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Providing decision makers and the investment community with transparent methods to value investments in resilience and adaptation measures to protect physical assets from climate change impacts is becoming increasingly critical. To address this need, this paper introduces and utilizes the decoupled net present value (DNPV) valuation methodology. DNPV is a robust method that can incorporate climate change risk into investment analyses. This paper also discusses how the widespread use of traditional valuation methods such as net present value combined with risk-adjusted discount rates introduces a pernicious time bias effect that magnifies stakeholders’ misaligned interests and investment horizons, leading investors, both public and private, to significantly underinvest in resilience and adaptation. Furthermore, because traditional valuation methods cannot correlate physical risks (e.g., loss of revenue due to physical damage or lost access to an asset) with discount rates, investments to reduce climate change risks are largely considered as expenses that make the investment less attractive. The DNPV method addresses this issue and offers a viable alternative that can consistently and transparently quantify all risks (market and non-market) in terms of cash flows. This allows investors and stakeholders to quantify in monetary terms the potential exposure of physical assets to climate-related hazards and assess the effect of decisions to invest in resilience and adaptation measures. With the aid of a simple numerical example, the DNPV method is used to illustrate how such actions can be treated as quantifiable risk reduction investment opportunities that result in better investment decisions.

Banking systems are at the center of the financial infrastructure of any country. It has become apparent after the subprime crisis that such systems cannot be studied by looking at their components individually (that is, in isolation). Thus, an integrated approach is needed.In this paper we introduce a numerically friendly, yet general, algorithm that allows us to represent a banking system in a realistic way. We start with a detailed description of the banks' balance sheets and we incorporate two different features to account for connectivity effects: interbank loans and correlated-exposures to a common universe of credit-risk loans. The driving force behind the model is the progressive deterioration of the loan portfolios to which the banks are exposed. This method is useful to identify the weaknesses of a given banking system, and it is also helpful to assess the merits of different potential responses from the regulator's viewpoint. An example based on the banking system of a Latin American country is used to demonstrate the merits of this approach.Some of our findings are in agreement with those of previous authors, namely, that the probability of developing cascades is proportional to the degree of connectivity of the banking networks, and that the maximum resilience for a given set on banks is achieved for some "intermediate" (optimal?) level of connectivity. However, we also find -- in contrast with a few earlier researchers -- that investigating the features of a banking system by collapsing banks individually (and keeping other features unaltered) can give a misleading view of the system resilience.

Credit ratings play an important role in the fixed income market as the entire regulatory framework of this market segment is based on them and a significant part of what investors can and cannot do is dictated by ratings. Also, a number of ratings-based metrics are employed globally to estimate capital reserves, liquidity buffers, and solvency standards for many institutional investors such as insurance companies and pension funds. A critical assumption at the root of this regulatory architecture is that the credit-rating scales of the three leading agencies (Moody’s, Fitch, and Standard & Poor’s) are completely equivalent.In this study we focus on the Mexican fixed income market. We find that the ratings of all three rating agencies exhibit a very high degree of inter-rater reliability. This means that in terms of ranking a group of bonds based on creditworthiness the three rating agencies would produce very similar results.On the other hand, using a non-parametric statistic, the Wilcoxon matched-pairs test, we conclude that there are significant discrepancies among the ratings of the three agencies. This is consistent with a low level of inter-rater agreement detected. These findings challenge the suitability of credit ratings as a useful metric for regulatory purposes as they create the possibility of arbitrage.

We analyze the guarantees that art-auction houses offer from an options viewpoint. This approach allows us to derive analytical expressions to value the positions involved in such arrangements. We further validate these formulas with a Monte Carlo simulation applied to a realistic example. Finally, we show that the risk associated with such guarantees is lower than what is commonly believed by market practitioners, we also expose the dangers of relying on the Black-Scholes model to value such guarantees, and we introduce a simple risk-reward metric that has intuitive appeal.

