Technical paper
Masterclass: Valuing generation assets using Monte Carlo simulation
In this Masterclass, Les Clewlow, James Lujun Liu, Doug Meador, Ron Sobey and Chris Strickland describe the use of Monte Carlo methods for valuing generation assets in more detail. In particular, they discuss the appropriate price models to use and how…
Last option before the armageddon
Damiano Brigo and Massimo Morini show how the pricing of credit index options depends on the probability of a financial portfolio 'armageddon'. They introduce a new equivalent pricing measure that lays the foundation for a market model framework in multi…
Calibration of local stochastic volatility models to market smiles
Pierre Henry-Labordère introduces a new technique for calibrating local volatility extensions of arbitrary multi-factor stochastic volatility models to market smiles. Although approximate, this technique is both fast and accurate. The procedure is…
Credit spread shocks: how big and how often?
The second half of 2007 saw violent moves in credit spreads. In the fallout, there has been much discussion about how to estimate the probabilities of these severe events, but few conclusions have been obtained beyond the fact that historical data is…
Calculation of variable annuity market sensitivities using a pathwise methodology
Under traditional finite difference methods, the calculation of variable annuity sensitivities can involve multiple Monte Carlo simulations, leading to high computational cost. A pathwise approach reduces this dramatically, while providing an unbiased…
Fast Monte Carlo Bermudan Greeks
Cutting Edge - Interest Rates
Rehabilitating innovation
The financial crisis has put greater focus on the accuracy of models, with some regulators criticising banks for placing too much reliance on model outputs. In an introduction to this month's Cutting Edge section, Mauro Cesa, Risk's technical editor, and…
The hybrid saddlepoint method for credit portfolios
Anthony Owen, Alistair McLeod and Kevin Thompson derive a practical analytic approach, which they call the hybrid saddlepoint method, to calculate the credit loss distribution for a heterogeneous portfolio of correlated obligors
Credit spread shocks: how big and how often?
The second half of 2007 saw violent moves in credit spreads. In the fallout, there has been much discussion about how to estimate the probabilities of these severe events, but few conclusions have been obtained beyond the fact that historical data is…
Mixed fortunes predicted for alternative asset class ETFs
Alternative asset class exchange traded funds (ETFs) enable investors to gain simple access to alternative investment opportunities such as hedge funds, commodities, real estate or currency baskets.
A framework for extrapolation of long-term interest rates
Technical papers
A dynamic model for hard-to-borrow stocks
Traders with short positions in stocks that are subject to short-selling restrictions risk being 'bought in', in the sense that their positions may be closed out by the clearing firm at market prices. Marco Avellaneda and Mike Lipkin present a model for…
Simulations with exact means and covariances
Attilio Meucci presents a simple method to generate scenarios from multivariate elliptical distributions with given sample means and covariances, and shows an application to the risk management of a book of options
Stepping through Fourier space
Diverse finite-difference schemes for solving pricing problems with Levy underlyings appear in financial literature. Invariably, the integral and diffusive terms are treated asymmetrically, large jumps are truncated, and the methods are difficult to…
Fast Monte Carlo Bermudan Greeks
In recent years, much effort has been devoted to improving the efficiency of the Libor market model. Matthias Leclerc, Qian Liang and Ingo Schneider extend the pioneering work of Giles & Glasserman (2006) and show how fast calculations of Monte Carlo…
