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Elisa Luciano

Università degli Studi di Torino, ECONOMIA, Faculty Member

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Elisa Luciano, born 1963, became Professor of Finance in 1994. She taught in a number of institutions, including École Politechnique-Cachan, and visited the Wharton School, Cornell University, Insead. She is a Research Fellow of Netspar (NL), FERC (UK) and Collegio Carlo Alberto (IT). She published around 100 articles in Academic journals, including the Journal of Finance and RFS. She stays in the top 2% Repec Authors, top 8% women economist (SSRN).

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Patrizia Semeraro

Politecnico di Torino

Jessica Cariboni

Ana-Maria Fuertes

City, University of London

McGill University

Fredrik Backman

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Papers by Elisa Luciano

Copulas and Dependence models in Credit Risk: Diffusions versus Jumps

The most common approach for default dependence modelling is at present copula functions. Within ... more The most common approach for default dependence modelling is at present copula functions. Within this framework, the paper examines factor copulas, which are the industry standard, together with their latest development, namely the incorporation of sudden jumps to default instead of a pure diffusive behavior. The impact of jumps on default dependence - through factor copulas - has not been fully explored yet. Our novel contribution consists in showing that modelling default arrival through a pure jump asset process does matter, even when the copula choice is the standard, factor one, and the correlation is calibrated so as to match the diffusive and non diffusive case. An example from the credit derivative market is discussed.

Financial synergies and systemic risk in the organization of bank affiliates

Journal of Banking & Finance

We analyze theoretically banks' choice of organizational structures in branches, subsidiaries or ... more We analyze theoretically banks' choice of organizational structures in branches, subsidiaries or stand-alone banks, in the presence of public bailouts and default costs. These structures are characterized by different arrangements for internal rescue of affiliates against default. The cost of debt and leverage are endogenous. For moderate bailout probabilities, subsidiary structures, wherein the two entities provide mutual internal rescue under limited liability, have the highest group value, but also the highest risk taking as measured by leverage and expected loss. We explore the effect of constraints on leverage and policy implications. The conflict of interests between regulators, who minimize systemic risk, and banks, who maximize their own value, is mitigated when capital requirements are effective.

Copula-Based Default Dependence Modelling: Where Do We Stand?

Copula functions have proven to be extremely useful in describing joint default and survival prob... more Copula functions have proven to be extremely useful in describing joint default and survival probabilities in credit risk applications. We overview the state of the art and point out some open modelling issues. We discuss rst joint default modelling in diffusion based structural models, then in intensity based ones, focusing on the possibility-and the dynamic inconsistency-of re-mapping a model of the second type into one of the rst. For both types of models, we discuss calibration issues under the risk neutral measure, using the factor copula device. The survey leads us to focus on a non-diffusive structural model, which can be re-mapped in a dynamic consistent intensity-based one, and which can be calibrated under a risk neutral measure without assuming equicorrelation.

Life Insurance Ownership by Italian Households: A Gender-Based Differences Analysis

The Geneva Papers on Risk and Insurance Issues and Practice, 2016

The purpose of this study is to analyse, for men and women, the microeconomic determinants of lif... more The purpose of this study is to analyse, for men and women, the microeconomic determinants of life insurance purchases. Indeed, only a few papers have tried to justify rigorously the gender-based differences in life insurance ownership. On the basis of survey data collected by the Bank of Italy in 2012 (the Survey on Income and Households), we estimate the propensity to buy and the willingness to pay for a life insurance contract. We examine the differences between two types of contracts, that is, traditional life and term life insurance and show that, in all cases, women are less likely to be insured than are men. The demand for insurance is highly correlated with income, family structure and employment status. Geographical variables within Italy significantly affect the demand too. We introduce novel variables that measure the financial status of households and their proximity to the financial market or, similarly, their familiarity with financial market opportunities. These determinants turn out to be significant and affect demand almost as much as traditional variables. To study policy implications, we calculate the probabilities of having either traditional life or term insurance, under several scenarios for the determinants of demand. Again, financial market proximity plays a key role.

