Next Issue
Volume 3, December
Previous Issue
Volume 3, June

Risks, Volume 3, Issue 3 (September 2015) – 9 articles , Pages 234-444

  • Issues are regarded as officially published after their release is announced to the table of contents alert mailing list.
  • You may sign up for e-mail alerts to receive table of contents of newly released issues.
  • PDF is the official format for papers published in both, html and pdf forms. To view the papers in pdf format, click on the "PDF Full-text" link, and use the free Adobe Readerexternal link to open them.
Order results
Result details
Select all
Export citation of selected articles as:
Article
The Financial Stress Index: Identification of Systemic Risk Conditions
Risks 2015, 3(3), 420-444; https://doi.org/10.3390/risks3030420 - 16 Sep 2015
Cited by 14 | Viewed by 4384
Abstract
This paper develops a financial stress measure for the United States, the Cleveland Financial Stress Index (CFSI). The index is based on publicly available data describing a six-market partition of the financial system comprising credit, funding, real estate, securitization, foreign exchange, and equity [...] Read more.
This paper develops a financial stress measure for the United States, the Cleveland Financial Stress Index (CFSI). The index is based on publicly available data describing a six-market partition of the financial system comprising credit, funding, real estate, securitization, foreign exchange, and equity markets. This paper improves upon existing stress measures by objectively selecting between several index weighting methodologies across a variety of monitoring frequencies through comparison against a volatility-based benchmark series. The resulting measure facilitates the decomposition of stress to identify disruptions in specific markets and provides insight into historical stress regimes. Full article
(This article belongs to the Special Issue Financial Engineering to Address Complexity)
Show Figures

Graphical abstract

Article
Multi-Objective Stochastic Optimization Programs for a Non-Life Insurance Company under Solvency Constraints
Risks 2015, 3(3), 390-419; https://doi.org/10.3390/risks3030390 - 15 Sep 2015
Cited by 5 | Viewed by 3366
Abstract
In the paper, we introduce a multi-objective scenario-based optimization approach for chance-constrained portfolio selection problems. More specifically, a modified version of the normal constraint method is implemented with a global solver in order to generate a dotted approximation of the Pareto frontier for [...] Read more.
In the paper, we introduce a multi-objective scenario-based optimization approach for chance-constrained portfolio selection problems. More specifically, a modified version of the normal constraint method is implemented with a global solver in order to generate a dotted approximation of the Pareto frontier for bi- and tri-objective programming problems. Numerical experiments are carried out on a set of portfolios to be optimized for an EU-based non-life insurance company. Both performance indicators and risk measures are managed as objectives. Results show that this procedure is effective and readily applicable to achieve suitable risk-reward tradeoff analysis. Full article
Show Figures

Figure 1

Article
Supervising System Stress in Multiple Markets
Risks 2015, 3(3), 365-389; https://doi.org/10.3390/risks3030365 - 14 Sep 2015
Cited by 2 | Viewed by 3161
Abstract
This paper develops an extended financial stress measure that considers the supervisory objective of identifying risks to the stability of the financial system. The measure provides a continuous and bounded signal of financial stress using daily public market data. Broad coverage of material [...] Read more.
This paper develops an extended financial stress measure that considers the supervisory objective of identifying risks to the stability of the financial system. The measure provides a continuous and bounded signal of financial stress using daily public market data. Broad coverage of material financial system markets over time is achieved by leveraging dynamic credit weights. We consider how this measure can be used to monitor, analyze, and alert financial system stress. Full article
(This article belongs to the Special Issue Financial Engineering to Address Complexity)
Show Figures

Graphical abstract

Article
Valuation of Index-Linked Cash Flows in a Heath–Jarrow–Morton Framework
Risks 2015, 3(3), 338-364; https://doi.org/10.3390/risks3030338 - 10 Sep 2015
Viewed by 2773
Abstract
In this paper, we study the valuation of stochastic cash flows that exhibit dependence on interest rates. We focus on insurance liability cash flows linked to an index, such as a consumer price index or wage index, where changes in the index value [...] Read more.
In this paper, we study the valuation of stochastic cash flows that exhibit dependence on interest rates. We focus on insurance liability cash flows linked to an index, such as a consumer price index or wage index, where changes in the index value can be partially understood in terms of changes in the term structure of interest rates. Insurance liability cash flows that are not explicitly linked to an index may still be valued in our framework by interpreting index returns as so-called claims inflation, i.e., an increase in claims cost per sold insurance contract. We focus primarily on the case when a deep and liquid market for index-linked contracts is absent or when the market price data are unreliable. Firstly, we present an approach for assigning a monetary value to a stochastic cash flow that does not require full knowledge of the joint dynamics of the cash flow and the term structure of interest rates. Secondly, we investigate in detail model selection, estimation and validation in a Heath–Jarrow–Morton framework. Finally, we analyze the effects of model uncertainty on the valuation of the cash flows and how forecasts of cash flows and interest rates translate into model parameters and affect the valuation. Full article
Show Figures