Mexico and Chile have Defined Contributions (DC) pension systems. In both cases affliates are offered several investment funds with, allegedly, different risk-return profiles. Analyzing actual return data for the April 2008-March 2018 period, and using a number of risk (and return) related metrics, we reach quite different conclusions in relation to such funds. In the case of Mexico, the funds delivered returns according to their intended risk profile, and they are consistently ranked correctly in terms of absolute risk, risk-adjusted returns, and cumulative returns. Chilean funds, on the other hand, exhibited erratic risk-return patterns, with the most conservative fund outperforming the riskiest fund in terms of cumulative returns. Overall our analysis is an indictment on the idea of using asset allocation limits to control portfolio risk (Chile), and supports the view that risk is much better controlled using an overall portfolio-level risk metric (Mexico). Since most pension funds still rely heavily on asset-class limits to manage risk, our results should serve as a serious warning against the danger of relying on this practice.

We identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. Also, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision-makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk profile. We conclude that with the customary LTV ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversified collateral, from a risk perspective, are relevant. Finally, we find that the uncertainty related to the value of the painting is much more important than the uncertainty related to either the credit risk profile of the borrower, or, the artists’ returns during the period the loan remains outstanding.

Securitization has been a significant breakthrough in our ability to manage financial risk. In the same way that a futures contract permits exposure to price risk to be separated from ownership of a risky asset, securitization allows the separation of many types of risk exposure and other important characteristics from ownership of the securities in which they originate. Credit derivatives, in particular, can eliminate nearly all exposure to default risk for most investors in a pool of credit-risky bonds, even if the credit quality of the underlying securities is not strong. But the financial crisis of 2008 exposed several important facts: These instruments are complicated, their true risk characteristics had not been fully appreciated, and few people really understood them—apparently including some of those who were in the business of buying, selling, and creating them. This article is a basic primer on securitization of credit risk and the derivative securities that are created in the process. It provides an accessible overview that will be useful for teaching undergraduates about securitization of credit risk and as a general introduction to the subject for the non-technically-oriented reader.

We propose a model to assess the credit risk features of fixed income portfolios assuming they can be characterized by two parameters: their default probability and their default correlation. We rely on explicit expressions to assess their credit risk and demonstrate the benefits of our approach in a complex leveraged structure example. We show that using expected loss as a proxy for credit risk is misleading as it does not capture the dispersion effects introduced by correlation. The implications of these findings are relevant for improving current risk management practices and for regulation purposes.

This paper introduces a new financial metric for the art market. The metric is based on the price per unit of area and is applicable to two-dimensional art objects such as paintings., Comment: 36 pages, 13 figures

The dynamic behavior of a printed wiring (PW) board plays an important role in its reliability. One key parameter in determining such behavior is the fundamental frequency of the PW board. This paper shows how the sensitivity of the natural frequencies of the board with respect to some design variables can be studied using a statistical approach and how this can guide the experimental and modeling phases of the design.

The dynamic behavior of printed circuit (PC) boards plays an important role in the reliability of a package. This paper is concerned with four issues that are important in estimating the dynamic response of PC boards, namely, limitations of estimates based on the first vibration mode, the importance of geometric nonlinearities, the influence of a component location on the modal mass distribution and the relative importance of errors in the mass and stiffness estimates of a board component. >

For pt. 1 see ibid., vol. 41, no. 8, p. 1379-87 (1994). Device and circuit results from transistors fabricated with a novel bipolar isolation technology are presented and discussed. The isolation structure, called sequentially planarized interlevel isolation technology (SPIRIT), is fabricated by using a combination of selective epitaxial growth of silicon and a preferential polishing technique as the key process elements. This structural concept aims for reduced collector-substrate and collector-base capacitances, as well as a lower extrinsic base contact resistance, in a partial-SOI structure without significantly increasing the device temperature during operation. The feasibility of the isolation structure is demonstrated through ECL ring oscillators with gate delays of 23.6 ps at 0.72 mA and 47 ps at 0.23 mA. The temperature contours for SPIRIT and other bipolar isolation structures are simulated by using a finite-element method. It is shown that the capacitance versus self-heating tradeoff of SPIRIT is significantly improved over that of conventional trench or SOI isolation structures. >

Thermal stresses are a major concern in the reliability of metal lines. This paper addresses some modeling issues concerning the determination of thermal stresses in such structures. Specifically, a finite element technique that allows one to follow the evolution of the stress field as a function of the steps of the manufacturing process is discussed. In addition, comparisons between several modeling strategies, namely, plane stress versus plane strain, geometric nonlinearity versus geometric linearity, “frozen view” models versus “evolving” models, etc., are presented. A detailed example describing the manufacturing of a copper line is included to illustrate these points.

