News attention to financial intermediaries and crises predicts excess bond premium and macroeconomic movements.
problem Drivers of the excess bond premium (EBP).
method News attention to 180 topics captures up to 80% of EBP variation and forecasts macroeconomic movements.
result News attention to financial intermediaries and crises drives up the EBP and predicts macroeconomic downturns.
We present extensive evidence that ``risk premium'' is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit an approximately linear relation between the Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry,…
In the "positive interest" models of Flesaker-Hughston, the nominal discount bond system is determined by a one-parameter family of positive martingales. In the present paper we extend this analysis to include a variety of distributions for the martingale family, parameterised by a function that determines the behaviou…
Developing a climate-aware pricing framework for XL reinsurance and CAT bonds under non-stationary catastrophe risk.
problem Pricing excess-of-loss (XL) reinsurance and catastrophe (CAT) bonds under climate uncertainty.
method Modeling catastrophe arrivals as a Cox process with a temperature-dependent stochastic intensity and aggregate losses following a compound Cox structure.
result Climate dependence materially changes the loss-generation mechanism and affects the valuation of catastrophe-linked contracts.
Develops a bi-variate stochastic framework to model mortality and interest rates with long-range dependence.
problem Captures long-range dependence and instantaneous correlation in mortality and interest rates.
method Mixed fractional Brownian motions, analytical solutions, risk-neutral measure, sequential parameter estimation.
result Explicit pricing of zero-coupon bonds and extreme mortality bonds, practical implications for pricing and risk management.
Financial markets provide a natural quantitative lab for understanding some of the most advanced human behaviours. Among them is the use of mathematical tools known as financial instruments. Besides money, the two most fundamental financial instruments are bonds and equities. More than 30 years ago Mehra and Prescott f…
In this paper, we study an insurer's reinsurance-investment problem under a mean-variance criterion. We show that excess-loss is the unique equilibrium reinsurance strategy under a spectrally negative Lévy insurance model when the reinsurance premium is computed according to the expected value premium principle. Furthe…
We show that the martingale component in the long-term factorization of the stochastic discount factor due to Alvarez and Jermann (2005) and Hansen and Scheinkman (2009) is highly volatile, produces a downward-sloping term structure of bond Sharpe ratios, and implies that the long bond is far from growth optimality. In…
Study finds significant premium for low-beta stocks in firm-level idiosyncratic return distributions.
problem Understanding the role of common idiosyncratic quantile factors in asset pricing.
method Quantile factor analysis to extract common idiosyncratic quantile factors with asymmetric pricing effects.
result Significant premium for innovations to the lower-tail factor: high-beta stocks outperform low-beta stocks by around 7-8% per year.
Study finds it hard to establish common factor pricing in corporate bonds.
problem Difficulty in establishing common factor pricing in corporate bonds.
method Portfolio- and bond-level analyses using multifactor models.
result Common factor pricing in corporate bonds is not significantly explanatory.
New financial price model using earning yield derived from CIR process.
problem Excess volatility and equity premium puzzles in financial markets.
method Proposes a new financial price process based on earning yield and Cox-Ingersoll-Ross (CIR) process.
result Derives analytically stylized facts of financial prices and returns, including power law distribution of returns and fat-tailed distribution of prices.
The risk premium is one of main concepts in mathematical finance. It is a measure of the trade-offs investors make between return and risk and is defined by the excess return relative to the risk-free interest rate that is earned from an asset per one unit of risk. The purpose of this article is to determine upper and …
Cryptocurrency markets show higher spreads during extreme fear and greed phases.
problem Understanding and predicting liquidity withdrawal in cryptocurrency markets.
method Analysis of Crypto Fear & Greed Index and Bitcoin daily data.
result Extreme fear and greed regimes exhibit significantly higher spreads than neutral periods.
This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Under fairly general assumptions for the distribution of the total net assets of a set of firms we show that retaining the first few moments of the por…
Simple model uses time series momentum to outperform benchmarks in equity and bond markets.
problem Finding systematic excess returns in various markets.
method Time series momentum applied to multiple investable indices without complex parameter estimation.
result Significant outperformance in equity and bond markets, nearly doubling returns.
We present a new approach for the pricing of interest rate derivatives which allows a direct computation of option premiums without deriving a (Black-Scholes type) partial differential equation and without explicitly solving the stochastic process for the underlying variable. The approach is tested by rederiving the pr…
Optimal insurance contracts are designed to screen risk preferences and risk types under asymmetric information.
problem Designing optimal insurance contracts under asymmetric information and risk types.
method Constructing a menu of contracts that maximizes mean-variance utilities, subject to truth-telling constraints.
result Equilibrium contracts exhibit nonlinear pricing with decreasing risk loadings, inducing self-selection.
