This article predicts the relative performance of hedge fund investment styles using time-varying conditional stochastic dominance tests. These tests allow for the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns. During the recent...

Besides the heterogeneity of agents’ beliefs, we perceive that, contrary to the constant short-term risk attitude of fundamentalists, the risk attitude for chartists varies over time due to psychological factors such as prospect theory’s reflection effect, which refers to the reversing of...

An ICAPM which includes bank credit growth as a state variable explains 94% of the cross-sectional variation in the average returns on the 25 Fama–French portfolios. We find compelling evidence that bank credit growth is priced in the cross-section of expected stock returns, even after...

Operational risk data, when available, are usually scarce, heavy-tailed and possibly dependent. In this work, we introduce a model that captures such real-world characteristics and explicitly deals with heterogeneous pairwise and tail dependence of losses. By considering flexible families of...

This paper investigates the network structure of interbank markets. Using a dataset of interbank exposures in the Netherlands, we corroborate the recent hypothesis that the core periphery model is a ‘stylised fact’ of interbank markets. We find a core of highly connected banks intermediating...

Intraday Value-at-Risk (VaR) is one of the risk measures used by market participants involved in high-frequency trading. High-frequency log-returns feature important kurtosis (fat tails) and volatility clustering (extreme log-returns appear in clusters) that VaR models should take into account....

Basel III has introduced a non-risk-weighted leverage ratio requirement (LRR) which complements the internal ratings based (IRB) capital requirements. It provides a backstop against model risk which arises if some loans get incorrectly rated and become toxic. We study the effects of the LRR on...

We propose a relatively simple, accurate and flexible approach to forecasting the distribution of defaulted debt recovery outcomes. Our approach is based on mixtures of Gaussian distributions, explicitly conditioned on borrower characteristics, debt instrument characteristics and credit...

Contingent Convertibles (“CoCos”) are contingent capital instruments which convert into shares, or have a principal write down, if a trigger event takes place. CoCos exhibit the undesirable so-called death-spiral effect: by actively hedging the equity risk, investors can (unintentionally)...

We propose a dynamic framework which encompasses the main risks in balance sheets of banks in an integrated fashion. Our contributions are fourfold: (1) solving a simple one-period model that describes the optimal bank policy under credit risk; (2) estimating the long-term stochastic processes...