We show that sudden and large price moves in bitcoin prices, which we call jumps, explain a large portion of the variation in bitcoin returns. In order to do so, we use the general utility specification adopted in Maheu et al. (2013) for characterizing the conditional mean of daily bitcoin...

Classic option pricing theory values a derivative contract via dynamic replication, and views the derivative as redundant relative to the replicating portfolio. In practice, while dynamic replication proves highly effective in drastically reducing the risk in derivative investments, the...

This paper investigates US Treasury market volatility and develops new ways of dealing with the underlying interest rate volatility risk. We adopt an innovative approach which is based on a class of model-free interest rate volatility (VXI) indices we derive from options traded on the CBOE. The...

This paper examines derivatives use of foreign exchange, interest rate and commodities risk by non-financial firms across multiple industries, using data from 1995 to 2001. This paper considers the interaction of a firm's risk exposures, derivatives use, and real operations simultaneously, and...

This paper derives two new improved risk metrics LAPVaR and LAPSF. Traditional VaRDeltaNormal valuation exaggerates market and liquidity risks to the point it could be larger than the actual portfolio value. Put VaR – PVaR – as well as Put Shortfall – PSF – uses option theory to solve...

In aftermath of the Financial Crisis, some risk management practitioners advocate wider adoption of Bayesian inference to replace Value-at-Risk (VaR) models for minimizing risk failures (Borison & Hamm, 2010). They claim reliance of Bayesian inference on subjective judgment, the key limitation...

The financial crisis of 2007 has triggered various debates, ranging from the stability of the banking system to subtle technical issues regarding the Gaussian and other copulas. All these debates are important, and it might be good to start even a further one: Credit derivatives have much in...

The aim of this paper is to present model risk situations and a methodology to measure and quantify the associated risk at model level, with different types of assumptions. Then, considering that in practice, a model risk management at model level is hardly feasible, this paper also outlines a...

The purpose of this study is to assess model risk with respect to parameter estimation for a simple binary logistic regression model applied as a predictive model. The assessment is done by comparing the effectiveness of eleven different parameter estimation methods. The results from the...

Analytical portfolio risk calculations can be derived and computed in matrix form. Since the inputs are linear asset returns, the calculation outputs as percentages, eg, Portfolio Analytical VaR would be a percentage itself and not a dollar number. Marginal Contributions and Expected Shortfall...