Local volatility models
Low interest rates revealed weaknesses in the industry’s standard fixed-income derivatives pricing model. Risk’s technical articles this year tackled the problem in diverse ways. Laurie Carver gives...
Insurance Risk and BNY Mellon have conducted a survey to look at how insurance companies are preparing for the new regime and the opportunities and challenges that the changes will bring.
More Local volatility models articles
The debit valuation adjustment is a controversial concept when applied to derivatives liabilities, but it has won accountants round. Further thought shows it could be applied more broadly – even to purely positive assets. Laurie Carver introduces this...
The asymptotic behaviour of local volatility surfaces for low and high strikes – the so-called wings – is important in option pricing and risk management. Stefano De Marco, Peter Friz and Stefan Gerhold show certain models allow for the derivation...
Using a one time-step finite difference implementation, Jesper Andreasen and Brian Huge eliminate the arbitrages in the wings of the volatility smile that result from most expansion techniques for local stochastic volatility models, including the widely...
Local stochastic volatility models combine perfect calibration at time zero with realistic price dynamics. But traditional methods tend to underestimate the forward skew, and mis-price exotics such as cliquets as a result. Piotr Karasinski and Artur Sepp...
Local volatility was, for a long time, seen as being a universal panacea. However, cracks appeared and we have been forced to look elsewhere for a new framework. Philippe Henrotte, co-founder, partner and head of financial theory and research at Ito33,...
Index providers and fund managers who have tended to focus on performance are seeing demand from investors for strategy indexes that focus on risk
The markets classically assumed by quantitative finance trade continuously, are frictionless, infinitely deep and liquid, and often normally distributed – a fiction so enchanting that many modellers mistook it for reality in the pre-crisis years. One...
This paper discusses a number of diverse considerations that risk managers need to incorporate into their thought processes and recurring procedures if they are to fulfill their role more effectively in the future
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