Rovina, assicurazione e scambi di attivit� finanziarie

Rivista Di Matematica Per Le Scienze Economiche E Sociali, 1988

A Note on the Pricing Solution to Bilateral Monopoly and Its Efficiency

Rivista …, 1998

The Economics of Continuous-Time Finance

This book introduces the economic applications of the theory of continuous-time finance, with the... more This book introduces the economic applications of the theory of continuous-time finance, with the goal of enabling the construction of realistic models, particularly those involving incomplete markets. Indeed, most recent applications of continuous-time finance aim to capture the imperfections and dysfunctions of financial markets—characteristics that became especially apparent during the market turmoil that started in 2008. The book begins by using discrete time to illustrate the basic mechanisms and introduce such notions as completeness, redundant pricing, and no arbitrage. It develops the continuous-time analog of those mechanisms and introduces the powerful tools of stochastic calculus. Going beyond other textbooks, the book then focuses on the study of markets in which some form of incompleteness, volatility, heterogeneity, friction, or behavioral subtlety arises. After presenting solutions methods for control problems and related partial differential equations, the text exami...

Risk Analysis and Portfolio Modelling

Journal of Risk and Financial Management

Financial risk measurement is a challenging task because both the types of risk and their measure... more Financial risk measurement is a challenging task because both the types of risk and their measurement techniques evolve quickly. This book collects a number of novel contributions for the measurement of financial risk, which addresses partially explored risks or risk takers in a wide variety of empirical contexts.

Credit risk assessment via copulas: association invariance and risk-neutrality

Copula functions have proven to be extremely useful in describing joint default and survival prob... more Copula functions have proven to be extremely useful in describing joint default and survival probabilities in credit risk applications. We overview the state of the art and point out some modelling issues, such as the choice of a specic copula and of the amount of dependence, as well as re-mapping of models, or dependence invariance. We also discuss how to

Bivariate Copula Functions

Bank Efficiency and Banking Sector Development: the Case of Italy

The paper illustrates the efficiency features of the Italian banking system through a review of t... more The paper illustrates the efficiency features of the Italian banking system through a review of the most important empirical studies over the last fifteen years. Particular emphasis is given to DEA (dynamic envelopment analysis) studies and to their capability to investigate economies of scale and geographical differences. The role of mergers-which are, as a matter of fact, a crucial feature of several systems, including Italy-is stressed. The Italian experience is compared to the one of old EU member countries. The paper concludes that there seem to be economies of scale at the beginning of the period, while they do not seem to characterize more recent years.

Financial synergies and the Organization of Bank Affiliates; A Theoretical Perspective on Risk and Efficiency

Demographic risk transfer: is it worth for annuity providers? ICER Working Paper

Ssrn Electronic Journal, Sep 19, 2012

ABSTRACT Longevity risk transfer is a popular choice for annuity providers such as pension funds.... more ABSTRACT Longevity risk transfer is a popular choice for annuity providers such as pension funds. This paper formalizes the trade-off between the cost and the risk relief of such choice, when the annuity provider uses value-at-risk to assess risk. Using first-order approximations we show that, if the transfer is fairly priced and the aim of the fund is to maximize returns, the funds&#39; alternatives can be represented in the plane expected return-VaR. We build a risk-return frontier, along which the optimal transfer choices of the fund are located and calibrated it to the 2010 UK annuity and bond market.

No mean reverting affine processes for stochastic mortality

Guarantees, debt and taxes

Review of Financial Studies, 2014

Static versus dynamic longevity risk hedging

Risk-return appraisal of longevity swaps

Delta–Gamma hedging of mortality and interest rate risk

Insurance Mathematics and Economics, May 31, 2012

One of the major concerns of life insurers and pension funds is the increasing longevity of their... more One of the major concerns of life insurers and pension funds is the increasing longevity of their beneficiaries. This paper studies the hedging problem of annuity cash flows when mortality and interest rates are stochastic. We first propose a Delta-Gamma hedging technique for mortality risk. The risk factor against which to hedge is the difference between the actual mortality intensity in the future and its ''forecast'' today, the forward intensity. We specialize the hedging technique first to the case in which mortality intensities are affine, then to Ornstein-Uhlenbeck and Feller processes, providing actuarial justifications for this selection. We show that, without imposing no arbitrage, we can get equivalent probability measures under which the HJM condition for no arbitrage is satisfied. Last, we extend our results to the presence of both interest rate and mortality risk. We provide a UK calibrated example of Delta-Gamma hedging of both mortality and interest rate risk.

