Towards a global valuation model

Banks use a variety of pricing models across business lines, creating discrepancies in the way various financial instruments are priced. But developments in high-throughput computing could lead to the possibility of a global valuation model, argue Claudio Albanese, Guillaume Gimonet and Steve White

Every bank uses pricing models that are specific to the instrument it is valuing. But even when they are perfectly implemented, there are inconsistencies between the models used for each instrument on a firm-wide basis.

Every valuation formula embodies two common weaknesses:

Each explicitly or implicitly makes assumptions about the future states of underlying risk factors. Therefore, the modelling of the future is specific to each individual instrument, rather than to each risk factor, and is