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Risk aversion has been treated by traditional finance as a stable input that was more useful to match the investors’ needs than a real driver for the financial markets. With the development of behavioural finance, some analysts tried to use this metric to improve their predictions over the markets. However, risk aversion is hard to aggregate. Most early attempts to find a relevant risk aversion of the market as a whole failed.
In the early 2000’s, researchers started focusing on the derivatives markets to improve the measurement of the representative investor’s attitude toward risk. Since hedges are possible over options, they can be used to create risk-neutral market expectations at a maturity. These expectations can be interpreted as probability density function by using different processes. Once these risk neutral density functions are created, it can be compared to the actual view of the representative investor over the market at the same maturity. The variation between the risk-neutral and the subjective densities can be interpreted as a proxy of the marginal rate of substitution at maturity. From this relation, the relative risk aversion of the market can be calculated. 
Unfortunately, the process to create the risk neutral density requires consequent amount of data. In this thesis, the focus is done on the creation of a coefficient that can be computed with less statistics. The information is not processed from every option price but from the implied volatility index of an underlying market index. Distribution is parametrized, and the risk aversion can be computed with only two variables per date. However, this simplification is lowering the accuracy of the created coefficient. In the second part of the thesis, the explanatory power of the simplified metric is evaluated through linear regressions. The goal is to assess the impact of the simplification process. 
The results are mixed. The created coefficients are able to explain a significant part of the returns of the index. But more could have been expected regarding the fact that this risk aversion metric is using ex-post information.

Risk aversion --- Implied volatility --- VIX --- risk-neutral density function --- Behavioural finance --- Sciences économiques & de gestion > Finance

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This paper has been prepared for policy makers interested in establishing or strengthening financial strategies to increase the financial response capacity of governments of developing countries in the aftermath of natural disasters, while protecting their long-term fiscal balances. It analyzes various aspects of emergency financing, including the types of instruments available, their relative costs and disbursement speeds, and how these can be combined to provide cost-effective financing for the different phases that follow a disaster. The paper explains why governments are usually better served by retaining most of their natural disaster risk while using risk transfer mechanisms to manage the excess volatility of their budgets or access immediate liquidity after a disaster. Finally, it discusses innovative approaches to disaster risk financing and provides examples of strategies that developing countries have implemented in recent years.

Banks & Banking Reform --- Capital market development --- Debt Markets --- Developing countries --- Disbursement --- Emergency financing --- Environment --- Finance and Financial Sector Development --- Financial institutions --- Financial instruments --- Global capital --- Global capital market --- Government budget --- Hazard Risk Management --- Indebtedness --- Insurance --- Insurance & Risk Mitigation --- International bank --- International financial markets --- Liquidity --- Natural disaster --- Natural Disasters --- Public investment --- Returns --- Risk management --- Risk neutral --- Urban Development

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June 1999 - When will a landlord prefer to supply both land and credit to a tenant rather than allow the lender to borrow from a separate moneylender? The paper shows that if tenancy contracts are obtained prior to contracting with the moneylender, and the tenant has limited liability, interlinked deals will predominate over the alternative situation where the landlord and the moneylender act as noncooperative principals. Basu, Bell, and Bose analyze the example of a landlord, a moneylender, and a tenant (the landlord having access to finance on the same terms as the moneylender). It is natural to assume that the landlord has first claim on the tenant's output (as a rule, if they live in the same village, he may have some say in when the crop is harvested). The moneylender is more of an outsider, not well placed to exercise such a claim. A landless, assetless tenant will typically not get a loan unless he has a tenancy. Without interlinkage, the landlord is likely to move first. In the noncooperative sequential game where the landlord is the first mover and also enjoys seniority of claims if the tenant defaults, interlinkage is superior, even if contracts are nonlinear - a result unchanged with the incorporation of moral hazard. The main result is that if a passive principal - one whose decisions are limited to exercising his property rights to determine his share of returns - is the first mover, allocative efficiency is impaired unless his equilibrium payoffs are uniform across states of nature. The limited liability of the tenant creates the strict superiority of interlinkage by making uniform rents nonoptimal when, with noncollusive principals, the landlord (the passive principal) is the first mover. A change in seniority of claims from the first to the second mover (the moneylender) further strengthens this result. But uniform payoffs for the first mover are not essential for allocative efficiency if he is the only principal with a continuously variable instrument of control. So, the main result is sensitive to changes in the order of play but not to changes in the priority of claims. This paper - a product of the Office of the Senior Vice President and Chief Economist, Development Economics - is part of a larger effort in the Bank to understand the institutional structure of rural markets and its welfare implications. The authors may be contacted at kbasu@worldbank.org, clive.bell@urz.uni-heidelberg.de, or psbose@cc.memphis.edu.

