Study shows how capital constraints can lead to systemic crises in financial systems.
problem Impact of regulatory capital constraints on fire sales and financial stability.
method Mean field game model with banks adjusting holdings via trading strategies under regulatory constraints.
result Capital constraints can lead to simultaneous defaults in a substantial proportion of the banking system.
We consider the risk sharing problem for capital requirements induced by capital adequacy tests and security markets. The agents involved in the sharing procedure may be heterogeneous in that they apply varying capital adequacy tests and have access to different security markets. We discuss conditions under which there…
Study examines how EU's Value at Risk constraints affect insurance oligopolies.
problem Impact of EU's Value at Risk constraints on insurance oligopolies.
method Bertrand model with profit-maximizing companies facing Value at Risk constraints.
result Value at Risk constraints can lead to monopolistic premiums or market failure.
Study examines how business units can benefit from group cohesion under regulatory constraints.
problem Regulatory constraints limit business units' ability to form a single cohesive group.
method Defined and analyzed cohesive risk measures to minimize capital costs.
result Cohesive risk measures allow groups to achieve minimal capital costs without altering individual liabilities.
Paper examines constraints on cryptocurrency networks to improve liquidity and capital costs.
problem Improving liquidity in cryptocurrency networks with limited capital deposits.
method Introduces constraints to bound loss in default scenarios and simplifies network structure.
result Achieves optimal tradeoff between liquidity and capital costs in payment networks.
Optimizes bank capital structure under Basel III constraints, simplifying complex dynamics.
problem Optimizing risky investments, dividends, and capital structure under Basel III constraints.
method Formulated as a stochastic control problem, reducing dynamics to a one-dimensional process in leverage ratio.
result Simple policy: pay dividends at an upper barrier and recapitalize at the distress boundary.
Dynamic model considers private asset markets' complexities.
problem Understanding and optimizing private asset allocation.
method State-of-the-art dynamic model with machine learning.
result Optimal investment policies quantified over fund life.
The strengthening of capital requirements has induced banks and traders to consider charging a so called capital valuation adjustment (KVA) to the clients in OTC transactions. This roughly corresponds to charge the clients ex-ante the profit requirement that is asked to the trading desk. In the following we try to deli…
Optimal dividend strategy with ratcheting and capital injection under Cramér-Lundberg model.
problem Optimal dividend payout for an insurance company with ratcheting constraints and capital injections.
method Systematic probabilistic and PDE-based approach to solve HJB equation, constructing strong solution and optimal strategy.
result Existence and uniqueness of strong solution, explicit optimal feedback control strategy.
In this paper, we study the optimal control problem for a company whose surplus process evolves as an upward jump diffusion with random return on investment. Three types of practical optimization problems faced by a company that can control its liquid reserves by paying dividends and injecting capital. In the first pro…
We consider the problem of minimizing capital at risk in the Black-Scholes setting. The portfolio problem is studied given the possibility that a correlation constraint between the portfolio and a financial index is imposed. The optimal portfolio is obtained in closed form. The effects of the correlation constraint are…
The aim of this paper is to solve an optimal investment, consumption and life insurance problem when the investor is restricted to capital guarantee. We consider an incomplete market described by a jump-diffusion model with stochastic volatility. Using the martingale approach, we prove the existence of the optimal stra…
In order to study the phenomenon in detail that income distribution follows Pareto law, we analyze the database of high income companies in Japan. We find a quantitative relation between the average capital of the companies and the Pareto index. The larger the average capital becomes, the smaller the Pareto index becom…
The paper optimizes dividend strategies for companies with assets and liabilities under solvency constraints.
problem Maximizing dividends while adhering to solvency requirements in the face of correlated asset and liability movements.
method Developed verification lemmas to show optimal barrier dividend strategies in two cases: with and without shareholder funding.
result Optimal dividend strategies are barrier-type, derived in closed form and illustrated.
Reinsurance can help life insurers maintain higher capital guarantees without losing utility.
problem Decreasing capital guarantees in life insurance products.
method Dynamic investment-reinsurance optimization problem with simultaneous Value-at-Risk and no-short-selling constraints. Introduced guarantee-equivalent utility gain for comparison.
result Optimally managed reinsurance allows insurers to offer higher capital guarantees without reducing expected utility.
Study optimal consumption with relaxed benchmarks and drawdown constraints.
problem Optimal consumption under relaxed benchmark tracking and consumption drawdown constraint.
method Transformed stochastic control problem into regular control problem with state-control constraints, then solved using dual transform and optimal consumption behavior.
result Closed-form solution for optimal investment and consumption in feedback form.
