often, actuaries replace a group of heterogeneous life insurance contracts (different age at policy issue, contract duration, sum insured, etc.) with a representative one in order to speed the computations. The present paper aims to homogenize a group of policies by controlling the impact on Tail-VaR and related risk measures. © 2015 Elsevier B.V. All rights reserved.

In this paper we study a classical option-based portfolio strategy which minimizes the Value-at-Risk of the hedged position in a continuous time, regime-switching jump-diffusion market, by using Fourier Transform methods. However, the analysis of this hedging strategy, as well as the computational technique for its implementation, is fairly general, i.e. it can be applied to any dynamical model...

A new approach for cost-sensitive classification is proposed. We extend the framework of cost-sensitive learning to mitigate risks of huge costs occurring with low probabilities, and propose an algorithm that achieves this goal. Instead of minimizing the expected cost commonly used in cost-sensitive learning, our algorithm minimizes expected shortfall, a.k.a. conditional value-at-risk, known as...

Value-at-risk (VaR) has become the standard criterion for assessing risk in the financial industry. Given the widespread usage of VaR, it becomes increasingly important to study the effects of VaR-based risk management on the prices of stocks and options. We solve a continuous-time asset pricing model, based on Lucas (1978) and Basak and Shapiro (2001), to investigate these effects. We find tha...

We investigate why spreads on corporate bonds are so much larger than expected losses from default. Systematic factors make very little contribution to spreads, even if higher moments or downside effects are taken into account. Instead we find that sizes of spreads are strongly related to idiosyncratic-risk factors: not only to idiosyncratic equity volatility, but even more to idiosyncratic bon...