Cutting Edge
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
Isolating a risk premium on the volatility of volatility
Lorenzo Ravagli shows how to exploit a risk premium embedded in the vol of vol in out-of-the-money options
CVA with Greeks and AAD
Reghai, Kettani and Messaoud present new technique to calculate CVA using adjoints
Cutting edge introduction: Jumpy wrong-way risk
Quants propose easy approximations for modelling wrong-way risk in CVA frameworks
Risk budgeting and diversification based on optimised uncorrelated factors
Meucci, Santangelo and Deguest introduce a risk decomposition method based on minimum-torsion bets
Jumping with default: wrong-way risk modelling for CVA
Fabio Mercurio and Minqiang Li investigate CVAs in the presence of wrong-way risk
FVA for general instruments
Alexander Antonov, Bianchetti and Mihai develop a universal and efficient approach to numerical FVA calculation
Modelling the financial risks of wind generation with Weibull
The manner in which wind generation can affect the half-hourly APX price is discussed