Technical paper
Loan portfolio value
Using a conditional independence framework, Oldrich Vasicek derives a useful limiting form for the portfolio loss distribution with a single systematic factor. He then derives a risk-neutral distribution suitable for traded portfolios, and shows how…
Weather option pricing with transaction costs
The weather derivatives market is becoming more liquid, and dynamic hedging of weather options with weather swaps is now possible, though limited by transaction costs. Here Stephen Jewson investigates the effect of such hedging on option pricing
Unsystematic credit risk
Although Basel has shifted its treatment of unsystematic credit risk from the first, capital rules pillar (where it was called the 'granularity adjustment') to the second, supervisory pillar of the forthcoming Accord, this issue is of great practical…
Unsystematic credit risk
Although Basel has shifted its treatment of unsystematic credit risk from the first, capital rules pillar (where it was called the ‘granularity adjustment’) to the second, supervisory pillar of the forthcoming Accord, this issue is of great practical…
Minimising extremes
Portfolio diversification often breaks down in stressed market environments, but the co-movement of asset prices in a tail risk regime may be modelled using a coefficient of tail dependence. Here, Yannick Malevergne and Didier Sornette show how such…
A joint state-space model for spot and futures power
Portfolio-wide risk management requires a model that accounts correctly for correlations between the spot asset and various futures products. Kjetil Kåresen and Egil Husby discuss a joint multi-factor model for power spot and futures prices and show how…
Portfolio allocation to corporate bonds with correlated defaults
This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility ofcorrelated defaults. Under fairly general assumptions for the distribution of thetotal net assets of a set…
Fallacies about the effects of market risk management systems
This paper takes another look at allegations that risk management systems have contributed to increased volatility in financial markets, with the particular example of the summer of 1998. The paper also provides new evidence on the potential effect of…
Avoiding pro-cyclicality
David Cosandey and Urs Wolf argue that, for small to medium-sized enterprises, Basel II is pro-cyclical because of a double-counting of the risks. They present two main directions for possible capital rules that would circumvent the pro-cyclicality…
A bootstrap back-test
Back-testing
Copula vulnerability
Counterparty credit risk
Reconstructing volatility
Options on stock baskets have become a mainstay of the equity derivatives business, but pricing and hedging of such products is highly sensitive to implied volatility and correlation assumptions. Here, Marco Avellaneda, Dash Boyer-Olson, Jérôme Busca and…
Reconstructing volatility
Equity derivatives
Estimating oil price volatility: a Garch model
Nikolai Sidorenko, Michael Baron and Michael Rosenberg present a general framework for modelling energy price volatility. These models explain the volatility persistence and clustering present in many commodity prices. In addition, they can incorporate…
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.