An Zeng, Stefano Battiston, The Multiplex Network of EU Lobby Organizations, In: SSRN, No. 2571869, 2015. (Working Paper)
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Andreas Karpf, Antoine Mandel, Stefano Battiston, A network-based analysis of the European Emission Market, In: Documents de travail du Centre d'Economie de la Sorbonne, No. 2015.84, 2015. (Working Paper)
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Stefano Battiston, Guido Caldarelli, Robert May, Tarik Roukny, Joseph Stiglitz, The Price of Complexity in Financial Networks, In: Columbia Business School Research Paper, No. No. 15-49, 2015. (Working Paper)
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Stefano Battiston, Antoine Mandel, Irene Monasterolo, Franziska Schuetze, Gabriele Visentin, A Climate Stress-Test of the EU Financial System, In: SSRN, No. 2726076, 2016. (Working Paper)
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Tarik Roukny, Stefano Battiston, Joseph E Stiglitz, Interconnectedness as a source of uncertainty in systemic risk, In: SSRN, No. 2726631, 2016. (Working Paper)
Financial networks have shown to be important in understanding systemic events in credit markets. In this paper, we investigate how the structure of those networks can affect the capacity of regulators to assess the level of systemic risk. We introduce a model to compute the individual and systemic probability of default in a system of banks connected in a generic network of credit contracts and exposed to external shocks with a generic correlation structure. Even in the presence of complete knowledge, we identify conditions on the network for the emergence of multiple equilibria. Multiple equilibria give rise to uncertainty in the determination of the default probability. We show how this uncertainty can affect the estimation of systemic risk in terms of expected losses. We further quantify the effects of cyclicality, leverage, volatility and correlations. Our results are relevant to the current policy discussions on new regulatory framework to deal with systemic events of distress as well as on the desirable level of regulatory data disclosure. |
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Marco Bardoscia, Stefano Battiston, Fabio Caccioli, Guido Caldarelli, Pathways towards instability in financial networks, In: ArXiv.org, No. 1602.05883, 2016. (Working Paper)
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Urs Birchler, René Hegglin, Michael Rudolf Reichenecker, Alexander Wagner, Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks, In: Swiss Finance Institute Research Paper, No. 16-28, 2017. (Working Paper)
Wealth management constitutes an important aspect of today's banking world, but very little is known about what explains the differences among banks in their ability to attract new assets under management. Using a unique panel database of Swiss private banks, we test the hypothesis that the performance of a bank in attracting new money depends on two input factors: skill and reputation. Relatively skilled banks -- that is, banks that are more cost-efficient than predicted by their input factors -- also perform better in attracting net new money. We also find that negative media coverage (such as in the context of fraudulent business practices related to tax evasion) strongly diminishes the future ability to attract assets under management, especially at small banks. The present value of lost profits is 3.35 (0.73) times the median annual net profit of a small (large) bank. Thus, adding to the explicit fines that many Swiss banks had to pay in the course of the U.S. Department of Justice's investigations, there are substantial implicit and reputational costs to banks of having negative media coverage. Investment performance for clients seems not to explain future net new money growth. In sum, these results underscore the importance of trust in money management. |
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Stefano Battiston, James Glattfelder, Evolving Power-Structures: The Network of Global Economic Influence, In: -, No. -, 2016. (Working Paper)
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Marc Chesney, Nikola Vasiljevic, Québécoisation method for the pricing of Parisian options with jump risk, No. -, 2016. (Working Paper)
In this paper, a new technique for pricing of European and American Parisian options, that we call the québécoisation method, is developed. We study the pricing of Parisian options in a hyper-exponential jump-diffusion model using the double Laplace-Carson transform with respect to the time to maturity and the residual Parisian time (time to expiration of the Parisian window) of the system of two partial integro-differential equations describing the option price dynamics. The transformed, i.e., québécoised, option price and hedging parameters delta and gamma are computed in a closed form, and the final results are obtained via the two-dimensional Gaver-Stehfest inversion algorithm. Our pricing method is analytically tractable, and it provides important economic insights for pricing and hedging of European and American Parisian options in the presence of jumps. |
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Boris Wälchli, A Proximity Based Stress Testing Framework, In: SSRN, No. 2660498, 2015. (Working Paper)
In this a paper a non-linear macro-stress testing methodology with focus on early warning is developed. The methodology builds on a variant of Random Forests and its proximity measures. It develops a framework in which naturally defined contagion and feedback effects transfer the impact of stressing a relatively small part of the observations on the whole dataset and thus allow to estimate the a stressed future state. It will be shown that contagion can be directly derived from the proximities while iterating the proximity based contagion leads to naturally defined feedback effects. This procedure allows accurate forecast of events under stress and thus allows to forecast the emergence of a potential crisis. The framework also estimates a set of the most influential economic indicators leading to the potential crisis, which can then be used as indications of remediation or prevention of that crisis. Since the methodology is Random Forests based the framework is suitable for big data analysis. |
