Value-at-Risk (VaR) models often are used to estimate the equity investment that is required to limit the default rate on funding debt. Typical VaR ""buffer stock"" capital calculations produce biased estimates. To ensure accuracy, VaR must be modified by: (1) measuring loss relative to initial...

In a stylized model of a financial intermediary, risk managers expend costly effort to reduce loan PD and LGD. When effort is unobservable, incentive compensation (IC) can induce manager effort, but underwriting and loss mitigation managers require different IC contracts. Subsidized insured...

Conditional value at risk (CoVaR) and marginal expected shortfall (MES) have been proposed as measures of systemic risk. Some argue these statistics should be used to impose a “systemic risk tax” on financial institutions. These recommendations are premature because CoVaR and MES are ad hoc...