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XVAs denote various counterparty risk related valuation adjustments that are applied to financial derivatives since the 2007--09 crisis. We root a cost-of-capital XVA strategy in a balance sheet perspective which is key in identifying the economic meaning of the XVA terms. Our approach is first detailed in a static setup that is solved explicitly. It is then plugged in the dynamic and trade incremental context of a r…
In the aftermath of the financial crisis, supervisory authorities have considerably altered the mode of operation of financial stress testing. Despite these efforts, significant concerns and extensive criticism have been raised by market participants regarding the considered unrealistic methodological assumptions and simplifications. Current stress testing methodologies attempt to simulate the risks underlying a fina…
In this work, we present a numerical method based on a sparse grid approximation to compute the loss distribution of the balance sheet of a financial or an insurance company. We first describe, in a stylised way, the assets and liabilities dynamics that are used for the numerical estimation of the balance sheet distribution. For the pricing and hedging model, we chose a classical Black & Scholes model with a stochast…
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly a…
Current post-trade clearing systems rely almost exclusively on cash or cash-like collateral, leaving vast reserves of short-term liquidity embedded in trade credit outside formal settlement infrastructures. A key barrier to integrating this liquidity is the near-universal dependence of clearing services on novation, which imposes institutional overhead that restricts accessibility and limits the range of obligations …
In this paper we develop structural first passage models (AT1P and SBTV) with time-varying volatility and characterized by high tractability, moving from the original work of Brigo and Tarenghi (2004, 2005) [19] [20] and Brigo and Morini (2006)[15]. The models can be calibrated exactly to credit spreads using efficient closed-form formulas for default probabilities. Default events are caused by the value of the firm …
This paper provides a mathematical framework based on the principle of invariance to classify institutions in two paradigms according to the way in which credit, debit and funding adjustments are calculated: accounting and management perspectives. This conceptual classification helps to answer questions such as: In which paradigm each institution sits (point of situation)? Where is the market consensus and regulation…
The credit rating is an evaluation of a company's credit risk that values the ability to pay back the debt and predict the likelihood of the debtor defaulting. There are various features influencing credit rating. Therefore, it is essential to select substantive features to explore the main reason for credit rating change. To address this issue, this paper exploited Principal Component Analysis and Factor Analysis as…
Recent developments in the literature on financial architecture suggest that banks and markets not only coexist, but also coevolve in ways that are non-neutral from the viewpoint of optimality. This article aims to analyse the concrete mechanisms of this coevolution by focusing on a very relevant case study: Belgium (the first Continental country to industrialize) at the time of the very first emergence of a modern f…
We develop a continuous-time structural dynamic model to determine the exact insolvency regions of banks arising from the non-linear interaction between liquidity and credit risk. While existing literature predominantly treats these risks in isolation or via reduced-form specifications, we explicitly model the feedback loop where funding shocks and regulatory constraints force balance-sheet adjustments that can lead …
This paper attempts to explain the credit default swap (CDS) premium, using a novel approach to identify the volatility and jump risks of individual firms from high-frequency equity prices. Our empirical results suggest that the volatility risk alone predicts 48% of the variation in CDS spread levels, whereas the jump risk alone forecasts 19%. After controlling for credit ratings, macroeconomic conditions, and firms'…
Covered interest parity verges on a physical law in international finance. And yet it has been systematically violated since the Great Financial Crisis. Especially puzzling have been the violations since 2014, even once banks had strengthened their balance sheets and regained easy access to funding. We offer a framework to think about these violations, stressing the combination of hedging demand and tighter limits to…
This paper introduces a new algorithmic execution model that integrates interbank limit and market orders with internal liquidity generated through market making. Based on the Cartea et al.\cite{cartea2015algorithmic} framework, we incorporate market impact in interbank orders while excluding it for internal market-making transactions. Our model aims to optimize the balance between interbank and internal liquidity, r…
This paper compares a series of contemporary portfolio construction approaches by employing ten U.S. stocks (TSLA, WMT, BAC, GS, LLY, MRK, GOOG, META, AAPL and XOM) in a time frame from September 2023 to December 2025. The paper explores both basic mean-variance optimization, constrained optimization, Fama French five factor regression modeling, Monte Carlo simulation, and the Black-Litterman model to determine how c…
We address the problem of executing large client orders in continuous double-auction markets under time and liquidity constraints. We propose a model predictive control (MPC) framework that balances three competing objectives: order completion, market impact, and opportunity cost. Our algorithm is guided by a trading schedule (such as time-weighted average price or volume-weighted average price) but allows for deviat…
In this paper, we develop an open-economy macroeconomic model of a Proof-of-Stake network to analyze nominal token-price dynamics and the systemic effects of speculative capital. We first consider a network populated solely by active utility users, who finance network activity through a steady exogenous inflow of fiat currency. We prove the existence of a unique, globally asymptotically stable steady-state equilibriu…
Generating synthetic financial time series that preserve the statistical properties of real market data is essential for stress testing, risk model validation, and scenario design. Existing approaches struggle to simultaneously reproduce heavy-tailed distributions, negligible linear autocorrelation, and persistent volatility clustering. We developed a hybrid hidden Markov framework that discretized excess growth rate…
The ECB balance sheet reflects the scale of European Central Bank asset holdings and helps track euro-area liquidity, policy transmission, and duration absorption.
