We present an approach to market-consistent multi-period valuation of insurance liability cash flows based on a two-stage valuation procedure. First, a portfolio of traded financial instrument aimed at replicating the liability cash flow is fixed. Then the residual cash flow is managed by repeated one-period replicatio…
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26 results for “cost-of-capital”
This study examines how risky investments affect insurance capital valuation.
problem Standard cost-of-capital assumptions do not account for risky investments.
method Analyzed effects of allowing buffer capital investments in risky assets.
result Decomposition of buffer capital contributions varies with riskiness.
Proposes a new method for determining LGD discount rates based on cost of capital.
problem Determining an appropriate discount rate for LGD estimation.
method Market-consistent pricing of defaulted loan portfolios to infer discount rates.
result Discount rates reflect both undiversifiable risk and time value of money.
Dynamic reinsurance minimizes insurer's cost of capital over time.
problem Minimizing insurer's cost of capital in a dynamic reinsurance setting.
method Dynamic extension of the static optimal reinsurance problem, viewed as a risk-sensitive Markov Decision Process.
result Existence of a stationary Markovian optimal reinsurance policy under an infinite planning horizon.
A new XVA strategy rooted in balance sheet perspective improves equity process for bank shareholders.
problem Counterparty risk valuation adjustments (XVAs) in financial derivatives.
method Develops a cost-of-capital XVA strategy in a balance sheet perspective, solving explicitly in static setup and dynamically in trade context.
result Ensures a submartingale equity process corresponding to a target hurdle rate on capital at risk.
The paper uses LSM to solve complex monetary utility functions.
problem Computing dynamic monetary utility functions with high dimensions.
method Least Squares Monte Carlo (LSM) algorithm.
result LSM algorithm successfully applied to recursive Cost-of-Capital valuation.
We discuss and clarify the XVA modelling framework specified in the paper "MVA by replication and regression" (Risk Magazine, May 2015) for including bilateral credit risk and funding costs in derivative pricing, and in doing so we rectify two key errors in the valuation adjustments accounting for costs of capital and …
Credit (CVA), Debit (DVA) and Funding Valuation Adjustments (FVA) are now familiar valuation adjustments made to the value of a portfolio of derivatives to account for credit risks and funding costs. However, recent changes in the regulatory regime and the increases in regulatory capital requirements has led many banks…
Recent theoretical results establish that time-consistent valuations (i.e. pricing operators) can be created by backward iteration of one-period valuations. In this paper we investigate the continuous-time limits of well-known actuarial premium principles when such backward iteration procedures are applied. We show tha…
Optimal financing and dividend distribution in a general diffusion model with regime switchingmath.OC
We study the optimal financing and dividend distribution problem with restricted dividend rates in a diffusion type surplus model where the drift and volatility coefficients are general functions of the level of surplus and the external environment regime. The environment regime is modeled by a Markov process. Both cap…
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…
In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. Here XVA is a catch-all acronym whereby X is replaced by a letter such as C for credit, D for debt, F for funding, K for capital and so on, and VA stands…
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…
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.
The purpose of this research article is to discover how the econophysics analysis can complement the econometrics models in application to the risk management in the central banks and financial institutions, operating within the nonlinear dynamical financial system. We consider the modern risk management models and sho…
PDLPs reduce borrowing costs for perpetual futures traders.
problem High capital costs for market makers and traders in decentralized settings.
method Formalize PDLPs and target weight mechanisms, describe pool arbitrage and expected payoffs.
result PDLPs are easy to delta hedge, improving capital efficiency.
Study minimizes risk in MDPs with spectral measures.
problem Minimizing risk in MDPs with spectral measures.
method Splitting into inner and outer minimization problems; solving inner as MDP; proving existence for outer.
result Existence and solution methods for the outer minimization problem.
Model shows how Ethereum can capture MEV from block construction, but centralization remains a concern.
problem Ethereum's ability to capture MEV from block construction.
method Economic model of Execution Tickets to study MEV extraction.
result MEV capture decreases with risk aversion and capital costs, and can be low with heterogeneous buyers.
We study a singular stochastic control problem faced by the owner of an insurance company that dynamically pays dividends and raises capital in the presence of the restriction that the surplus process must be above a given dividend payout barrier in order for dividend payments to be allowed. Bankruptcy occurs if the su…
Framework for realistic insurance liability valuation.
problem Economic realism in insurance liability valuation.
method Replication approach of no-arbitrage theory, considering capital and fulfillment conditions.
result Identifies conditions for market price recovery and extends production for insolvency.
Model shows how financial markets can decarbonize under climate uncertainty.
problem Decarbonization of financial markets under climate uncertainty.
method Mean-field game approach to model firm decisions and investor interactions.
result Climate uncertainty weakens the impact of green-minded investors on decarbonization.
A Kalman filter reduces valuation risk in business valuation models.
problem Reducing valuation risk in business valuation models.
method Recursive FCFF model with Kalman filtering to adjust WACC.
result Significant reduction in valuation risk by implementing Kalman filter.
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.
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.
This paper investigates market-consistent valuation of insurance liabilities in the context of, for instance, Solvency II and to some extent IFRS 4. We propose an explicit and consistent framework for the valuation of insurance liabilities which incorporates the Solvency II approach as a special case. The proposed fram…
Model investor risk preferences to adjust real option valuation.
problem Investor risk preferences impact real option valuation.
method Model investor heterogeneity with different required returns, discounting cash flows with investor and market rates.
result Risk-adjusted valuation model facilitates subjective decision making.