Banks operating under Value-at-Risk constraints give rise to a well-defined aggregate balance sheet capacity for the banking sector as a whole that depends on total bank capital. Equilibrium risk and market risk premiums can be solved in closed form as functions of aggregate bank capital. We...

In this paper we compare overall as well as downside risk measures with respect to the criteria of first and second order stochastic dominance. While the downside risk measures, with the exception of tail conditional expectation, are consistent with first order stochastic dominance, overall risk...

Accurate prediction of extreme events are of primary importance in many financial applications. The properties of historical simulation and Risk Metrics techniques for computing Valu-at Risk (VaR) are compared with a method which involves modelling the tails of financial returns explicitly with...

Risk is endogenous. Equilibrium risk is the fixed point of the mapping that takes perceived risk to actual risk. When risk-neutral traders operate under Value-at-Risk constraints, market conditions exhibit signs of fluctuating risk appetite and amplification of shocks through feedback effects....

Most of the existing empirical literature on FX market microstructure uses indicative quote data derived from Reuters EFX Screens. This paper examines the adequacy of such data as proxies for firm, tradeable quotes. We present a comparison of prices (and volumes) derived from Reuters D2000-2...

Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with coordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation procedure. We illustrate the model...

This paper explores the potential for violations of VaR subadditivity both theoretically and by simulations, and finds that for most practical applications VaR is subadditive. Hence, there is no reason to choose a more complicated risk measure than VaR, solely for reasons of coherence.

Economic problems such as large claims analysis in insurance and value-at-risk in finance, require assessment of the probability P of extreme realizations Q. This paper provides a semi-parametric method for estimation of extreme (P,Q) combinations for data with heavy tails. We solve the long...

Many financial applications, such as risk analysis and derivatives pricing, depend on time scaling of risk.  A common method for this purpose, though only correct when returns are iid normal, is the square root of time rule where an estimated quantile of a return distribution is scaled to a...

The implications of Value-at-Risk regulations are analyzed in a CARA-normal general equilibrium model. Financial institutions are heterogeneous in risk preferences, wealth and the degree of supervision. Regulatory risk constraints lower the probability of one form of a systemic crisis, at the...