QT pace refers to the speed at which the Federal Reserve allows assets to roll off its balance sheet, affecting reserves, duration supply, and market liquidity.
The Fed balance sheet reflects the scale of Federal Reserve asset holdings and is a major driver of reserves, liquidity conditions, and policy transmission.
Swap spread measures the difference between interest rate swap rates and Treasury yields of similar maturity, helping track balance-sheet conditions, collateral dynamics, and structural stress in rates markets.
Funding stress signal derived from FX swap pricing distortions and balance sheet constraints.
Quantitative Tightening Pace — The speed of balance-sheet runoff and its impact on reserves, collateral markets, and term funding.
Balance Sheet Constraint Dealer — Dealer SLR/balance-sheet limits reducing intermediation.
QE Balance Sheet US — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Euro Area — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet UK — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Japan — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet China — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet EM Asia — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet LatAm — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet CEEMEA — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Canada — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Australia — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Nordics — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet ASEAN — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet India — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Korea — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Brazil — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Mexico — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet South Africa — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Turkey — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Poland — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet Indonesia — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet risk-on — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet risk-off — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet tightening — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet easing — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet stagflation — Policy reaction, fiscal-monetary, or macroprudential concept.
QE Balance Sheet reflation — Policy reaction, fiscal-monetary, or macroprudential concept.
Dealer Balance Sheet US (Liquidity).
Dealer Balance Sheet Euro Area (Liquidity).
Dealer Balance Sheet UK (Liquidity).
Balance Sheet Constraint Dealer — Dealer SLR/balance-sheet limits reducing intermediation.
Funding stress signal derived from FX swap pricing distortions and balance sheet constraints.
Dealer Balance Sheet Australia (Liquidity).
Dealer Balance Sheet Canada (Liquidity).
Dealer Balance Sheet carry (Liquidity).
Dealer Balance Sheet CEEMEA (Liquidity).
Dealer Balance Sheet China (Liquidity).
Dealer Balance Sheet disinflation (Liquidity).
Dealer Balance Sheet easing (Liquidity).
Dealer Balance Sheet EM Asia (Liquidity).
Dealer Balance Sheet Euro Area (Liquidity).
Dealer Balance Sheet Japan (Liquidity).
Dealer Balance Sheet LatAm (Liquidity).
Dealer Balance Sheet liquidity-crisis (Liquidity).
Dealer Balance Sheet month-end (Liquidity).
Dealer Balance Sheet quarter-end (Liquidity).
Dealer Balance Sheet recession (Liquidity).
Dealer Balance Sheet reflation (Liquidity).
Dealer Balance Sheet risk-off (Liquidity).
Dealer Balance Sheet risk-on (Liquidity).
Dealer Balance Sheet stagflation (Liquidity).
Dealer Balance Sheet tightening (Liquidity).
Dealer Balance Sheet UK (Liquidity).
Dealer Balance Sheet US (Liquidity).