Financial entities commonly go bankrupt with disastrous consequences for individuals and society These consequences arise since bankrupt limited liability company is not responsible for losses exceeding its financial resources. Such losses are carried by unsecured creditors or, in the case of...

This article critiques the use of the odds ratio for estimating the risk ratio under the "rare disease" assumption. The rare disease assumption is often used in empirical work with estimated odds ratios interpreted as if they are risk ratios. The critique uses a threshold or severity model for...

This paper analyses and develops insights to systematic risk and diversification when random, imperfectly dependent, losses are aggregated. Systematic risk and diversification are shown to vary across layers of component losses according to local dependence and volatility structures. Systematic...

A new measure of local dependence called "layer dependence" is proposed and analysed. Layer dependence measures the dependence between two random variables at different percentiles in their joint distribution. Layer dependence satisfies coherence properties similar to Spearman's correlation,...

This paper proposes a framework to analyze mean and distortion risk across layers forming a random loss. Layers are standard insurance and financial constructs representing insurance coverage, capital shortfall, derivative payouts and debt tranches. Layers are expressed using percentiles or...

This paper develops, analyses and implements an early warning tool for systemic risk in banks and financial entities. The tool is based on a refined approach to stress testing. Calculations performed on Australian bank data are shown to predict past distress. Risk is measured as a function of...

A critical problem in risk analysis involving financial variables is the calculation of risk margins. When there are a number of risks, the total risk margin is often reduced to reflect "diversification benefits." How large should the diversification benefit be? And how should the benefit be...

A critical problem in property and casualty insurance is forecasting incurred but as yet unpaid losses. Forecasts and risk margins are often based on individual loss triangles with each triangle corresponding to a different line of business. However lines of business are often related and an...

This article discusses the determination of risk capital based on quot;aversionquot; functions. Aversion functions weigh different outcomes according to perceived severity or likelihood. Many risk measures are usefully viewed in terms of aversion functions including those arising from distortion...