Optimal portfolio tracking with dynamic capital injection into a ratcheting benchmark.
problem Optimizing a portfolio's performance by dynamically adding capital to a non-decreasing benchmark.
method Formulated as an unconstrained control problem with a running maximum cost, transformed into an auxiliary problem with a nonlinear HJB equation, solved using probabilistic representation and stochastic flow analysis.
result Established the existence of a unique classical solution to the HJB equation, providing feedback optimal portfolio strategies.
Analyzes securitization impacts on monetary and fiscal policies.
problem Impact of securitization on monetary and fiscal policies.
method Develops optimal conditions, identifies constraints, introduces new decision models.
result Identifies constraints and interactions of securitization with capital-reserve requirements.
Model explains capital allocation and wealth distribution dynamics in a frictional economy.
problem Understanding capital allocation and wealth distribution dynamics in a frictional economy.
method Mean-field game approach to model interactions between expert and household groups.
result Experts accumulate capital during booms and quickly reverse behavior in busts, even without macro-shocks.
Firms should keep capital to offer sufficient protection against the risks they are facing. In the insurance context methods have been developed to determine the minimum capital level required, but less so in the context of firms with multiple business lines including allocation. The individual capital reserve of each …
Derives equations for capital deepening in a competitive economy without assuming a production function.
problem Understanding capital deepening and firm survival in a competitive economy.
method Derives equations of motion from accounting identities, without assuming a production function. Uses four coupled relaxation equations to govern capital productivity, labor share, and new investment productivity.
result A 1% improvement in new-capital productivity nearly doubles the aggregate growth rate within one capital lifetime.
This paper considers optimal control problem of a large insurance company under a fixed insolvency probability. The company controls proportional reinsurance rate, dividend pay-outs and investing process to maximize the expected present value of the dividend pay-outs until the time of bankruptcy. This paper aims at des…
This paper considers an optimal control of a big financial company with debt liability under bankrupt probability constraints. The company, which faces constant liability payments and has choices to choose various production/business policies from an available set of control policies with different expected profits and…
Consider an agent who enters a financial market on day t = 0 with an initial capital amount x. He invests this amount on stocks and the money market, and by day t = T, has generated a wealth W . He is given a convex class of probability measures (called scenarios) and a real-valued function (or floors) corresponding to…
Financial institutions are currently required to meet more stringent capital requirements than they were before the recent financial crisis; in particular, the capital requirement for a large bank's trading book under the Basel 2.5 Accord more than doubles that under the Basel II Accord. The significant increase in cap…
Portfolio managers are typically constrained by turnover limits, minimum and maximum stock positions, cardinality, a target market capitalization and sometimes the need to hew to a style (such as growth or value). In addition, portfolio managers often use multifactor stock models to choose stocks based upon their respe…
In this paper, we construct a solution to the optimal contract problem for delegated portfolio management of the fist-best (risk-sharing) type. The novelty of our result is (i) in the robustness of the optimal contract with respect to perturbations of the wealth process (interpreted as capital injections), and (ii) in …
Study uses VC correlation to uncover directional financial relationships.
problem Understanding causal relationships between financial variables.
method Volatility constrained correlation (VC correlation) method.
result Operating income is most influential, while market capitalization and revenue are most susceptible.
The study tests a functional-form restriction on risk exposure dynamics using margin debt data.
problem Understanding risk exposure dynamics under capital constraints and slack.
method Testing a regime-conditional functional-form restriction on aggregate risk-exposure dynamics implied by VaR-constrained intermediary models.
result The contraction and growth of exposures under capital constraints and slack are observed and tested.
Generalizes optimal portfolio theory to include capital gains taxes.
problem Investment optimization in markets with capital gains taxes.
method Mathematical analysis of a specific market model with realistic tax rules.
result Closedness of attainable terminal wealth set under no unbounded non-substitutable investment condition.
Hybrid framework optimizes reinsurance using generative models and reinforcement learning.
problem Traditional reinsurance optimization relies on restrictive assumptions and static designs.
method Combines VAEs for joint distribution learning and PPO for dynamic treaty parameter adaptation.
result Hybrid method produces more resilient outcomes with higher surpluses and lower tail risk.
Study examines how insurance affects households prone to proportional losses, especially those near poverty.
problem Impact of insurance on households susceptible to proportional losses, focusing on poverty traps.
method Modelled proportional capital losses with insurance, derived closed formulae and non-local differential equations.
result New formulae and methods to calculate trapping probability, constraints on parameters to prevent certainty of trapping.
