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Procyclicality of historical risk measure estimation means that one tends to over-estimate future risk when present realized volatility is high and vice versa under-estimate future risk when the realized volatility is low. Out of it different questions arise, relevant for applications and theory: What are the factors which affect the degree of procyclicality? More specifically, how does the choice of risk measure aff…
We explore a model of the interaction between banks and outside investors in which the ability of banks to issue inside money (short-term liabilities believed to be convertible into currency at par) can generate a collapse in asset prices and widespread bank insolvency. The banks and investors share a common belief about the future value of certain long-term assets, but they have different objective functions; change…
We study a discrete-time consumption-based capital asset pricing model under expectations-based reference-dependent preferences. More precisely, we consider an endowment economy populated by a representative agent who derives utility from current consumption and from gains and losses in consumption with respect to a forward-looking, stochastic reference point. First, we consider a general model in which the agent's p…
Since exchange economy considerably varies in the market assets, asset prices have become an attractive research area for investigating and modeling ambiguous and uncertain information in today markets. This paper proposes a new generative uncertainty mechanism based on the Bayesian Inference and Correntropy (BIC) technique for accurately evaluating asset pricing in markets. This technique examines the potential proc…
Since the beginning of the new millennium, stock markets went through every state from long-time troughs, trade suspensions to all-time highs. The literature on asset pricing hence assumes random processes to be underlying the movement of stock returns. Observed procyclicality and time-varying correlation of stock returns tried to give the apparently random behavior some sort of structure. However, common mispercepti…
Systemic financial risk refers to the simultaneous failure or destabilization of multiple financial institutions, often triggered by contagion mechanisms or common exposures to shocks. In this paper, we present a dynamical model of bank leverage (the ratio of asset holdings to equity) a quantity that both reflects and drives risk dynamics. We model how banks, constrained by Value-at-Risk (VaR) regulations, adjust the…
A theoretical model of systemic-risk propagation of financial market is analyzed for stability. The state equation is an unsteady diffusion equation with a nonlinear logistic growth term, where the diffusion process captures the spread of default stress between interconnected financial entities and the reaction term captures the local procyclicality of financial stress. The stabilizing controller synthesis includes t…
In this paper, we examine the capacity of an arbitrage-free neural-SDE market model to produce realistic scenarios for the joint dynamics of multiple European options on a single underlying. We subsequently demonstrate its use as a risk simulation engine for option portfolios. Through backtesting analysis, we show that our models are more computationally efficient and accurate for evaluating the Value-at-Risk (VaR) o…
We explore the implications of a preference ordering for an investor-consumer with a strong preference for keeping consumption above an exogenous social norm, but who is willing to tolerate occasional dips below it. We do this by splicing two CRRA preference orderings, one with high curvature below the norm and the other with low curvature at or above it. We find this formulation appealing for many endowment funds an…
Effective risk control must make a tradeoff between the microprudential risk of exogenous shocks to individual institutions and the macroprudential risks caused by their systemic interactions. We investigate a simple dynamical model for understanding this tradeoff, consisting of a bank with a leverage target and an unleveraged fundamental investor subject to exogenous noise with clustered volatility. The parameter sp…
Credit risk management in Italy is characterized, in the period June 2008 to June 2012, by frequent (frequency=0.5 cycles per year) and intense (peak amplitude: mean=39.2 billion Euros, s.e.=2.83 billion Euros) quarterly contractions and expansions around the mean (915.4 billion Euros, s.e.=3.59 billion Euros) of the nominal total credit used by non-financial corporations. Such frequent and intense fluctuations are f…
Initial Margin Procyclicality — Margin models that rise sharply in stress and amplify deleveraging.
Margin Procyclicality US — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Euro Area — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality UK — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Japan — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality China — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality EM Asia — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality LatAm — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality CEEMEA — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Canada — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Australia — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality risk-on — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality risk-off (Liquidity).
Margin Procyclicality tightening (Liquidity).
Margin Procyclicality easing (Liquidity).
Margin Procyclicality stagflation (Liquidity).
Margin Procyclicality reflation (Liquidity).
Margin Procyclicality disinflation (Liquidity).
Margin Procyclicality liquidity-crisis (Liquidity).
Margin Procyclicality carry (Liquidity).
Margin Procyclicality recession (Liquidity).
Margin Procyclicality month-end (Liquidity).
Margin Procyclicality quarter-end (Liquidity).
Margin Procyclicality year-end (Liquidity).
Initial Margin Procyclicality — Margin models that rise sharply in stress and amplify deleveraging.
Margin Procyclicality Australia — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Canada — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality carry (Liquidity).
Margin Procyclicality CEEMEA — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality China — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality disinflation (Liquidity).
Margin Procyclicality easing (Liquidity).
Margin Procyclicality EM Asia — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Euro Area — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality Japan — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality LatAm — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality liquidity-crisis (Liquidity).
Margin Procyclicality month-end (Liquidity).
Margin Procyclicality quarter-end (Liquidity).
Margin Procyclicality recession (Liquidity).
Margin Procyclicality reflation (Liquidity).
Margin Procyclicality risk-off (Liquidity).
Margin Procyclicality risk-on — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality stagflation (Liquidity).
Margin Procyclicality tightening (Liquidity).
Margin Procyclicality UK — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality US — Market or funding liquidity stress and intermediation concept.
Margin Procyclicality year-end (Liquidity).