Technical paper
Validation of profit and loss attribution models for equity derivatives
The aim of this paper is to validate profit and loss attribution generated by daily movements of option prices as seen through their Black–Scholes (Black and Scholes 1973) and Merton (1973) implied volatilities.
A risk-based approach to construct multi asset portfolio solutions
In this paper, the authors introduce an approach to cluster asset classes by correlation distance and then outline how these results can be used to design portfolios that are optimal in a group risk parity (GRP) framework.
The present of futures
Fabio Mercurio introduces a new multi-curve model for pricing futures convexity adjustments
Navigating the new energy market dynamics
Utilities need to adapt to compete in the “new normal” environment of renewable energy supply
Shapley allocation, diversification and services in operational risk
In this paper, the authors propose a method of allocating operational risk regulatory capital using a closed-form Shapley method, applicable to a large number of business units (BUs).
Modeling catastrophic operational risk using a compound Neyman–Scott clustering model
In this paper, the authors discuss the hazard generated by OpRisk driven by natural and human-made disasters, and argue the position of the LDA as the most-fitted statistical approach to deal with it.
The absence of evidence and the evidence of absence: an algorithmic approach for identifying operational outages in TARGET2
This paper implements an algorithmic approach to identify participants’operational outages based on transaction data.
Distributed ledger technology in payments, clearing and settlement
This paper examines how DLT can be used in the area of PCS, and identifies both the opportunities and challenges associated with its long-term implementation and adoption.
Risk mutualization and financial stability: recovering and resolving a central counterparty
This paper investigates how financial market participants respond to risk mutualization implemented by a CCP using assessments after a large credit loss.
SPEI’s diary: econometric analysis of a dynamic network
This paper identifies the determinants behind the dynamics of the real-time settlement payment system in Mexico, SPEI, during the period January 2005–December 2015.
FMIC 2 special issue introduction: a policy view on developments in the field of financial market infrastructures
This introductory article positions these papers and speeches within the context of the wider conference proceedings of the Financial Market Infrastructure Conference II: New Thinking in a New Era, including insights from the panel sessions and…
Central counterparties and systemic stability
The paper is the text of a keynote address by Marc Bayle de Jessé presented at the conference.
Mostly prior-free asset allocation
This paper develops a prior-free version of Harry Markowitz’s efficient portfolio theory, which allows the decision maker to express their preferences with regard to risk and reward, even though they are unable to express a prior over potentially…
A copula approach to credit valuation adjustment for swaps under wrong-way risk
This paper deals with the credit valuation adjustment (CVA) of interest rate swap (IRS) contracts in the presence of an adverse dependence between the default time and interest rates: so-called wrong-way risk (WWR).
When do central counterparties enhance market stability?
This paper examines the impact of market structure and payment assumptions on the fragility of various networks.
The impact of unconventional monetary policy shocks on the crude oil futures market
This paper examines how West Texas Intermediate (WTI) crude oil price returns and volatilities respond to changes in US monetary policy.
Foreign exchange correlation swap: problem solver or troublemaker?
A correlation structure is an important element in pricing products such as correlation swaps
Adjoint algorithmic differentiation tool support for typical numerical patterns in computational finance
This paper demonstrates the flexibility and ease in using C++ algorithmic differentiation (AD) tools based on overloading to numerical patterns (kernels) arising in computational finance.
Monte Carlo payoff smoothing for pricing autocallable instruments
This paper develops a Monte Carlo method to price instruments with discontinuous payoffs and non-smooth trigger functions, which allows a stable computation of Greeks via finite differences.
The quickest way to lose the money you cannot afford to lose: reverse stress testing with maximum entropy
This paper extends a technique devised by Saroka and Rebonato to “optimally” deform a yield curve in order to deal with a common and practically relevant class of optimization problems subject to linear constraints.
Optimal equity protection of Solvency II regulated portfolios
In the context of equity investments, this paper examines the relationship between the cost of acquiring protection (in the form of put option) and the reduction of capital charges that it entails. The paper develops the idea that Solvency II regulations…
Valuing streams of risky cashflows with risk-value models
Based on risk-value models this paper introduces a multi-period approach to the valuation of streams of risky cash flows.
American quantized calibration in stochastic volatility
Fiorin, Callegaro and Grasselli show how discretisation methods reduce computing time in high-dimensional problems
Central counterparty resolution: an unresolved problem
This paper describes the current policy for recovery and resolution of CCPs and assesses the tool kit for resolution of them.