Under the advanced internal ratings-based (AIRB) approach, the banks are allowed to use their internally developed models for probability of default (PD), exposure at default (EAD) and loss given default (LGD) parameters. According to the Basel II Accord (2004), the potential over-optimism of...

We use extreme value theory to study idiosyncratic tail risk for a large panel of US stocks. Surprisingly, calls and puts contain important information about the lower and upper tails, respectively. Furthermore, the direction of this information is often wrong: Over prolonged periods of time,...

We characterize the extreme points of first-order stochastic dominance (FOSD) intervals and show how these intervals are at the heart of many topics in economics. Using knowledge of these extreme points, we characterize the distributions of posterior quantiles under a given prior, leading to an...

This paper proposes a general method to recover the subjective probability distribution of nonlinear payoffs from option prices. We show that the characteristic function of the distribution can be represented as the present value of a static option portfolio with complex-valued portfolio...

We propose and experimentally test a new theory of probability distortions in risky choice. The theory is based on a core principle from neuroscience called efficient coding, which states that information is encoded more accurately for those stimuli that the agent expects to encounter more...

Loss aversion, risk aversion, and the probability weighting function (PWF) are three central concepts in explaining decisionmaking under risk. I examine interlinkages between these concepts in a model of decisionmaking that allows for loss averse/tolerant stochastic reference dependence and...

One of the key decisions in execution strategies is the choice between a passive (liquidity providing) or an aggressive (liquidity taking) order to execute a trade in a limit order book (LOB). Essential to this choice is the fill probability of a passive limit order placed in the LOB. This paper...

The potential cure of a defaulted company affects the estimation of the loss given default (LGD), as specific LGD values are associated with defaulted and subsequently cured companies. This study estimates the probability of defaulted company being cured on the basis of data from a large...