Amount Of Cred Borrower --- Contract Law --- Contracts --- Contractual Obligations --- Credit Contract --- Debt Markets --- Default --- Discount --- Discount Rates --- Economic Theory and Research --- Finance --- Finance and Financial Sector Development --- Financial Literacy --- Instrument --- Instruments --- Labor Policies --- Law and Development --- Limited Liability --- Loan --- Loan Contracts --- Macroeconomics and Economic Growth --- Moneylender --- Moral Hazard --- Option --- Risk Aversion --- Risk Neutral --- Social Protections and Labor --- Unlimited Liability

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With the availability of new and more comprehensive financial market data, making headlines of massive public interest due to recent periods of extreme volatility and crashes, the field of computational finance is evolving ever faster thanks to significant advances made theoretically, and to the massive increase in accessible computational resources. This volume includes a wide variety of theoretical and empirical contributions that address a range of issues and topics related to computational finance. It collects contributions on the use of new and innovative techniques for modeling financial asset returns and volatility, on the use of novel computational methods for pricing, hedging, the risk management of financial instruments, and on the use of new high-dimensional or high-frequency data in multivariate applications in today’s complex world. The papers develop new multivariate models for financial returns and novel techniques for pricing derivatives in such flexible models, examine how pricing and hedging techniques can be used to assess the challenges faced by insurance companies, pension plan participants, and market participants in general, by changing the regulatory requirements. Additionally, they consider the issues related to high-frequency trading and statistical arbitrage in particular, and explore the use of such data to asses risk and volatility in financial markets.

insurance --- Solvency II --- risk-neutral models --- computational finance --- asset pricing models --- overnight price gaps --- financial econometrics --- mean-reversion --- statistical arbitrage --- high-frequency data --- jump-diffusion model --- instantaneous volatility --- directional-change --- seasonality --- forex --- bitcoin --- S&amp --- P500 --- risk management --- drawdown --- safe assets --- securitisation --- dealer behaviour --- liquidity --- bid–ask spread --- least-squares Monte Carlo --- put-call symmetry --- regression --- simulation --- algorithmic trading --- market quality --- defined contribution plan --- probability of shortfall --- quadratic shortfall --- dynamic asset allocation --- resampled backtests --- stochastic covariance --- 4/2 model --- option pricing --- risk measures --- American options --- exercise boundary --- Monte Carlo --- multiple exercise options --- dynamic programming --- stochastic optimal control --- asset pricing --- calibration --- derivatives --- hedging --- multivariate models --- volatility

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India has pursued an active food security policy for many years, using a combination of trade policy interventions, public distribution of food staples, and assistance to farmers through minimum support prices defended by public stocks. This policy has been quite successful in stabilizing staple food prices, but at a high cost, and with potential risks of unmanageable stock accumulation. Based on a rational expectations storage model representing the Indian wheat market and its relation to the rest of the world, this paper analyzes the cost and welfare implications of this policy and unpacks the contribution of its different elements. To analyze alternative policies, social welfare is assumed to include an objective of price stabilization and optimal policies corresponding to this objective are assessed. Considering fully optimal policies under commitment as well as optimal simple rules, it is shown that adopting simple rules can achieve most of the gains from fully optimal policies, with both potentially allowing for lower stockholding levels and costs.

Accelerator --- Access to Markets --- Aggregate Demand --- Agriculture --- Arbitrage --- Barriers --- Benchmark --- Bidding --- Border Price --- Cash Flow --- Choice --- Closed Economy --- Commodity --- Commodity Price --- Communication --- Consumer Price --- Consumer Price Index --- Consumers --- Consumption --- Costs --- Criteria --- Debt Markets --- Demand --- Demand Elasticity --- Demand Function --- Development Economics --- Development Policy --- Distribution --- Domestic Market --- Domestic Price --- Econometrics --- Economic Theory --- Economic Theory & Research --- Economics Research --- Elasticity --- Emerging Markets --- Equations --- Equilibrium --- Equilibrium Values --- Exchange --- Exchange Rate --- Expectations --- Exports --- Failures --- Fair --- Finance and Financial Sector Development --- Floor Price --- Food Price --- Fraud --- Free Trade --- Incentives --- Income --- Incomplete Markets --- Influence --- Inputs --- Interest --- Interest Rate --- International Economics & Trade --- International Trade --- Lags --- Laissez Faire --- Laissez-Faire --- Macroeconomics and Economic Growth --- Marginal Cost --- Marginal Utility --- Market --- Market Conditions --- Market Economy --- Market Equilibrium --- Market Failures --- Market Power --- Market Price --- Marketing --- Markets --- Markets & Market Access --- Middle-Income Country --- Multipliers --- Open Economy --- Opportunity Cost --- Optimization --- Outcomes --- Output --- Price --- Price Behavior --- Price Change --- Price Elasticity --- Price Index --- Price Instability --- Price Levels --- Price Movements --- Price Policy --- Price Risk --- Price Stability --- Price Stabilization --- Price Uncertainty --- Price Volatility --- Prices --- Private Entity --- Private Sector Development --- Producer Price --- Product --- Production --- Profit Maximization --- Public Policy --- Purchasing --- Rapid Expansion --- Real Income --- Risk Aversion --- Risk Neutral --- Risk-Averse --- Risk-Neutral --- Sales --- Savings --- Security --- Share --- Stabilization Policy --- Stock --- Storage --- Subsidy --- Substitution --- Supply --- Supply Elasticity --- Surplus --- Taxes --- Theory --- Time Value of Money --- Trade --- Trade Barriers --- Trade Policies --- Trade Policy --- Trends --- Utility --- Value --- Value of Money --- Variables --- Volatility --- Welfare --- World Market --- World Trade