Proposes an efficient method for sparse index tracking with ℓ0-norm constraints.
problem Constructing a sparse portfolio to track a financial index.
method Formulates a new problem using ℓ0-norm constraints, develops an efficient algorithm based on primal-dual splitting. result Demonstrates effectiveness through experiments on S&P500 and Russell3000 datasets.
Based on a point of view that solvency and security are first, this paper considers regular-singular stochastic optimal control problem of a large insurance company facing positive transaction cost asked by reinsurer under solvency constraint. The company controls proportional reinsurance and dividend pay-out policy to…
The investment risk minimization problem with budget and return constraints has been the subject of research using replica analysis but there are shortcomings in the extant literature. With respect to Tobin's separation theorem and the capital asset pricing model, it is necessary to investigate the implications of a ri…
The paper analyzes bank decisions in a three-step model, focusing on equity and debt raising.
problem Bank decision-making in a three-time-step model with equity and debt raising.
method Theoretical analysis of raising new equity and debt, considering capital requirements and equity holders constraints.
result Raising equity and debt can increase or decrease return on equity, depending on specific cases.
The study examines how limited liability and haircut affect a bank's loan portfolio's liquidity risk.
problem Impact of limited liability and haircut on a bank's loan portfolio's liquidity risk.
method Constructed a novel loan portfolio model with limited liability and haircut constraint, analyzed at three time steps.
result Model with haircut constraint leads to lesser liquidity risk.
This paper considers nonlinear regular-singular stochastic optimal control of large insurance company. The company controls the reinsurance rate and dividend payout process to maximize the expected present value of the dividend pay-outs until the time of bankruptcy. However, if the optimal dividend barrier is too low t…
This study finds ESG rating disagreement reduces corporate productivity, especially in certain types of firms.
problem The impact of ESG rating disagreement on corporate productivity.
method Analysis of A-share listed companies data from 2015 to 2022 using XGBoost regression and SHAP.
result ESG rating disagreement reduces corporate productivity, especially in certain types of firms.
The paper refines and generalizes worst-case law invariant convex risk measures.
problem Developing robust convex risk measures under uncertainty sets.
method Generalizing closed forms for worst-case law invariant convex risk measures with uncertainty sets based on norms and moment constraints.
result Explicit closed forms for convex risk measures are developed and assessed through numerical simulations.
This paper studies the optimal dividend problem with capital injection under the constraint that the cumulative dividend strategy is absolutely continuous. We consider an open problem of the general spectrally negative case and derive the optimal solution explicitly using the fluctuation identities of the refracted-ref…
Mathematical model for focused investing reduces diversification risks.
problem Reduces diversification risks in focused investing portfolios.
method Generalized Kelly Criterion with constraints for optimal capital allocation.
result Software shows excessive diversification in real portfolios.
New method optimizes portfolios by dynamically integrating ESG constraints.
problem Static ESG scores mismatch sequential portfolio decisions.
method MACF-X, a family of adapters that learns ESG costs from multimodal evidence.
result Reduces tail ESG budget pressure while maintaining financial performance.
New method for insurance valuation combining hedging and risk minimization.
problem Current insurance valuation methods do not reflect regulatory risk measures.
method Two-step hedging procedure using generalised regression.
result The method produces portfolios neutral to risk measures like VaR or expectiles.
When assessing group solvency, an important question is to what extent intragroup transfers may be considered, as this determines to which extent diversification can be achieved. We suggest a framework to describe the families of admissible transfers that range from the free movement of capital to excluding any transac…
The paper extends Merton's problem by adding benchmark tracking, finding optimal strategies.
problem Maximizing consumption utility with a trade-off against benchmark performance.
method Developed a convex duality theorem and derived optimal strategies for specific cases.
result Found optimal portfolio and consumption strategies for CRRA utility and geometric Brownian motion benchmarks.
The paper explores capital allocation using Euler formula with VaR and ES, revealing non-monotonicity and providing estimation methods.
problem Non-monotonicity in VaR-based capital allocation and the need for consistent risk measures.
method Use of Euler formula, Value-at-Risk (VaR), Expected shortfall (ES), simulation, and Markov chain Monte Carlo.
result Capital allocation with VaR is not monotonous, and consistent risk measures are crucial.
Study finds stock prices rarely appreciate during capital inflows but often appreciate during normal flows.
problem Understanding stock price behavior during capital inflows and outflows.
method Identified capital flow episodes using threshold and k-means clustering; detected stock index changepoints using PELT method; combined results over identified capital flows.
result Stock prices rarely appreciate during capital inflows but often appreciate during normal flows.