Figure 1

Article
Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs
Risks 2015, 3(3), 318-337; https://doi.org/10.3390/risks3030318 - 21 Aug 2015
Cited by 2 | Viewed by 2526
Abstract
For pension-savers, a low payoff is a financial disaster. Such investors will most likely prefer left-skewed payoff distributions over right-skewed payoff distributions. We explore how such distributions can be delivered. Cautious-relaxed utility measures are cautious in ensuring that payoffs don’t fall much below [...] Read more.
For pension-savers, a low payoff is a financial disaster. Such investors will most likely prefer left-skewed payoff distributions over right-skewed payoff distributions. We explore how such distributions can be delivered. Cautious-relaxed utility measures are cautious in ensuring that payoffs don’t fall much below a reference value, but relaxed about exceeding it. We find that the payoff distribution delivered by a cautious-relaxed utility measure has appealing features which payoff distributions delivered by traditional utility functions don’t. In particular, cautious-relaxed distributions can have the mass concentrated on the left, hence be left-skewed. However, cautious-relaxed strategies prescribe frequent portfolio adjustments which may be expensive if transaction costs are charged. In contrast, more traditional strategies can be time-invariant. Thus we investigate the impact of transaction costs on the appeal of cautious-relaxed strategies. We find that relatively high transaction fees are required for the cautious-relaxed strategy to lose its appeal. This paper contributes to the literature which compares utility measures by the payoff distributions they produce and finds that a cautious-relaxed utility measure will deliver payoffs that many investors will prefer. Full article
Show Figures

Graphical abstract

Article
Life Insurance Cash Flows with Policyholder Behavior
Risks 2015, 3(3), 290-317; https://doi.org/10.3390/risks3030290 - 24 Jul 2015
Cited by 13 | Viewed by 3580
Abstract
The problem of the valuation of life insurance payments with policyholder behavior is studied. First, a simple survival model is considered, and it is shown how cash flows without policyholder behavior can be modified to include surrender and free policy behavior by calculation [...] Read more.
The problem of the valuation of life insurance payments with policyholder behavior is studied. First, a simple survival model is considered, and it is shown how cash flows without policyholder behavior can be modified to include surrender and free policy behavior by calculation of simple integrals. In the second part, a more general disability model with recovery is studied. Here, cash flows are determined by solving a modified Kolmogorov forward differential equation. We conclude the paper with numerical examples illustrating the methods proposed and the impact of policyholder behavior. Full article
(This article belongs to the Special Issue Life Insurance and Pensions)
Show Figures

Graphical abstract

Article
Monopolistic Insurance and the Value of Information
Risks 2015, 3(3), 277-289; https://doi.org/10.3390/risks3030277 - 24 Jul 2015
Cited by 2 | Viewed by 2603
Abstract
The value of information regarding risk class for a monopoly insurer and its customers is examined in both symmetric and asymmetric information environments. A monopolist always prefers contracting with uninformed customers as this maximizes the rent extracted under symmetric information while also avoiding [...] Read more.
The value of information regarding risk class for a monopoly insurer and its customers is examined in both symmetric and asymmetric information environments. A monopolist always prefers contracting with uninformed customers as this maximizes the rent extracted under symmetric information while also avoiding the cost of adverse selection when information is held asymmetrically. Although customers are indifferent to symmetric information when they are initially uninformed, they prefer contracting with hidden knowledge rather than symmetric information since the monopoly responds to adverse selection by sharing gains from trade with high-risk customers when low risks are predominant in the insurance pool. However, utilitarian social welfare is highest when customers are uninformed, and is higher when information is symmetric rather than asymmetric. Full article
(This article belongs to the Special Issue Information and market efficiency)
Article
Best-Estimates in Bond Markets with Reinvestment Risk
Risks 2015, 3(3), 250-276; https://doi.org/10.3390/risks3030250 - 16 Jul 2015
Viewed by 2964
Abstract
The concept of best-estimate, prescribed by regulators to value insurance liabilities for accounting and solvency purposes, has recently been discussed extensively in the industry and related academic literature. To differentiate hedgeable and non-hedgeable risks in a general case, recent literature defines best-estimates using [...] Read more.
The concept of best-estimate, prescribed by regulators to value insurance liabilities for accounting and solvency purposes, has recently been discussed extensively in the industry and related academic literature. To differentiate hedgeable and non-hedgeable risks in a general case, recent literature defines best-estimates using orthogonal projections of a claim on the space of replicable payoffs. In this paper, we apply this concept of best-estimate to long-maturity claims in a market with reinvestment risk, since in this case the total liability cannot easily be separated into hedgeable and non-hedgeable parts. We assume that a limited number of short-maturity bonds are traded, and derive the best-estimate price of bonds with longer maturities, thus obtaining a best-estimate yield curve. We therefore use the multifactor Vasiˇcek model and derive within this framework closed-form expressions for the best-estimate prices of long-term bonds. Full article
Show Figures

Figure 1

Article
Options with Extreme Strikes
Risks 2015, 3(3), 234-249; https://doi.org/10.3390/risks3030234 - 08 Jul 2015
Cited by 2 | Viewed by 2519
Abstract
In this short paper, we study the asymptotics for the price of call options for very large strikes and put options for very small strikes. The stock price is assumed to follow the Black–Scholes models. We analyze European, Asian, American, Parisian and perpetual [...] Read more.
In this short paper, we study the asymptotics for the price of call options for very large strikes and put options for very small strikes. The stock price is assumed to follow the Black–Scholes models. We analyze European, Asian, American, Parisian and perpetual options and conclude that the tail asymptotics for these option types fall into four scenarios. Full article
(This article belongs to the Special Issue Recent Advances in Mathematical Modeling of the Financial Markets)
Previous Issue
Next Issue
Back to TopTop