Technical papers/Market Risk
Cutting Edge introduction: The tipping-point for leverage
Borrowing the stake for a bet is as old as the hills – and so is losing it. But how much debt is too much for a given position? A group of quants believe they know. Laurie Carver introduces this month’s...
It is a cliché that returns are fat-tailed, but that doesn’t make the distributions any easier to work with. However, drawing on the father of their application in finance – and some thermodynamics...
Focusing on how often a trading strategy ends on the winning side can distract from the question of whether it profits on average. The key is in the return distribution’s skew – and at least for trend-following...
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How banks needs to consider their IT infrastructure
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More Technical papers/Market Risk articles
Risk 25: Cutting edge classics
In October 2001, two prescient articles drew attention to the Gaussian copula model – that would play such a crucial role in the crisis to come – and anticipated the methods regulators are now exploring to capitalise market liquidity risk
Cutting Edge introduction: Hedging dependence
Since cross-asset class correlations aligned in 2008 there has been pent-up demand for instruments that provide exposure to another measure of it – covariance. But structuring a covariance swap that can be hedged simply has been a challenge. Laurie...
Cutting edge introduction: perturbing the smile
There has been a long history of interaction between physics and quantitative finance. Now a technique for finding the effects of small fluctuations in quantum fields is being used to get a handle on the implied volatility smiles a stochastic model can...
Cutting Edge introduction: viva cross-vegas
The sensitivity of single-rate derivatives to implied volatility is traditionally only considered with respect to the underlying fixing, in effect collapsing the term structure to a point. But a full set of implied volatilities can be found using a new...
Cutting Edge introduction: risky contributions
Value-at-risk is usually calculated via Monte Carlo simulation, making it difficult to see the contributions from different risks. But in some circumstances approximate formulas can be derived that greatly save computing power – and explicitly show...
Cutting Edge introduction: requiem for a probabilist
The already challenging task of calibrating stochastic volatility models becomes even more complex when rates are random too. But an efficient Monte Carlo approach can be found – by using an esoteric, but neglected, stochastic calculus. Laurie Carver...
Right Laplace, right time
Calibrating implied volatility just got easier – thanks to a classical mathematical device with an illustrious history. Laurie Carver introduces this month’s technical articles by looking at how the Laplace transform can make volatility calibration...
Using market and credit risk analytics to strengthen performance
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This handy guide reviews the various steps banks are taking to improve their risk management techniques, looking at the benefits and pitfalls of each one.
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