The estimation of the inverse covariance matrix plays a crucial role in optimal portfolio choice. We propose a new estimation framework that focuses on enhancing portfolio performance. The framework applies the statistical methodology of shrinkage directly to the inverse covariance matrix using...

Asset managers are often given the task of restricting their activity by keeping both the value at risk (VaR) and the tracking error volatility (TEV) under control. However, these constraints may be impossible to satisfy simultaneously because VaR is independent of the benchmark portfolio. The...

As the skewed return distribution is a prominent feature in nonlinear portfolio selection problems which involve derivative assets with nonlinear payoff structures, Value-at-Risk (VaR) is particularly suitable to serve as a risk measure in nonlinear portfolio selection. Unfortunately, the...

We propose a bootstrapped Data Envelopment Analysis (DEA)-based procedure to pre-calculate and pre-evaluate the short-run operating efficiency gains of a potential bank merger or acquisition (M&A). As an illustrative example, we apply our proposed procedure to investigate the degree of operating...

Using a standard overlapping generations monetary production economy, faced with endogenously determined tax evasion by heterogeneous agents in the economy, we provide a theoretical model that indicates that both a lower (higher) level of financial development and a higher (lower) level of...

Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. A single-regime model hides the fact that explanatory variables take on different loadings across changing patterns in credit...

This paper presents an asset liability management model based on robust optimization techniques. The model explicitly takes into consideration the time-varying aspect of investment opportunities. The emphasis of the proposed approach is on computational tractability and practical appeal....

Credit migration is an essential component of credit portfolio modeling. In this paper, we outline a framework for gauging the effects of credit migration on portfolio risk measurements. For a typical loan portfolio, we find credit migration can explain as much as 51% of volatility and 35% of...

This paper proposes the use of a portfolio optimization methodology which combines features of equilibrium models and investor’s views as in Black and Litterman (1992), and also deals with estimation risk as in Michaud (1998). In this way, our combined methodology is able to meet the needs of...

Multi-asset class, multimarket central counterparties (CCPs) are becoming less uncommon as a result of merges between specialized (single-asset class, single market) CCPs and market demands for greater capital efficiency. Yet, traditional CCP risk management models often lack the necessary...