Journal of Risk

Volatility is central to financial modeling, and this issue of The Journal of Risk offers four papers dealing with both its computational and empirical aspects.

In our first paper, "A Taylor series approach to pricing and implied volatility for local-stochastic volatility models", Matthew Lorig, Stefano Pagliarani and Andrea Pascucci develop a simple yet effective technique to price European options based on popular stochastic volatility specifications, with time-varying coefficients and in the presence of default risk. They further show that this technique extends naturally to default-free calibration of implied volatilities.

Following a more empirical route, Özcan Ceylan presents a model that captures both the feedback and the leverage effects of stochastic volatility in "Time-varying volatility asymmetry: a conditioned HAR-RV(CJ) EGARCH-M model", the issue's second paper. A particular feature of this approach is its ability to forecast asymmetric volatility responses to good and bad news during different market cycles.

While the first two papers in the issue focus on single assets, the next two deal with portfolios. In our third paper, "Copulas and portfolio strategies: an applied risk management perspective", Theo Berger and Martin Missong conduct an empirical study to evaluate the risk management performance of different portfolio strategies in combination with various models that capture tail distribution correlations. They find that the Student t copula, in particular, produces improved value-at-risk estimates compared with those obtained from classic conditional or Gaussian correlations.

The fourth and final paper in this issue, "Aone-factor copula-based model for credit portfolios" by Marek Kolman, is a practitioner-centered contribution that illustrates ways of addressing certain limitations contained in two popular portfolio credit risk models: CreditMetrics and CreditRiskC. Specifically, the one-factor Gaussian and double-t copulas are contrasted, and the inclusion of a stochastic recovery rate is evaluated.

Farid AitSahlia
Warrington College of Business Administration,
University of Florida

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