Local stress fields associated with deep trench structures are modeled in three dimensions utilizing a finite-element method. A model consisting of a SiO/sub 2/-filled deep trench residing in a silicon substrate is utilized, and stress is generated by differential thermal contraction. It is shown that corner regions, especially convex, 'outside' corners, dramatically enhance the elastic energy density and shear stresses locally compared to noncorner regions. The effects of the specific corner geometry on these local stress fields is then investigated and it is shown that subtle geometric changes can yield substantial decreases in the magnitude and lateral extent of the fields. >

Periodic structures, that is, structures that consist of a basic pattern which is repeated multiple times, are commonplace in the electronics industry. This paper is concerned with the determination of thermal stresses in such structures. Specifically, it is demonstrated that thermal stresses can be computed using a reduced model, if one uses the correct boundary conditions. It is also shown that a reduced model can give very misleading results if incorrect boundary conditions are employed.

This study compares the performance of linear and quadratic tetrahedral elements and hexahedral elements in various structural problems. The problems selected demonstrate different types of behavior, namely, bending, shear, torsional and axial deformations. It was observed that the results obtained with quadratic tetrahedral elements and hexahedral elements were equivalent in terms of both accuracy and CPU time.

This work presents a general modeling technique for following the evolution of the stress field during the manufacturing of multilevel structures. This technique combines the finite element method with a modeling strategy that uses artificial nodes to simulate material interfaces. It can be applied to both linear and nonlinear structures. The main advantage of this approach is that it allows one to account for all topological and geometric changes during the manufacturing process, as well as the residual stresses introduced at each stage. Its implementation is very straightforward since it is compatible with current finite element technology and most commercial codes. The usefulness of this technique is illustrated with an example concerning an encapsulated copper line. >

The problem of determining the stresses in a bimaterial beam subjected to a thermal load is considered. One beam layer is assumed to be linear while the second layer is assumed to be elastoplastic. A simple analytical solution is derived and compared against results obtained with finite elements.

This paper presents a finite element technique to model the steady-state response of a flexible tape during high-speed recording. The tape is modeled as a flexible plate, including geometric nonlinearities due to large deflections. The air-film pressure field is described by using a modified version of the Reynolds equation for compressible fluids. A new nonlinear finite element that couples both air-film and tape mechanics is described in detail. This element, which has been incorporated into a standard finite element code (MSC/NASTRAN®), allows one to determine the pressure field and the air-film thickness due to tape-head interaction. An example demonstrates the usefulness of this technique.

This paper presents a finite element method for the study of gas‐lubricated bearings. The fluid is assumed to be compressible, and the effect of the molecular mean free path has been incorporated into the formulation. A variational statement for the governing equation is derived and used to formulate a non‐linear quadrilateral finite element that has been incorporated into a standard code (MSC/NASTRAN). This constitutes a useful analysis tool for designers, especially in cases of complex bearing geometry. The results obtained with this method agree well with analytical solutions obtained by other authors for simple geometric configurations.

This paper introduces a system identification algorithm based upon modelling of the restoring force behaviour of the structure. This algorithm is more efficient than traditional algorithms based upon matching the time history of response of the structure, since error evaluation does not require the solution of any differential equations. The effectiveness of this system identification approach, in coordination with a model for deteriorating structures is demonstrated by an example using actual earthquake data from the Bank of California building which was damaged during the 1971 San Fernando earthquake.

This paper presents a physically motivated model for the gross dynamic behaviour of degrading hysteretic structures subjected to damaging earthquake motions. The model is intended to provide a vehicle for gaining insight into the nature of the non-linear response of such structures and to be used in system identification studies. A concept is presented for identifying the model parameters based on examination of the gross restoring force characteristic of a real structure. The model is applied to data from two damaged structures: the Bank of California building in the 1971 San Fernando earthquake and the Imperial County Services building in the 1979 Imperial County earthquake.