This paper analyzes extreme flooding risks and proposes insurance and bond solutions.
problem Severe rise in magnitude and frequency of floods causing catastrophic losses.
method Extremes analysis using Peaks-Over-Threshold method and Point Process model; Value-at-Risk (VaR) and Conditional VaR (CVaR) estimation; Flood zoning insurance and catastrophic bond design.
result Developed flood risk vulnerability and threat analysis considering geography and economic factors; Proposed flood zoning insurance and catastrophic bond design.
Machine learning helps estimate risk premiums of stocks without knowing their factors.
problem Estimate risk premiums of stocks without knowing their underlying factors.
method Used elastic-net machine learning to project stock returns onto peers and construct replicate portfolios.
result Unique stocks have higher SARP and excess returns than ubiquitous stocks.
Study finds carbon emissions affect stock value, but not bought emissions.
problem Determining if carbon emissions impact stock value and whether this is due to direct or indirect emissions.
method Fixed-effects analysis with propensity score weighting to control for selection bias.
result Firms with higher Scope 1 emissions have a statistically significant positive carbon premium, but Scope 2 emissions do not.
The paper assesses how equity tail risk impacts US Treasury bond returns.
problem The effects of equity tail risk on the US government bond market.
method Estimating equity tail risk using option-implied stock market volatility and assessing its predictive power in reduced-form regressions and a term structure model.
result Equity tail risk significantly predicts one-month excess returns on Treasuries.
The paper models stochastic interest rates for life insurance using phase-type distributions.
problem Modeling stochastic interest rates in life insurance with matrix approach.
method Integrates piecewise deterministic interest rates into a Markov jump process framework.
result Explicit formulas for reserves and future payments can be derived.
New method decomposes local projections to reveal historical drivers of estimates.
problem Uncertainty in interpreting local projections due to black-box nature.
method Decomposes LP estimates into contributions of historical events, interpreting weights as shocks and proximity scores.
result Dominant historical events drive impulse response estimates, revealing underlying mechanisms.
The paper proposes a method for predicting equity premium using penalized quantile regression.
problem Heteroscedasticity and heavy-tails in equity premium prediction.
method Penalized quantile regression with consistent variable selection across multiple quantiles.
result The proposed method outperforms benchmark methods and reveals interesting predictor relationships.
We review different approaches for measuring the impact of liquidity on CDS prices. We start with reduced form models incorporating liquidity as an additional discount rate. We review Chen, Fabozzi and Sverdlove (2008) and Buhler and Trapp (2006, 2008), adopting different assumptions on how liquidity rates enter the CD…
Study finds high cyber risk stocks generate significant excess returns.
problem Understanding and quantifying cyber risk's impact on stock returns.
method Machine learning algorithm measuring cyber risk proximity to a corpus.
result High cyber risk stocks generate an excess return of 18.72% p.a.
We study an asset allocation stochastic problem with restriction for a defined-contribution pension plan during the accumulation phase. We consider a financial market with stochastic interest rate, composed of a risk-free asset, a real zero coupon bond price, the inflation-linked bond and the risky asset. A plan member…
This paper examines momentum spillover across multiple asset classes using only pricing data.
problem Challenges in studying momentum spillover across diverse asset classes due to lack of common characteristics.
method Utilised a linear and interpretable graph learning model to reveal momentum spillover network.
result Network momentum strategy yields a Sharpe ratio of 1.5 and an annual return of 22%.
We decompose the squared price-of-risk premium into three components: intervention-stable premium, confounding wedge, and information loss.
problem Decomposing the squared price-of-risk premium into its components
method Identifying an order-three obstruction to aggregation across portfolios
result The decomposition is estimable and detectable with a permutation-calibrated screen
Basel III introduces new capital charges for CVA. These charges, and the Basel 2.5 default capital charge can be mitigated by CDS. Therefore, to price in the capital relief that CDS contracts provide, we introduce a CDS pricing model with three legs: premium; default protection; and capital relief. If markets are compl…
In his stimulating article on the reasons for two puzzling observations about the behaviour of interest rates, exchange rates and the rate of inflation, Charles Engel (2016) puts forward an explanation that rests on the concept of a non-pecuniary liquidity return on assets. Albeit intriguing the analysis struggles to a…
This paper measures the intensity of implicit government guarantees using PMC index model.
problem Excessive local government debt due to implicit government guarantees.
method Text mining of policy documents related to municipal investment bonds, PMC index model.
result Recent policies have reduced the intensity of implicit government guarantees.
This paper analyzes a game between insurer and reinsurer under ambiguity and risk aversion, optimizing reinsurance and investment strategies.
problem Optimizing reinsurance and investment strategies in a game between insurer and reinsurer under ambiguity and risk aversion.
method Stackelberg game, α-maxmin mean-variance criterion, Heston's stochastic volatility, Hamilton-Jacobi-Bellman equations, Riccati differential equations. result Excess-of-loss reinsurance is optimal for the insurer, and the equilibrium strategies are determined by specific equations.
