arXiv · arXiv q-fin · 2010
If the probability of default parameters (PDs) fed as input into a credit portfolio model are estimated as through-the-cycle (TTC) PDs stressed market conditions have little impact on the results of the capital calculations conducted with the model. At first glance, this is totally different if the PDs are estimated as point-in-time (PIT) PDs. However, it can be argued that the reflection of stressed market condition…
Norbert Jobst, Dirk Tasche
arXiv · arXiv q-fin · 2001
The instability of historical risk factor correlations renders their use in estimating portfolio risk extremely questionable. In periods of market stress correlations of risk factors have a tendency to quickly go well beyond estimated values. For instance, in times of severe market stress, one would expect with certainty to see the correlation of yield levels and credit spreads go to -1, even though historical estima…
Vineer Bhansali, Mark B. Wise
arXiv · arXiv · 2021
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers the modeling of the liability liquidity risk (or funding liquidity), the second dimension is dedicated to the modeling of the asset liquidity risk (or market liquidity), whereas the third dimension considers the management of the asset-liability liquidi…
Thierry Roncalli
arXiv · arXiv · 2021
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers the asset-liability management of the liquidity gap risk (or asset-liability…
Thierry Roncalli, Amina Cherief, Fatma Karray-Meziou, Margaux Regnault
arXiv · arXiv · 2021
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers asset-liability liquidity risk management (or asset-liability matching). The…
Thierry Roncalli, Fatma Karray-Meziou, François Pan, Margaux Regnault
OpenAlex · Review of Financial Studies · 2022 · cites 55
Abstract Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40$\%$ of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical s…
Zhiguo He, Paymon Khorrami, Zhaogang Song
arXiv · arXiv · 2026
Agent-based models of markets readily produce emergent instabilities, but telling a genuine collective effect apart from a parameter artefact takes discipline. We apply Bouchaud's phase-diagram method to a continuous-double-auction order-book model. The method is to map the full phase diagram, test its robustness to rule changes, and rule out degenerate and numerical origins before we call any feature a tipping point…
Jan Novotny
arXiv · arXiv q-fin · 2021
We build an optimal portfolio liquidation model for OTC markets, aiming at minimizing the trading costs via the choice of the liquidation time. We work in the Locally Linear Order Book framework of \cite{toth2011anomalous} to obtain the market impact as a function of the traded volume. We find that the optimal terminal time for a linear execution of a small order is proportional to the square root of the ratio betwee…
Mike Weber, Iuliia Manziuk, Bastien Baldacci
arXiv · arXiv · 2024
This paper introduces a new risk-on risk-off strategy for the stock market, which combines a financial stress indicator with a sentiment analysis done by ChatGPT reading and interpreting Bloomberg daily market summaries. Forecasts of market stress derived from volatility and credit spreads are enhanced when combined with the financial news sentiment derived from GPT-4. As a result, the strategy shows improved perform…
Baptiste Lefort, Eric Benhamou, Jean-Jacques Ohana, David Saltiel, Beatrice Guez
arXiv · arXiv · 2026
Market stress rarely harms investors through one channel alone. Losses, volatility spikes, and deteriorating tradability often arrive together. We examine whether ESG is associated with lower exposure to clustered fragility in equity markets. Using monthly data on S&P 500 constituents from 2014 to 2025, we study downside returns, volatility, illiquidity, and a cofragility state that captures their joint occurrence wi…
Minxuan Hu, Jiayu Yi, Ziheng Chen, Wenxi Sun, Qishi Zhan
arXiv · arXiv · 2025
This study explores the potential impact of introducing a Central Bank Digital Currency (CBDC) on financial stability in an emerging dual-currency economy (Romania), where the domestic currency (RON) coexists with the euro. It develops an integrated analytical framework combining econometrics, machine learning, and behavioural modelling. CBDC adoption probabilities are estimated using XGBoost and logistic regression …
Catalin Dumitrescu
arXiv · arXiv · 2019
We discuss a simple, exactly solvable model of stochastic stock dynamics that incorporates regime switching between healthy and distressed regimes. Using this model, which is analytically tractable, we discuss a way of extracting expected returns for stocks from realized CDS spreads, essentially, the CDS market sentiment about future stock returns. This alpha/signal could be useful in a cross-sectional (statistical a…
Zura Kakushadze
arXiv · arXiv · 2016
Assessing the stability of economic systems is a fundamental research focus in economics, that has become increasingly interdisciplinary in the currently troubled economic situation. In particular, much attention has been devoted to the interbank lending market as an important diffusion channel for financial distress during the recent crisis. In this work we study the stability of the interbank market to exogenous sh…
Matteo Serri, Guido Caldarelli, Giulio Cimini
arXiv · arXiv · 2016
In the last years, increasing efforts have been put into the development of effective stress tests to quantify the resilience of financial institutions. Here we propose a stress test methodology for central counterparties based on a network characterization of clearing members, whose links correspond to direct credits and debits. This network constitutes the ground for the propagation of financial distress: equity lo…
Giulia Poce, Giulio Cimini, Andrea Gabrielli, Andrea Zaccaria, Giuditta Baldacci
arXiv · arXiv · 2026
Cryptoassets are increasingly entangled with the traditional financial system, and how this activity integrates into national economies and behaves under stress bears on financial stability and the design of public digital money. However, blockchain pseudonymity and the lack of geographic identifiers force existing work to rely on indirect proxies to infer and locate market participants. Here we use a regulatory regi…
Pietro Saggese, Michael Sigmund, Burkhard Raunig, Esther Segalla, Bernhard Haslhofer
arXiv · arXiv · 2026
We study whether crypto-style perpetual-futures mechanics can be applied to a binary event claim that ultimately pays 0 or 1. A synthetic long entered at price p0 with collateral xp0/L has terminal equity -xp0(1-1/L) when the claim pays 0, if the position survives to resolution without a top-up, close, or conversion. Thus any L > 1 creates an adverse-outcome account shortfall under these conditions, independent of th…
Maksym Nechepurenko
arXiv · arXiv · 2026
I construct a Market Stress Probability Index (MSPI) that estimates the probability of high stress in the U.S. equity market one month ahead using information from the cross-section of individual stocks. Using CRSP daily data, each month is summarized by a set of interpretable cross-sectional fragility signals and mapped into a forward-looking stress probability via an L1-regularized logistic regression in a real-tim…
Marc Schmitt
arXiv · arXiv · 2025
We develop a transparent and fully auditable LLM-based pipeline for macro-financial stress testing, combining structured prompting with optional retrieval of country fundamentals and news. The system generates machine-readable macroeconomic scenarios for the G7, which cover GDP growth, inflation, and policy rates, and are translated into portfolio losses through a factor-based mapping that enables Value-at-Risk and E…
Masoud Soleimani