The dynamics of the leverage cycle

We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The Value-at-Risk constraint implies that when perceived risk is low, leverage is high and vice versa, a phenomenon that has been dubbed pro-cyclical leverage. We show that this leads to endogenous irregular oscillations, in which gradual increases in stock prices and leverage are followed by drastic market collapses, i.e. a leverage cycle. This phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle. We introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro-cyclical to countercyclical leverage. When the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point. While there is always a leverage ceiling above which the dynamics are unstable, countercyclical leverage can be used to raise the ceiling. We also study the impact on leverage cycles of direct, temporal control of the bank's riskiness via the bank's required Value-at-Risk quantile. Under such a rule the regulator relaxes the Value-at-Risk quantile following a negative stock price shock and tightens it following a positive shock. While such a policy rule can reduce the amplitude of leverage cycles, its effectiveness is highly dependent on the choice of parameters. Finally, we investigate fixed limits on leverage and show how they can control the leverage cycle.Comment: 35 pages, 9 figure

The Meaning of Memory Safety

We give a rigorous characterization of what it means for a programming language to be memory safe, capturing the intuition that memory safety supports local reasoning about state. We formalize this principle in two ways. First, we show how a small memory-safe language validates a noninterference property: a program can neither affect nor be affected by unreachable parts of the state. Second, we extend separation logic, a proof system for heap-manipulating programs, with a memory-safe variant of its frame rule. The new rule is stronger because it applies even when parts of the program are buggy or malicious, but also weaker because it demands a stricter form of separation between parts of the program state. We also consider a number of pragmatically motivated variations on memory safety and the reasoning principles they support. As an application of our characterization, we evaluate the security of a previously proposed dynamic monitor for memory safety of heap-allocated data.Comment: POST'18 final versio

Issues of shaping the students’ professional and terminological competence in science area of expertise in the sustainable development era

The paper deals with the problem of future biology teachers’ vocational preparation process and shaping in them of those capacities that contribute to the conservation and enhancement of our planet’s biodiversity as a reflection of the leading sustainable development goals of society. Such personality traits are viewed through the prism of forming the future biology teachers’ professional and terminological competence. The main aspects and categories that characterize the professional and terminological competence of future biology teachers, including terminology, nomenclature, term, nomen and term element, have been explained. The criteria and stages of shaping the future biology teachers’ professional and terminological competence during the vocational training process have been fixed. Methods, techniques, technologies, guiding principles and forms of staged work on the forming of an active terminological dictionary of students have been described and specified. The content of the distant special course “Latin. Botanical Terminology”, which provides training for future teachers to study the professional subjects and to understand of international scientific terminology, has been presented. It is concluded that the proper level of formation of the future biology teachers’ professional and terminological competence will eventually ensure the qualitative preparation of pupils for life in a sustainable development era

Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France

This paper uses longitudinal data to perform tests of asymmetric information in the French automobile insurance market for the 1995-1997 period. This market is characterized by the presence of a regulated experience-rating scheme (bonus-malus). We demonstrate that the result of the test depends crucially on how the dynamic process between insurance claims and contract choice is modelled. We apply a Granger causality test controlling for the unobservables. We find evidence of moral hazard which we distinguish from adverse selection using a multivariate dynamic panel data model. Experience rating appears to lead high risk policyholders to choose contracts that involve less coverage over time. These policyholders respond to contract changes by increasing their unobservable efforts to reduce claims.Automobile insurance, road safety, asymmetric information, experience rating, moral hazard, adverse selection, dynamic panel data models, Granger causality test

Mean Exit Time and Survival Probability within the CTRW Formalism

An intense research on financial market microstructure is presently in progress. Continuous time random walks (CTRWs) are general models capable to capture the small-scale properties that high frequency data series show. The use of CTRW models in the analysis of financial problems is quite recent and their potentials have not been fully developed. Here we present two (closely related) applications of great interest in risk control. In the first place, we will review the problem of modelling the behaviour of the mean exit time (MET) of a process out of a given region of fixed size. The surveyed stochastic processes are the cumulative returns of asset prices. The link between the value of the MET and the timescale of the market fluctuations of a certain degree is crystal clear. In this sense, MET value may help, for instance, in deciding the optimal time horizon for the investment. The MET is, however, one among the statistics of a distribution of bigger interest: the survival probability (SP), the likelihood that after some lapse of time a process remains inside the given region without having crossed its boundaries. The final part of the article is devoted to the study of this quantity. Note that the use of SPs may outperform the standard "Value at Risk" (VaR) method for two reasons: we can consider other market dynamics than the limited Wiener process and, even in this case, a risk level derived from the SP will ensure (within the desired quintile) that the quoted value of the portfolio will not leave the safety zone. We present some preliminary theoretical and applied results concerning this topic.Comment: 10 pages, 2 figures, revtex4; corrected typos, to appear in the APFA5 proceeding