Non mean reverting affne processes for stochastic mortality

Carlo Alberto Notebooks, 2006

In this paper we use doubly stochastic processes (or Cox processes) in order to model the random ... more In this paper we use doubly stochastic processes (or Cox processes) in order to model the random evolution of mortality of an individual. These processes have been widely used in the credit risk literature in modelling default arrival, and in this context have proved to be quite flexible, especially when the intensity process is of the affine class. We investigate the applicability of affine processes in describing the individual's intensity of mortality and the mortality trend. We also provide some calibrations to the UK population. Calibrations suggest that, in spite of their popularity in the financial context, mean reverting processes are less suitable for describing the death intensity of individuals than non mean reverting processes. Among the latter, affine processes whose deterministic part increases exponentially seem to be appropriate. As for the stochastic part, negative jumps seem to do a better job than diffusive components alone. Stress analysis and analytical results indicate that increasing the randomness of the intensity process results in improvements in survivorship.

Dependence Calibration and Portfolio Fit with FactorBased Time Changes

ABSTRACT The paper explores the fit properties of a class of multivariate Lévy processes, which a... more ABSTRACT The paper explores the fit properties of a class of multivariate Lévy processes, which are characterized as time-changed correlated Brownian motions. The time-change has a common and an idiosyncratic component, to reflect the properties of trade, which it represents. The resulting process may provide Variance-Gamma, Normal-Inverse-Gaussian or Generalized-Hyperbolic margins. A non-pairwise calibration to a portfolio of ten US daily stock returns over the period 2009-2013 shows that fit of the Hyperbolic specification is very good, in terms of marginal distributions and overall correlation matrix. It succeeds in explaining the return distribution of both long-only and long-short random portfolios better than competing models do. Their tail behavior is very well captured also by the Variance-Gamma specification. Journal of Economic Literature Classification: G12, G13

Copulas and Dependence models in Credit Risk: Diffusions versus Jumps

The most common approach for default dependence modelling is at present copula functions. Within ... more The most common approach for default dependence modelling is at present copula functions. Within this framework, the paper examines factor copulas, which are the industry standard, together with their latest development, namely the incorporation of sudden jumps to default instead of a pure diffusive behavior. The impact of jumps on default dependence - through factor copulas - has not been fully explored yet. Our novel contribution consists in showing that modelling default arrival through a pure jump asset process does matter, even when the copula choice is the standard, factor one, and the correlation is calibrated so as to match the diffusive and non diffusive case. An example from the credit derivative market is discussed.

Financial synergies and systemic risk in the organization of bank affiliates

Journal of Banking & Finance

We analyze theoretically banks' choice of organizational structures in branches, subsidiaries or ... more We analyze theoretically banks' choice of organizational structures in branches, subsidiaries or stand-alone banks, in the presence of public bailouts and default costs. These structures are characterized by different arrangements for internal rescue of affiliates against default. The cost of debt and leverage are endogenous. For moderate bailout probabilities, subsidiary structures, wherein the two entities provide mutual internal rescue under limited liability, have the highest group value, but also the highest risk taking as measured by leverage and expected loss. We explore the effect of constraints on leverage and policy implications. The conflict of interests between regulators, who minimize systemic risk, and banks, who maximize their own value, is mitigated when capital requirements are effective.

Copula-Based Default Dependence Modelling: Where Do We Stand?

