Technical papers
DVA: a 'shameful scam'
Despite the attempts of some quants to give it a sturdy foundation, debit valuation adjustment remains a scam, one critic argues. Laurie Carver introduces this month’s technical articles
Using the Commodity Futures Trading Commission's Commitments of Traders data, considering both the generalized autoregressive conditional heteroskedasticity (GARCH) and the power ARCH volatility-based...
Luca Capriotti and Michael Giles show how algorithmic differentiation can be used to systematically implement the adjoint calculation of sensitivities in Monte Carlo for general path-dependent and multi-asset...
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More Technical papers articles
Non-linear momentum strategies
Trading strategies that follow trends, or market momentum, result in positively skewed distribution of trading returns. Strategies that are linear in the factors driving the momentum have been studied before, but Richard Martin and Ali Bana extend this...
The impossibility of DVA replication
Some have argued that the debit valuation adjustment – which measures the benefit to a bank from its own potential for default – is monetisable. They claim replication strategies involving the dealer buying its own bonds, or writing protection on...
Fat tails via utility-based entropy
Asset returns are well known to be fat-tailed, but widely used classical econometric techniques are not well suited for building such distributions. Craig Friedman, Yangyong Zhang and Wenbo Cao use a minimum relative utility-based entropy principle to...
The beta stochastic volatility model
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...
Fat tails via utility-based entropy
Asset returns are well known to be fat-tailed, but widely used classical econometric techniques are not well suited for building such distributions. Craig Friedman, Yangyong Zhang and Wenbo Cao use a minimum relative utility-based entropy principle to...
Cutting Edge introduction: Tales of tails
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 – may make it a bit easier. Laurie Carver introduces...
Quadratic Gaussian inflation
Quadratic Gaussian models are particularly amenable to analytic solutions, and so have become popular for rates modelling. Here, Manlio Trovato, Diana Ribeiro and Hringur Gretarsson extend the approach to inflation, and show that realistic smile and convexity...
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