Cutting Edge
Risk management for whales
Rama Cont and Lakshithe Wagalath introduce a liquidation-adjusted VAR
The UK carbon floor and power plant hedging
How to calculate expected future carbon costs and optimal valuation and hedging decisions, by adjusting Monte Carlo simulations for the UK market
Loan classification under IFRS 9
Vivien Brunel proposes a method to classify non-defaulted loans in accordance with IFRS 9
Expected shortfall and VAR: cracking the marginal allocations
A new method to estimate marginal VAR and marginal ES is presented
Capital and funding
Quants propose KVA and FVA accounting framework based on Solvency II regulation
Cleaning correlation matrices
Bun, Bouchaud and Potters present a technique that allow cleaning in-sample noise from correlation matrixes
How to get maximum value from power plant hedging
Dynamic hedging is becoming more common among plant operators
Liability-side pricing of swaps
Wujiang Lou presents a framework to compute recursive CVA and FVA via Monte Carlo simulation
Cross-dependent volatility
Julien Guyon introduces cross-dependent volatility models and calibrate them to market smiles
Accounting for KVA under IFRS 13
An accounting treatment for the economic effect of KVA in accordance with IFRS13
Quant Ideas: How VAR can add value to energy market analysis
Alessandro Mauro shows how using value-at-risk can improve market risk analysis in the energy sector
From FVA to KVA: including cost of capital in derivatives pricing
Youssef Elouerkhaoui presents a general derivatives pricing framework including cost of capital
Johnson-Omega performance measure
Alexander Passow presents a portfolio performance measure that combines the omega measure with Johnson distributions
The funding invariance principle
Youssef Elouerkhaoui shows how the choice of discounting rate is irrelevant for pricing
Risk management for return enhancement
Lundin and Satchell present a non-linear asymmetric dependence method between two assets
Non-parametric local volatility formula for interest rate swaptions
Gatarek, Jabłecki and Qu introduce a Dupire-like formula for swaptions
Testing interest rate models for Solvency II applications
Alexey Botvinnik and Vladimir Ostrovski propose a validation method for interest rate models
Cutting Edge introduction: No more shortfalls?
Academics develop expected shortfall backtest to compare standardised and internal models
Hedging error measurement for imperfect strategies
Jack Baczynski, Jonathan da Silva and Rosalino Junior present an index for measuring hedging errors
Expected shortfall is jointly elicitable with value-at-risk: implications for backtesting
Fissler, Ziegel and Gneiting investigate the role of elicitability in backtesting problems and show how comparative backtests can be implemented for expected shortfall
Diversification benefit of operational risk
Torresetti and Le Pera explore the relevance of the diversification benefit from a theoretical and practical viewpoint
Year of the XVAs: top technical papers and authors of 2015
Funding valuation adjustment under the microscope, along with other, newer XVAs
Cutting edge introduction: Monetising out-of-the-money
Out-of-the-money options contain a hidden premium, says one quant
Correlation skew via stochastic correlation and jumps
Valer Zetocha introduces a correlation model based on the Jacobi process with jumps