Copula functions have proven to be extremely useful in describing joint default and survival prob... more Copula functions have proven to be extremely useful in describing joint default and survival probabilities in credit risk applications. We overview the state of the art and point out some open modelling issues. We discuss rst joint default modelling in diffusion based structural models, then in intensity based ones, focusing on the possibility-and the dynamic inconsistency-of re-mapping a model of the second type into one of the rst. For both types of models, we discuss calibration issues under the risk neutral measure, using the factor copula device. The survey leads us to focus on a non-diffusive structural model, which can be re-mapped in a dynamic consistent intensity-based one, and which can be calibrated under a risk neutral measure without assuming equicorrelation.

Life Insurance Ownership by Italian Households: A Gender-Based Differences Analysis

The Geneva Papers on Risk and Insurance Issues and Practice, 2016

The purpose of this study is to analyse, for men and women, the microeconomic determinants of lif... more The purpose of this study is to analyse, for men and women, the microeconomic determinants of life insurance purchases. Indeed, only a few papers have tried to justify rigorously the gender-based differences in life insurance ownership. On the basis of survey data collected by the Bank of Italy in 2012 (the Survey on Income and Households), we estimate the propensity to buy and the willingness to pay for a life insurance contract. We examine the differences between two types of contracts, that is, traditional life and term life insurance and show that, in all cases, women are less likely to be insured than are men. The demand for insurance is highly correlated with income, family structure and employment status. Geographical variables within Italy significantly affect the demand too. We introduce novel variables that measure the financial status of households and their proximity to the financial market or, similarly, their familiarity with financial market opportunities. These determinants turn out to be significant and affect demand almost as much as traditional variables. To study policy implications, we calculate the probabilities of having either traditional life or term insurance, under several scenarios for the determinants of demand. Again, financial market proximity plays a key role.

Rovina, assicurazione e scambi di attivit� finanziarie

Rivista Di Matematica Per Le Scienze Economiche E Sociali, 1988

A Note on the Pricing Solution to Bilateral Monopoly and Its Efficiency

Rivista …, 1998

The Economics of Continuous-Time Finance

This book introduces the economic applications of the theory of continuous-time finance, with the... more This book introduces the economic applications of the theory of continuous-time finance, with the goal of enabling the construction of realistic models, particularly those involving incomplete markets. Indeed, most recent applications of continuous-time finance aim to capture the imperfections and dysfunctions of financial markets—characteristics that became especially apparent during the market turmoil that started in 2008. The book begins by using discrete time to illustrate the basic mechanisms and introduce such notions as completeness, redundant pricing, and no arbitrage. It develops the continuous-time analog of those mechanisms and introduces the powerful tools of stochastic calculus. Going beyond other textbooks, the book then focuses on the study of markets in which some form of incompleteness, volatility, heterogeneity, friction, or behavioral subtlety arises. After presenting solutions methods for control problems and related partial differential equations, the text exami...

Risk Analysis and Portfolio Modelling

Journal of Risk and Financial Management

Financial risk measurement is a challenging task because both the types of risk and their measure... more Financial risk measurement is a challenging task because both the types of risk and their measurement techniques evolve quickly. This book collects a number of novel contributions for the measurement of financial risk, which addresses partially explored risks or risk takers in a wide variety of empirical contexts.

Credit risk assessment via copulas: association invariance and risk-neutrality

Copula functions have proven to be extremely useful in describing joint default and survival prob... more Copula functions have proven to be extremely useful in describing joint default and survival probabilities in credit risk applications. We overview the state of the art and point out some modelling issues, such as the choice of a specic copula and of the amount of dependence, as well as re-mapping of models, or dependence invariance. We also discuss how to

Bivariate Copula Functions

Bank Efficiency and Banking Sector Development: the Case of Italy

The paper illustrates the efficiency features of the Italian banking system through a review of t... more The paper illustrates the efficiency features of the Italian banking system through a review of the most important empirical studies over the last fifteen years. Particular emphasis is given to DEA (dynamic envelopment analysis) studies and to their capability to investigate economies of scale and geographical differences. The role of mergers-which are, as a matter of fact, a crucial feature of several systems, including Italy-is stressed. The Italian experience is compared to the one of old EU member countries. The paper concludes that there seem to be economies of scale at the beginning of the period, while they do not seem to characterize more recent years.

