Counterparty risk measurement integrates two sources of risk: market risk, which determines the size of a firm's exposure to a counter party, and credit risk, which reflects the likelihood that the counterparty will default on its obligations. Wrong-way risk refers to the possibility that a...

Open-end mutual funds offer investors same-day liquidity while holding assets that in some cases take several days to sell. This liquidity transformation creates a potentially destabilizing first-mover advantage: when asset prices fall, investors who exit a fund earlier may pass the liquidation...

This paper approaches risk management from three perspectives: firm-level risk measurement, governance and incentives, and systemic concerns. These are three essential dimensions of best practices in risk management; although we discuss each dimension separately, they are interrelated. The paper...

This paper develops methods for selecting and analyzing stress scenarios for financial risk assessment, with particular emphasis on identifying sensible combinations of stresses to multiple variables. We begin by focusing on reverse stress testing — finding the most likely scenarios leading to...

We address the problem of defining and calculating forward volatility implied by option prices when the underlying asset is driven by a stochastic volatility process. We examine alternative notions of forward implied volatility and the information required to extract these measures from the...

Regulatory changes are transforming the multi-trillion dollar swaps market from a network of bilateral contracts to one in which swaps are cleared through central counterparties (CCPs). The stability of the new framework depends on the resilience of CCPs. Margin requirements are a CCP's first...