In this paper we develop a novel valuation model and methodology to value a pharmaceutical R&D project based on real options approach. The real options approach enables the possibility of optimally abandon the project before completion whenever the investment cost turns out to be larger than the...

The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because...

In this paper we consider the optimal stopping problem for general dynamic monetary utility functionals. Sufficient conditions for the Bellman principle and the existence of optimal stopping times are provided. Particular attention is payed to representations which allow for a numerical...

In this paper we consider the optimal stopping problem for general dynamic monetary utility functionals. Sufficient conditions for the Bellman principle and the existence of optimal stopping times are provided. Particular attention is payed to representations which allow for a numerical...

The binomial model presents a set of properties that make it a suitable approach in order to value the real options, throughout an easy and practical application. This is possible by the adaptation of the valuation principle for non-arbitrage, own of the options pricing theory. However, their...

We use the Least Absolute Shrinkage and Selection Operator (LASSO) quantile regression technique to construct and analyse the complete tail risk connectedness network of the whole US industry system. We also investigate the empirical relationship between input-output linkages and the tail risk...

We present a stochastic simulation model for estimating forward-looking corporate probability of default and loss given default. We formulate the model in a discrete time frame, apply capital-budgeting techniques to define the relationships that identify the default condition, and solve the...

As the third component of the Standardized Approach of the Fundamental Review of the Trading Book [1], the Residual Risk Add-On tries to capture the risks not covered by the other two components (Sensitivity Based Method and Default Risk Charge) and plays the role of Risk Not in VaR program or...

The Basel Committee of Banking Supervision has recently set out the revised standards for minimum capital requirements for market risk. The Committee has focused, among other things, on the two key areas of moving from Value-at-Risk (VaR) to Expected Shortfall (ES) and considering a...

This paper introduces a flexible risk decomposition method for life insurance contracts embedding several risk factors. Hedging can be naturally embedded in the framework. Although the method is applied to variable annuities in this work, it is also applicable in general to other insurance or...