Natural catastrophes attract regularly the attention of media and have become a source of public concern. From a financial viewpoint, natural catastrophes represent idiosyncratic risks,diversifiable at the world level. But for reasons analyzed in this pap er reinsurance markets are unable to...

The paper examines a class of random dynamical systems related to the classical von Neumann and Gale models of economic dynamics. Such systems are defined in terms of multivalued operators in spaces of random vectors, possessing certain properties of convexity and homogeneity. We establish a...

This paper studies the term structure implications of a simple structural economy in which the representative agent displays ambiguity aversion, modeled by Multiple Priors Recursive Utility. Bond excess returns reflect a premium for ambiguity, which is observationally distinct from the risk...

Control problems with Recursive Multiple-Priors Utility (RMPU) are highly non-linear so that RMPU asset prices have been studied in very simple exchange economies only. We identify a continuous-time exchange equilibrium with Locally-Constrained-Entropy RMPU (LCE-RMPU) that is tractable even in...

In June 2003 Swiss banks held over CHF 500 billion in mortgages. This important segment accounts for about 63% of all loan portfolios of Swiss banks. Since default insurance is not common in Switzerland, the corresponding risks are a severe threat for the health of the financial system. We...

In this paper we discuss some statistical pitfalls that may occur in modeling cross-dependences with copulas in financial applications. In particular we focus on issues arising in the estimation and the empirical choice of copulas as well as in the design of time-dependent copulas.

This paper argues that observations of non-stationary choice behavior need notnecessarily imply specific properties of the individual’s discount function. As weshow, the observed “anomalies” in intertemporal choice can alternatively be explained by an individual’s perception of the risk...

The aim of this paper is to study the impact of bankruptcy law on financing, investment, default and liquidation decisions of firms. We build a model in which a firm can finance its investment by issuing debt. The investment is risky. Because of risk, the firm may default. The firm manager takes...

In spite of the fact that they can draw on a larger, more liquid and more diversifiedpool of capital than the equity of reinsurance companies, financial markets have failed to displace reinsurance as the primary risk-sharing vehicle for natural catastrophe risk. We show that this failure can be...

In this paper the performance of locally risk-minimizing hedge strategies for European options in stochastic volatility models is studied from an experimental as well as from an empirical perspective. These hedge strategies are derived for a large class of diffusion-type stochastic volatility...