Technical paper
Credit risk measurement of securitisation structures
Peter-Paul Hoogbruin, Harmenjan Sijtsma and Viktor Tchistiakov of ING Group Credit Risk Management present a framework for valuing securitisation tranches from an investor’s perspective.
Risk and reward at the speed of light: a new electricity price model
Samuel Bodily and Michel Del Buono propose a new electricity price model. The mean-reverting proportional volatility model matches important characteristics of power price dynamics where others, such as geometric Brownian motion, fall short
Component proponents
Principal component analysis is a widely used technique in finance but can be problematic when different data sets are grouped together. Christophe Pérignon and Christophe Villa show how to resolve this problem using a technique from biology called…
Finessing fixed dividends
Equity options
Assets with jumps
Option pricing
Exploring option pricing with mean-reversion jump diffusion
Yijun Du explores option pricing with a mean-reversion and jump-diffusion – or MJ – model, using Monte Carlo simulation. We find that jumps can increase the call price, a higher mean-reversion rate lowers the call price and the time to maturity has…
VAR you can rely on
Analytical and simulation-based methods often appear as rivals, but many real world problems are best served by judicious combinations of both approaches. In a first of a pair of computationally themed papers, Rabi De and Tanya Tamarchenko present a…
Trees from history
Option pricing
Calculating portfolio loss
For credit portfolios, analytical methods work best for tail risk, while Monte Carlo is used to model expected loss. However, products such as CDOs require a model for the entire distribution. Sandro Merino and Mark Nyfeler meet the challenge by…
Using Bayesian networks to predict op risk
By combining qualitative and quantitative data, Bayesian networks offer the perfect solution to the compelling need for an integrated approach to operational risk management, say Martin Neil and Ed Tranham.
Modelling weather-sensitive electrical loads
Here Véronique Bugnion, Aram Sogomonian and Glen Swindle introduce a new methodology for forecasting and jointly simulating temperature and electrical load
Risk and probability measures
Although its drawbacks are well known, VAR has become institutionalised as the market risk measure of choice among trading firms and regulators. Now there is a growing feeling that a reappraisal is overdue, exemplified here by Phelim Boyle, Tak Kuen Siu…