This study designs an optimal insurance policy form endogenously, assuming the objective of the insured is to maximize expected final wealth under the Value-at-Risk (VaR) constraint. The optimal insurance policy can be replicated using three options, including a long call option with a small...

Revenue volatility poses challenges for fiscal policy makers. It can create risks to service provision, require borrowing, or entail sudden tax changes. This paper investigates the use of value-at-risk techniques to measure the fiscal risks caused by volatility as well as the sensitivity of...

This paper considers diversified portfolios in a benchmark framework. A new limit theorem for the approximation of the benchmark, which is the growth optimal portfolio, is obtained. In a diverse market it is shown that there exist approximations for the benchmark that are independent of model...

The paper presents a consistent approach to the modeling of general and specific market risk as defined in regulatory documents. It compares the statistically based beta-factor model with a class of benckmark models that use a broadly based index as major building block for modeling. The...

To match the stylized facts of high frequency financial time series precisely andparsimoniously, this paper presents a finite mixture of conditional exponential powerdistributions where each component exhibits asymmetric conditional heteroskedasticity. Weprovide stationarity conditions and...

This paper reviews the state-of-the-art of macro stress-testing methodologies. Substantial progress has been made both in the econometric analysis of financial soundness indicators and in the simulation of value-at-risk measures to assess system-wide vulnerabilities. However, a number of...

Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a “duality” axiom which, roughly speaking, asserts...

This paper focuses on the many extreme credit default swap spread movements observed during the recent credit crisis and on how the tails of the spread (and price) change distribution significantly differ from those of the normal distribution even for diversified credit derivatives portfolios....

The paper suggests a nonlinear and multivariate time series model framework that enables the study of simultaneity in returns and in volatilities, as well as asymmetric effects arising from shocks and an outside stock exchange. Using daily data 2000-2006 for the Baltic state stock exchanges and...