Michel Gendron

The Advent of Copulas in Finance

The authors provide bibliometric evidence to illustrate the development of copula theory in mathematics, statistics, actuarial science and finance. They identify the main contributors to the field, and the most important areas of application in finance. They also describe some of the remaining methodological challenges.

On Financial Guarantee Insurance under Stochastic Interest Rates

We extend the financial guarantee insurance literature by modeling, under stochastic interest rates, private financial guarantees when the guarantor potentially defaults. By performing numerical simulations under plausible parameters values, we characterize the differential impact of the incorporation of stochasticity of interest rates on the valuation of both public and private guarantees.

On the computation of the aggregate claim distribution when individual claims are Inverse Gaussian

Abstract This paper investigates how various approximations to the distribution, F(x,t), of aggregate claims compare with exact values obtained from numerical methods when individual claims are Inverse Gaussian.

An Analysis of Portfolios of Insured Debts

This article analyzes multi-year risk management decisions in portfolios of insured debts or credit insurance. This is done by investigating risk reduction through portfolio diversification, increased insuring capacity and changes in contracts maturities. We propose a contingent-claims model that includes many realistic features such as coupon payments, stochastic interest rate and stochastic cash flows volatility. We distinguish between two types of portfolios: ‘closed’ and ‘opened’. We find that for a given riskiness level of insurers capital, an optimal value of credit insurance can be obtained by appropriate risk diversification and/or increased insurers capital. Our simulation results show that for insurers with high risk exposure, portfolio risk diversification is more effective than increasing insuring capacity. For a creditworthy insurer, increasing the size of the insurer’s capital can lead to significant improvement in the value of the credit insurance portfolio. This suggests that alternative risk transfer techniques, which provide synthetic (or contingent) capital to the insurer, should be considered in an integrated risk management.

Hedging Flood Losses Using Cat Bonds

Abstract In this paper, we develop a methodology to model the risk of losses resulting from a natural disaster in which the intensity parameter of the non-homogeneous Poisson process has an upward trend and a seasonal component. We apply this model to losses due to floods in the Financial Assistance Program of the Government of Quebec (Canada). We use the historically observed risk premiums to assess the financial costs for the government if it had issued such instruments to hedge risk linked to floods.

Project Finance with Limited Recourse: An Option Pricing Approach to Debt Capacity and Project Risk

Project finance has become an important method for financing large-scale, capital-intensive projects, such as power plants, oil pipelines, roads, tunnels, etc. We analyze debt capacity and risk choice in a project finance arrangement where the projects lenders have limited recourse to the sponsoring companys assets. We draw a parallel between vulnerable financial guarantee loans and project finance loans with limited recourse. Using contingent claims analysis, we illustrate the trade-offs between risk and debt capacity in those cases where the projects lenders have recourse to the sponsors assets and in those where they do not.

The Effect of Brokers on the Dynamics of a Walrasian Auction

We study the effect of the presence of brokers in an experimental exchange market using the Walrasian tâtonnement mechanism. We find that brokers tend to act as liquidity providers, submitting orders likely to equilibrate supply and demand given the orders they receive from other participants. As a result, average excess demand and prices are less volatile, and markets reach equilibrium more often, when brokers are present compared with the case without brokers. Brokers’ liquidity-providing behavior is more pronounced when their compensation includes, in addition to their trading profit, a component related to trading volume when equilibrium is reached. Under-revelation, a strategic behavior inherent to Walrasian auctions, is about the same with and without brokers when markets clear, yielding similar levels of market efficiency, measured as total surplus divided by potential surplus.

Title insurance and the “race to the bottom”

Purpose – The purpose of this paper is to use a stylised multi‐period model to describe the economic dynamics related to title risks and the implications of title insurance in the risk management decision process. Some fear that insofar as the quality of public records is concerned, the purchase of title insurance might induce a race to the bottom that would reduce the possibility to identify and correct title defects. This phenomenon is illustrated and the impact of different title risk management strategies and conditions under which recourse to lawyers is preferable to the purchase of title insurance are examined.Design/methodology/approach – The main source of risk is the disparity between the characteristics of a property and what is written on its title. The choice of a title risk management strategy is modeled as the probability of hiring a lawyer versus that of buying insurance. Consistent with the literature, the deterioration of public records is made a function of the risk management decisions....