Credit exposure models backtesting for Basel III

The Basel Committee on Banking Supervision has introduced strict regulatory guidance on how to validate and backtest internal model methods for credit exposure. Fabrizio Anfuso, Dimitrios Karyampas and Andreas Nawroth incorporate these …

Regulatory costs break risk neutrality

Regulations impose idiosyncratic capital and funding costs for holding derivatives. Idiosyncratic costs mean that no single measure makes derivatives martingales for all market participants. Chris Kenyon and Andrew Green demonstrate that regulatory…

Adjoint credit risk management

Adjoint algorithmic differentiation is one of the principal innovations in risk management in recent times. Luca Capriotti and Jacky Lee show how this technique can be used to compute real-time risk for credit products, even those valued with fast semi…

Operational risk modelled analytically

Regulators require banks to use an internal model to compute a capital charge for operational risk, which is thought to be sensitive to assumptions on dependence between losses that still remain a matter of debate. Vivien Brunel proposes an analytical…

Why CDOs work

Collateralised debt obligations have largely gone under the radar since the 2007 financial meltdown, when their market collapsed. Nearly every attempt at explaining the cause of their failure pointed towards flawed assumptions in pricing models and…

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