The Modern Portfolio Theory (MPT) has been the cornerstone of the asset allocation for over 40 years. In the past decade though, it led in a rather systematic way to bad investments decisions. One of MPT's main assumptions, investor risk aversion that translates into volatility aversion, biases...

In this paper we introduce a novel approach to risk estimation based on nonlinear factor models - the StressVaR (SVaR). Developed to evaluate the risk of hedge funds, the SVaR appears to be applicable to a wide range of investments. The computation of the StressVaR is a 3 step procedure whose...

We model the yield curve in any given country as an object lying in an infinite-dimensional Hilbert space, the evolution of which is driven by a "cylindrical Brownian motion". We assume that volatilities and correlations do not depend on rates (which hence are Gaussian). We prove that a...

Modeling counterparty risk is computationally challenging because it requires the simultaneous evaluation of all the trades with each counterparty under both market and credit risk. We present a multi-Gaussian process regression approach, which is well suited for OTC derivative portfolio...

In this paper, we prove that the conditional dependence structure of default times in the Markov model of "A Bottom-Up Dynamic Model of Portfolio Credit Risk. Part I: Markov Copula Perspective" belongs to the class of Marshall-Olkin copulas. This allows us to derive a factor representation in...

We devise simulation/regression numerical schemes for pricing the CVA on CDO tranches, where CVA stands for Credit Valuation Adjustment, or price correction accounting for the defaultability of a counterparty in an OTC derivatives transaction. This is done in the setup of a continuous-time...

In "Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model", the authors introduced a Markov copula model of portfolio credit risk where pricing and hedging can be done in a sound theoretical and practical way. Further theoretical backgrounds and practical details are developed in "A...