Technical paper/Credit risk

Credit exposure models backtesting for Basel III

The Basel Committee on Banking Supervision has introduced strict regulatory guidance on how to validate and backtest internal model methods for credit exposure. Fabrizio Anfuso, Dimitrios Karyampas and Andreas Nawroth incorporate these …

Adjoint credit risk management

Adjoint algorithmic differentiation is one of the principal innovations in risk management in recent times. Luca Capriotti and Jacky Lee show how this technique can be used to compute real-time risk for credit products, even those valued with fast semi…

Options for collateral options

When collateral can be posted in multiple currencies, pricing even the simplest derivatives involves optionality, which is often tackled numerically. But by conditioning on a risk factor to make variables independent, this can be simplified. Alexandre…

Systematic risk factors redefined

Credit risk factor models tend to have a narrow focus on the Gaussian case, use copula functions that don’t work well with the martingale methods used in pricing, and can introduce arbitrage. Dariusz Gatarek and Juliusz Jablecki show how an increasing…

Hedge backtesting for model validation

Derivatives pricing and expected exposure models must be backtested as a basic regulatory requirement. But what does this mean exactly, and how can it be used to reserve against model risk? Lee Jackson introduces a general backtesting framework for…