The topics of Economic Capital modelling, reverse stress testing and credit limits are inextricably intertwined as they all focus on exceptional loss events. In this paper, we use the KVA framework in to frame these three topics within a single unified approach. We propose setting credit limits...

This paper proposes a new method to introduce coherent risk measures for risks with infinite expectation, such as those characterized by some Pareto distributions. Extensions of the conditional value at risk, the weighted conditional value at risk and other examples are given. Actuarial...

We derive a closed-form expansion of option prices in terms of Black-Scholes prices and higher-order Greeks. We show how the true price of an option less its Black-Scholes price is given by a series of premiums on higher-order risks that are not priced under the Black-Scholes model assumptions....

Risk capital allocations (RCAs) are an important tool in quantitative risk management, where they are utilized to, e.g., gauge the profitability of distinct business units, determine the price of a new product, and conduct the marginal economic capital analysis. Nevertheless, the notion of RCA...

The exchange of regulatory initial margin for uncleared derivatives (BCBS 261 due on the 1st of September 2016) implies a massive consumption of collateral. This paper proposes a new model to account for collateral and its quality for both fair valuation and CCR capital frameworks defined under...

When two or more agents compete for a bonus and the agents' productivity in each of several possible occurrences depends stochastically on (constant) effort, the number of times that are checked to assign the bonus affects the level of un-certainty in the selection process. Uncertainty, in turn,...

As firms implement tournament bonus reward schemes, mainly the idea is to introduce competition amongst their agents in the order to promote their performance. Tournaments in which agents compete for a bonus by investing effort, are frequently applied, e.g., in development races, political...

Policy advocates often push for market-like performance incentives for publicly provided services such as in education or healthcare (as with Medicare in the U.S.). The evidence supporting output-based, performance incentives for such jobs is mixed at best. One possible explanation is that the...

In the presence of managerial short-termism and asymmetric information about skill and effort provision, firms may opportunistically shift earnings from uncertain to more certain times. We document that firms report more negative discretionary accruals when financial markets are less certain...

Traditionally, researchers have had difficulty testing the relationship between the degree of risk or uncertainty in workers' environments and incentive pay. The authors employ Prendergast's (2002) theory that incorporates the delegation of worker authority into the principal-agent model to...