2020 June - 35 articles
In a one price economy, the Fundamental Theorem of Asset Pricing (FTAP) establishes that no-arbitrage is equivalent to the existence of an equivalent martingale measure. Such an equivalent measure can be derived as the normal unit vector of the hyper...
How can risk of a company be allocated to its divisions and attributed to risk factors? The Euler principle allows for an economically justified allocation of risk to different divisions. We introduce a method that generalizes the Euler principle to...
In this article, a risk-adjusted return on capital (RAROC) valuation scheme for loans is derived. The critical assumption throughout the article is that no market information on a borrower’s credit quality like bond or CDS (Credit Default Swap)...
This paper proposes a novel system-wide multi-state framework to model state occupations and the transitions among current, delinquency, default, prepayment, repurchase, short sale and foreclosure on mortgage loans. The approach allows for the modell...
We study a discrete time hedging and pricing problem in a market with the liquidity risk. We consider a discrete version of the constant elasticity of variance (CEV) model by applying Leland’s discrete time replication scheme. The pricing equat...
The present paper is devoted to the study of a bank salvage model with a finite time horizon that is subjected to stochastic impulse controls. In our model, the bank’s default time is a completely inaccessible random quantity generating its own...
The cost of cybersecurity incidents is large and growing. However, conventional methods for measuring loss and choosing mitigation strategies use simplifying assumptions and are often not supported by cyber attack data. In this paper, we present a mu...
We investigate the state dependence of the variance of the instantaneous variance of the S&P 500 index empirically. Time-series analysis of realized variance over a 20-year period shows strong evidence of an elasticity of variance of the variance...
This paper examines the joint movement and tail dependence structure between the pair of foreign exchange rates (EUR, USD and GBP) against the GHS, using daily exchange rates data expressed in GHS per unit of foreign currencies (EUR, USD and GBP) bet...
In the automotive industry, it is important to know whether the failure of some car parts may be related to the failure of others. This project studies warranty claims for five engine components obtained from a major car manufacturer with the purpose...
Earnings management is a globally used tool for long-term profitable enterprises and for the apparatus of reduction of bankruptcy risk in developed countries. This phenomenon belongs to the integral and fundamental part of their business finance. How...
This paper investigates dynamic correlations of stock–bond returns for different stock indices and bond maturities. Evidence in the US shows that stock–bond relations are time-varying and display a negative trend. The stock–bond correlations are nega...
It is our pleasure to prologue the special issue on “Machine Learning in Insurance”, which represents a compilation of ten high-quality articles discussing avant-garde developments or introducing new theoretical or practical advances in t...
A longstanding objective of managers is to reduce risk to their businesses. The conventional strategy for risk reduction is diversification; however, evidence for the effectiveness of diversification remains inconclusive. According to Organizational...
Banks play a vital role in strengthening the financial system of a country; hence, their survival is decisive for the stability of national economies. Therefore, analyzing the survival probability of the banks is an essential and continuing research...
This paper examines the impact of the parameters of the distribution of the time at which a bank’s client defaults on their obligated payments, on the Lundberg adjustment coefficient, the upper and lower bounds of the ruin probability. We study...
Calibration is a highly challenging task, in particular in multiple yield curve markets. This paper is a first attempt to study the chances and challenges of the application of machine learning techniques for this. We employ Gaussian process regressi...
The paper proposes a novel computational impact analysis framework to proactively manage dynamic constraints and optimally promote the inception of central banks’ regulatory policies. Currently, central banks are encountering contradictory chal...
In this paper, we test the efficiency of least-squares Monte Carlo method to estimate capital requirements in life insurance. We choose a simplified Gaussian evaluation framework where closed-form formulas are available and allow us to obtain solid b...
After a brief overview of aspects of computational risk management, the implementation of the rearrangement algorithm in R is considered as an example from computational risk management practice. This algorithm is used to compute the largest quantile...
The research aims to verify whether the credit risk of small and medium-sized enterprises can be estimated more accurately using qualitative variables together with financial information from reports. In our paper, we select qualitative variables wit...
As cyber events have virtually no geographical limitations and can result in economic losses on a global scale, the assessment of return periods for such economic losses is currently debated among experts. The potential accumulation of consequential...
In this paper we aimed to examine the profitability of technical trading rules in the Bitcoin market by using trend-following and mean-reverting strategies. We applied our strategies on the Bitcoin price series sampled both at 5-min intervals and on...
In this paper, we discuss a generalization of the collective risk model and of Panjer’s recursion. The model we consider consists of several business lines with dependent claim numbers. The distributions of the claim numbers are assumed to be P...
The authors wish to make the following corrections to this paper (Ye and Bellotti 2019): [...]
In compulsory health insurance in Switzerland, policyholders can choose two main features, the level of deductible and the type of plan. Deductibles can be chosen among six levels, which range from CHF 300 to 2500. While the coverage and benefits are...
A regularization approach to model selection, within a generalized HJM framework, is introduced, which learns the closest arbitrage-free model to a prespecified factor model. This optimization problem is represented as the limit of a one-parameter fa...
In the present work, we analyze the dynamics of indirect connections between insurance companies that result from market price channels. In our analysis, we assume that the stock quotations of insurance companies reflect market sentiments, which cons...
Tax evasion, which is typically considered an illegal activity, is a critical problem and is considered a barrier to economic growth. A review of the literature shows that tax and social security contributions, regulations, public sector services, th...
We examine the profitability of the momentum and contrarian strategies in three South Asian markets, i.e., Bangladesh, India, and Pakistan. We also analyze, whether credit risk influences momentum and contrarian return for these markets from 2008 to...
The cornerstone of the capital asset pricing model (CAPM) lies with its beta. The question of whether or not beta is dead has attracted great attention from academics and practitioners in the last 50 years or so, and the debate is still ongoing. Many...
We propose novel nonparametric estimators for stochastic volatility and the volatility of volatility. In doing so, we relax the assumption of a constant volatility of volatility and therefore, we allow the volatility of volatility to vary over time....
Cryptocurrencies have recently captured the interest of the econometric literature, with several works trying to address the existence of bubbles in the price dynamics of Bitcoins and other cryptoassets. Extremely rapid price accelerations, often ref...
The goal of this paper is to develop regression models and postulate distributions which can be used in practice to describe the joint development process of individual claim payments and claim incurred. We apply neural networks to estimate our regre...
This note revisits the ideas of the so-called semiparametric methods that we consider to be very useful when applying machine learning in insurance. To this aim, we first recall the main essence of semiparametrics like the mixing of global and local...
