Paralleling regulatory developments, we devise value-at-risk and expected shortfall type risk measures for the potential losses arising from using misspecied models when pricing and hedging contingent claims. Essentially, losses from model risk correspond to losses realized on a perfectly hedged...

We investigate default probabilities and default correlations of Merton-type credit portfolio models in stress scenarios where a common risk factor is truncated. The analysis is performed in the class of elliptical distributions, a family of light-tailed to heavy-tailed distributions...

Starting from well-known empirical stylised facts of nancial time series, we develop dynamic portfolio protection trading strategies based on econometric methods. As a criterion for riskiness we consider the evolution of the value-at-risk spread from a GARCH model with normal innovations...

Recently, a number of structured funds have emerged as public-private partnerships with the intent of promoting investment in renewable energy in emerging markets. These funds seek to attract institutional investors by tranching the asset pool and issuing senior notes with a high credit quality....

We develop a general approach for stress testing correlations of financial asset portfolios. The correlation matrix of asset returns is specified in a parametric form, where correlations are represented as a function of risk factors, such as country and industry factors. A sparse factor...

The payoff of many credit derivatives depends on the level of credit spreads. Inparticular, credit derivatives with a leverage component are subject to gap risk, a riskassociated with the occurrence of jumps in the underlying credit default swaps. Inthe framework of first passage time models, we...

Remuneration systems in the banking industry, particularly bonus payments, have frequently been blamed for contributing to the build-up of risks leading to the recent financial crisis. In our model banks compete for managerial talent that is private information. Competition for talent sets...

We investigate correlations of asset returns in stress scenarios where a common risk factor is truncated. Our analysis is performed in the class of normal variance mixture (NVM) models, which encompasses many distributions commonly used in financial modelling. For the special cases of jointly...

We consider the problem of reducing the variance of Monte Carlo estimators of multivariate estimation problems by combining the variance reduction techniques Latin hypercube sampling with dependence (LHSD), control variates and importance sampling. Under some standard conditions, the resulting...

Can shorter maturity European options be statically hedged with longer maturity plain vanilla options? This problem appears for example when analyzing options on forwards in relation to liquid options on the spot underlying. Under mild assumptions on the underlying security price process and on...