Financial synergies and the Organization of Bank Affiliates; A Theoretical Perspective on Risk and Efficiency

Demographic risk transfer: is it worth for annuity providers? ICER Working Paper

Ssrn Electronic Journal, Sep 19, 2012

ABSTRACT Longevity risk transfer is a popular choice for annuity providers such as pension funds.... more ABSTRACT Longevity risk transfer is a popular choice for annuity providers such as pension funds. This paper formalizes the trade-off between the cost and the risk relief of such choice, when the annuity provider uses value-at-risk to assess risk. Using first-order approximations we show that, if the transfer is fairly priced and the aim of the fund is to maximize returns, the funds&#39; alternatives can be represented in the plane expected return-VaR. We build a risk-return frontier, along which the optimal transfer choices of the fund are located and calibrated it to the 2010 UK annuity and bond market.

No mean reverting affine processes for stochastic mortality

Guarantees, debt and taxes

Review of Financial Studies, 2014

Static versus dynamic longevity risk hedging

Risk-return appraisal of longevity swaps

Delta–Gamma hedging of mortality and interest rate risk

Insurance Mathematics and Economics, May 31, 2012

One of the major concerns of life insurers and pension funds is the increasing longevity of their... more One of the major concerns of life insurers and pension funds is the increasing longevity of their beneficiaries. This paper studies the hedging problem of annuity cash flows when mortality and interest rates are stochastic. We first propose a Delta-Gamma hedging technique for mortality risk. The risk factor against which to hedge is the difference between the actual mortality intensity in the future and its ''forecast'' today, the forward intensity. We specialize the hedging technique first to the case in which mortality intensities are affine, then to Ornstein-Uhlenbeck and Feller processes, providing actuarial justifications for this selection. We show that, without imposing no arbitrage, we can get equivalent probability measures under which the HJM condition for no arbitrage is satisfied. Last, we extend our results to the presence of both interest rate and mortality risk. We provide a UK calibrated example of Delta-Gamma hedging of both mortality and interest rate risk.

Non mean reverting affne processes for stochastic mortality

Carlo Alberto Notebooks, 2006

In this paper we use doubly stochastic processes (or Cox processes) in order to model the random ... more In this paper we use doubly stochastic processes (or Cox processes) in order to model the random evolution of mortality of an individual. These processes have been widely used in the credit risk literature in modelling default arrival, and in this context have proved to be quite flexible, especially when the intensity process is of the affine class. We investigate the applicability of affine processes in describing the individual's intensity of mortality and the mortality trend. We also provide some calibrations to the UK population. Calibrations suggest that, in spite of their popularity in the financial context, mean reverting processes are less suitable for describing the death intensity of individuals than non mean reverting processes. Among the latter, affine processes whose deterministic part increases exponentially seem to be appropriate. As for the stochastic part, negative jumps seem to do a better job than diffusive components alone. Stress analysis and analytical results indicate that increasing the randomness of the intensity process results in improvements in survivorship.

Dependence Calibration and Portfolio Fit with FactorBased Time Changes

ABSTRACT The paper explores the fit properties of a class of multivariate Lévy processes, which a... more ABSTRACT The paper explores the fit properties of a class of multivariate Lévy processes, which are characterized as time-changed correlated Brownian motions. The time-change has a common and an idiosyncratic component, to reflect the properties of trade, which it represents. The resulting process may provide Variance-Gamma, Normal-Inverse-Gaussian or Generalized-Hyperbolic margins. A non-pairwise calibration to a portfolio of ten US daily stock returns over the period 2009-2013 shows that fit of the Hyperbolic specification is very good, in terms of marginal distributions and overall correlation matrix. It succeeds in explaining the return distribution of both long-only and long-short random portfolios better than competing models do. Their tail behavior is very well captured also by the Variance-Gamma specification. Journal of Economic Literature Classification: G12, G13