We use a dynamic framework to address the questions: i) when should an insurance firm pay out dividends and raise (costly) capital and ii) when should an insurance firm take (liquid) investment risk. Financial decisions are made by a manager who strives to maximize firm value and operates in the...

We prove the existence of Pareto optimal allocations within sets of acceptable allocations when decision makers have probabilistic sophisticated variational preferences defined on random endowments in L1. Pareto optimal allocations, variational preferences, probabilistic sophistication,...

We study the market implications of ambiguity sensitive preferences using the alpha-maxmin expected utility (alpha-MEU) model. In the standard Ellsberg framework we prove that alpha-MEU preferences are equivalent to either maxmin, maxmax or subjective expected utility (SEU). We show how...

We investigate capital requirements based on Value at Risk (V@R) and Average Value at Risk (AV@R) when the bank's econometric model only approximately describes the true, unknown return generating process, as is often the case in practice. We provide a simple formula for such capital...

We derive analytically the first four conditional moments of the integrated variance implied by the GARCH diffusion process. From these moments we obtain an analytical closed-form approximation formula to price European options under the GARCH diffusion model.Using Monte Carlo simulations, we...

We study the impact of asymmetric information in a general credit model where the default is triggered when a fundamental diff usion process of the firm passes below a random threshold. Inspired by some recent technical default events during the fi nancial crisis, we consider the role of the...