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Michel Habib, Fabrice Collard, Jean-Charles Rochet, Optimal Sovereign Debt under Excusable Default, In: -, No. -, 2016. (Working Paper)
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Michel Habib, Richard Brealey, Ian Cooper, Valuation in the Public and Private Sectors: Tax, Risk and the Cost of Capital, In: -, No. -, 2016. (Working Paper)
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Michel Habib, D Bruce Johnsen, Hedging and Information in Forward and Option Contracts, In: -, No. -, 2016. (Working Paper)
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Boris Wälchli, A Random Forests Based Performance Ratio for Regulatory Asset Portfolio Management and Optimization, In: SSRN, No. 2550072, 2015. (Working Paper)
The following paper proposes a portfolio performance measure to optimize, mostly bond asset portfolios usually held for regulatory purposes from a risk focused perspective. The measure is based on variations of the proximity measure introduced by the Random Forests framework, leading to a proximity based performance ratio. The proximities are modeled using a recursive conditional partitioning type of Random Forests, which allows for a ranking as well as an analysis of the risk drivers of the portfolio performance. The proximity based performance ratio is shown to, on average, outperform nine different and commonly known risk and performance ratios as well as the 1/N-balanced portfolio in three different tests, in- and out of the sample. The proximity based performance ratio can consider a large amount of risk rivers and is suitable for big data analysis for big and small financial institutions. |
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Michel Habib, Multifaceted Transactions, Incentives, and Organizational Form, In: CEPR Discussion Paper, No. DP10432, 2015. (Working Paper)
When not every facet of a transaction can be contracted upon and transacting parties' payoffs are asymmetric, low-powered incentives for those facets of the transaction that can be contracted upon may be necessary to avoid too large a distortion in those facets that cannot be contracted upon (Barzel, 1982, 1997; Hansmann, 1996; Holmstrom and Milgrom, 1991). Distinguishing between different types of capital (financial, physical, intangible), different forms of incentives (performance pay, organizational form, ownership), and different transacting pairs (manager/shareholder, supplier/buyer, customer/firm), and using a model of investment developed by Falkinger (2014), we extend the preceding insight to explain partnerships, mutuals, cooperatives, government ownership, and vertical integration. Distinguishing between resource allocation and resource creation, we show that resource creation calls for higher powered incentives than does resource allocation. Allowing for diversification-induced economies of scale in the use of capital, we establish the result that larger, more diversified firms offer higher-powered incentives. Finally, allowing for the partial contractibility of investment and the use of capital, we show that the former decreases the power of incentives whereas the latter increases that power, thereby providing a combined explanation for the Nineteenth- and Twentieth-Century rise of large military and civilian bureaucracies and the more recent outsourcing of products and services previously sourced internally. Our results suggest that the recognition of the multiple facets of most transactions can help explain numerous institutional arrangements, as well as the apparent lack of disadvantage of low-powered-incentives organizations competing with their high-powered-incentives counterparts (Bohren and Josefsen, 2013; Hansmann and Thomsen, 2012). |
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Fulvia Fringuellotti, Ciprian Necula, A Generalized Bachelier Formula for Pricing Basket and Spread Options, In: SSRN, No. 2698307, 2015. (Working Paper)
In this paper we propose a closed-form pricing formula for European basket and spread options. Our approach is based on approximating the risk-neutral probability density function of the terminal value of the basket using a Gauss-Hermite series expansion around the Gaussian density. The new method is quite general as it can be applied for a basket with a large number of assets and for all dynamics where the joint characteristic function of log-returns is known in closed form. We provide a simulation study to show the accuracy and the speed of our methodology. |
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Felix Kübler, Simple ε-equilibria in stochastic economies with overlapping generations, In: -, No. -, 2015. (Working Paper)
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Johannes Brumm, Felix Kübler, Simon Scheidegger, Computing equilibria in dynamic stochastic macromodels with heterogeneous agents, In: -, No. -, 2015. (Working Paper)
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Johannes Brumm, Dominika Kryczka, Felix Kübler, Recursive equilibria in dynamic economies with stochastic production, In: s.n., No. n/a, 2014. (Working Paper)
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Karl Schmedders, Walter Edward Pohl, Ole Wilms, Higher-order dynamics in asset-pricing models with recursive preferences, In: Swiss Finance Inst, No. 14-68, 2015. (Working Paper)
This paper presents an analysis of the higher-order dynamics of key financial quantities in asset-pricing models with recursive preferences. For this purpose, we first describe a projection-based algorithm for solving such models. The method outperforms common methods like discretization and log-linearization in terms of effciency and accuracy. Our algorithm allows us to document the presence of strong nonlinear effects in the modern long-run risks models which cannot be captured by the common methods. For example, for a prominent recent calibration of a popular long-run risks model, the log-linearization approach overstates the equity premium by 100 basis points or 22.5%. The increasing complexity of state-of-the-art asset-pricing models leads to complex nonlinear equilibrium functions with considerable curvature which in turn have sizable economic implications. Therefore, these models require numerical solution methods, such as the projection methods presented in this paper, that can adequately describe the higher-
order equilibrium features. |
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