Traditional models for wrong-way risk focus on the correlation between default and exposure – a blunt tool for a tail risk. Alternatives are thin on the ground, but a scenario-based approach may provide...
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.
More Technical papers articles
The risk of exposure and counterparty default probability both increasing – so-called wrong-way risk – is usually understood in terms of the correlation between the two variables. But this approach is focused more on the centre of the distribution,...
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 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...
Debit valuation adjustments are becoming well understood for derivatives and liabilities – but can affect the asset side of the balance sheet too. Specifically, assets such as so-called goodwill depend on the creditworthiness of the firm. Chris Kenyon...
In this article, Ning Zhang and Robert Cumbie propose a utility maximisation method for natural gas marketers to find optimal hedging strategies to deal with price and load uncertainty by using price and weather derivatives. Monte Carlo simulation...
Technology can provide a competitive advantage in banking. How it is applied by Tier 1 and Tier 2 institutions, to the benefit for their risk management systems, is discussed.
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