This paper examines how ESG factors influence sovereign bond yields and credit ratings.
problem The impact of ESG factors on sovereign bond yields and credit ratings is not fully understood.
method The study identifies relevant ESG indicators and compares their importance in bond pricing and credit ratings.
result ESG factors, particularly the G and S pillars, are more important for credit ratings than the E pillar.
Study optimal reinsurance strategies in a game between insurer and two reinsurers.
problem Optimal reinsurance strategies in a competitive market.
method Stochastic game theory, Stackelberg model, Nash game, time-inconsistent control problem, extended Hamilton-Jacobi-Bellman equation.
result Equilibrium reinsurance strategies and premiums found for exponential claim size.
Study analyzes FIT schemes under market and regulatory uncertainty.
problem Tackles uncertainty in feed-in tariffs and their impact on investment thresholds.
method Uses semi-analytical real options framework to model and compare FIT schemes.
result Increasing regulatory uncertainty lowers investment thresholds for FIT schemes.
Parametric insurance offers better risk-sharing in high-risk settings than traditional indemnity insurance.
problem High-risk environments where traditional indemnity insurance is unaffordable or ineffective.
method Comparison of excess-of-loss indemnity insurance and parametric insurance within a mean-variance framework, considering fixed costs and binding budget constraints.
result Parametric insurance yields higher welfare for risk-averse individuals, especially when indemnity insurance is impractical.
In this paper, we study an optimal excess-of-loss reinsurance and investment problem for an insurer in defaultable market. The insurer can buy reinsurance and invest in the following securities: a bank account, a risky asset with stochastic volatility and a defaultable corporate bond. We discuss the optimal investment …
The paper calculates how fast optimal investment strategies approach CRRA strategies in stochastic factor models.
problem Understanding convergence rates of optimal investment strategies in stochastic factor models.
method Analyzes optimal feedback functions in nonlinear and quadratic term structure models, considering decay of bond prices and power-like utility at high wealth levels.
result Convergence rates of optimal investment strategies to CRRA strategies are determined by bond price decay and power-like utility behavior.
Improved financial market calibration reveals large excess volatility.
problem Large excess volatility in financial markets.
method Extended Chiarella model to handle long-term value drifts, calibrated on multiple asset classes.
result Large excess volatility (factor ≈ 4 for stock indices) and bimodal mispricing distribution.
The paper analyzes a five-factor capital market model and facilitates exact simulation.
problem Analyzing and simulating a five-factor capital market model.
method Using a Vasicek interest rate model, mean-reverting excess return, and realized inflation with expectation, the paper derives the necessary distributional results and describes practical methods to overcome rank deficiency.
result Exact simulation from the model can be achieved by sampling from a seven-dimensional normal distribution.
The study reveals unspanned risks in equity option risk premiums, explaining negative premiums for certain options.
problem Explaining negative risk premiums for certain equity option types.
method Developed a decomposition of equity option risk premiums, operationalized the pricing kernel process, and incorporated unspanned risks.
result Empirical evidence supports the presence of unspanned risks, explaining negative risk premiums for certain options.
The paper is motivated by a problem concerning the monotonicity of insurance premiums with respect to their loading parameter: the larger the parameter, the larger the insurance premium is expected to be. This property, usually called loading monotonicity, is satisfied by premiums that appear in the literature. The inc…
A heat kernel approach is proposed for the development of a general, flexible, and mathematically tractable asset pricing framework in finite time. The pricing kernel, giving rise to the price system in an incomplete market, is modelled by weighted heat kernels which are driven by multivariate Markov processes and whic…
Examines US equity risk premiums amid COVID-19.
problem Analyzing equity risk premiums during the pandemic.
method Not specified in the abstract.
result Not specified in the abstract.
We establish the existence of anomalous excess returns based on trend following strategies across four asset classes (commodities, currencies, stock indices, bonds) and over very long time scales. We use for our studies both futures time series, that exist since 1960, and spot time series that allow us to go back to 18…
A new insurance and reinsurance pricing scheme based on realized loss.
problem Determining fair and risk-adjusted insurance premiums.
method Performance-based variable premium scheme with random initial premium adjusted based on realized loss.
result The variable premium scheme reduces reinsurer's total risk exposure compared to expected-value premium.
Joint replacement is the most common inpatient surgical treatment in the US. We investigate the clinical pathway optimization for knee replacement, which is a sequential decision process from onset to recovery. Based on episodic claims from previous cases, we view the pathway optimization as an intelligence crowdsourci…