arXiv subjects

Emma Kroell

Publications and source records attributed to Emma Kroell.

3 recordsLinked to original sources

arXiv2025

Model Combination in Risk Sharing under Ambiguity

We consider the problem of an agent who faces losses in continuous time over a finite time horizon and may choose to share some of these losses with a counterparty. The agent is uncertain about the true loss distribution and has multiple models for the losses, characterized by a finite set of probability measures. Their goal is to optimize a mean-variance type criterion with model combination under ambiguity through risk sharing. We construct such a criterion using the chi-squared divergence, exploiting a dual representation to expand the state space, yielding a time consistent problem. Assuming a Cram\'er-Lundberg loss model, we fully characterize the optimal risk sharing contract and the agent's wealth process under the optimal strategy. We prove that the strategy we obtain is admissible and that the value function satisfies the appropriate verification conditions. Furthermore, we show that the model combination problem is equivalent to the monotone mean-variance problem of Maccheroni et al. (2009) under a composite probability measure that depends on the agent's reference probability measures. Finally, we apply the optimal strategy to an insurance setting in a simulation example and provide numerical illustrations of the results.

q-fin.RM↗

arXiv2023

Optimal Robust Reinsurance with Multiple Insurers

We study a reinsurer who faces multiple sources of model uncertainty. The reinsurer offers contracts to $n$ insurers whose claims follow compound Poisson processes representing both idiosyncratic and systemic sources of loss. As the reinsurer is uncertain about the insurers' claim severity distributions and frequencies, they design reinsurance contracts that maximise their expected wealth subject to an entropy penalty. Insurers meanwhile seek to maximise their expected utility without ambiguity. We solve this continuous-time Stackelberg game for general reinsurance contracts and find that the reinsurer prices under a distortion of the barycentre of the insurers' models. We apply our results to proportional reinsurance and excess-of-loss reinsurance contracts, and illustrate the solutions numerically. Furthermore, we solve the related problem where the reinsurer maximises, still under ambiguity, their expected utility and compare the solutions.

q-fin.RM↗

arXiv2022

Stressing Dynamic Loss Models

Stress testing, and in particular, reverse stress testing, is a prominent exercise in risk management practice. Reverse stress testing, in contrast to (forward) stress testing, aims to find an alternative but plausible model such that under that alternative model, specific adverse stresses (i.e. constraints) are satisfied. Here, we propose a reverse stress testing framework for dynamic models. Specifically, we consider a compound Poisson process over a finite time horizon and stresses composed of expected values of functions applied to the process at the terminal time. We then define the stressed model as the probability measure under which the process satisfies the constraints and which minimizes the Kullback-Leibler divergence to the reference compound Poisson model. We solve this optimization problem, prove existence and uniqueness of the stressed probability measure, and provide a characterization of the Radon-Nikodym derivative from the reference model to the stressed model. We find that under the stressed measure, the intensity and the severity distribution of the process depend on time and state. We illustrate the dynamic stress testing by considering stresses on VaR and both VaR and CVaR jointly and provide illustrations of how the stochastic process is altered under these stresses. We generalize the framework to multivariate compound Poisson processes and stresses at times other than the terminal time. We illustrate the applicability of our framework by considering ``what if'' scenarios, where we answer the question: What is the severity of a stress on a portfolio component at an earlier time such that the aggregate portfolio exceeds a risk threshold at the terminal time? Furthermore, for general constraints, we propose an algorithm to simulate sample paths under the stressed measure, thus allowing to compare the effects of stresses on the dynamics of the process.

q-fin.RM↗