Technical paper
Monthly snapshot
market data
An integrated framework for the governance of companies
Cases of insolvencies, losses and internal frauds have been increasing of late. As a result, the question is asked more and more often whether such cases could have been avoided with better governance of companies or a clearer organisational handbook. In…
String theory
Awards 2004
Constructing an operational event database
Michael Haubenstock of US bank Capital One outlines a framework for an event database, formulated with current US regulatory guidance on the subject in mind. The text is an abstract from The Basel Handbook, which has just been published by Risk Books.
The score for credit
Jorge Sobehart and Sean Keenan discuss the benefits and limitations of model performance measures for default and credit spread prediction, and highlight several common pitfalls in the model comparison found in the literature and vendor documentation. To…
Unifying volatility models
This article introduces a method for building analytically tractable option pricing models that combine state-dependent volatility, stochastic volatility and jumps. The eigenfunction expansion method is used to add jumps and stochastic volatility to…
Multi-factor adjustment
The author presents an analytical method for calculating portfolio value-at-risk and expected shortfall in the multi-factor Merton framework. This method is essentially an extension of the granularity adjustment technique to a new dimension.
Swap vega in BGM: pitfalls and alternatives
Raoul Pietersz and Antoon PelsserPractitioners who are developing the Libor BGM model for risk management of a swap-based interest rate derivative be warned: for certain volatility functions the estimate of swap vega may be poor. This may occur for time…
The one-year lag
market graphics
How good is your information?
Fraud, opaque accounting practices and incomplete data are unavoidable. Butare they factored into a credit risk forecast? An emerging class of models doesthe job by assuming incomplete information. Barra's Lisa Goldberg explains.
Trading techniques
Rankings 2004
Storage strategies
Rankings 2004
Corridor variance swaps
This article studies a recent variation of a variance swap called a corridor variance swap (CVS). For this swap, returns are not counted in the realised variance calculation if the reference index level is outside some specified corridor. CVSs allow…
What’s a basket worth?
Peter Laurence and Tai-Ho Wang take a significant step in the valuation of basket options with positive and fixed weights. These model all index options, price, cap or equal weighted. Departing from the usual Black-Scholes framework, the authors provide…
Come together
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Bringing credit portfolio modelling to maturity
Michael Barco shows how to perform mark-to-market credit portfolio modelling by extendingthe well-known saddle-point technique, introducing spread and recovery rate volatility. Hethen tests his results on a fictitious portfolio, showing how asset…
Sensible and efficient capital allocation for credit portfolios
Michael Kalkbrener, Hans Lotter and Ludger Overbeck construct a new approach to economiccapital allocation, showing that three axioms uniquely determine a capital allocation scheme,and, more importantly, that any allocation satisfying the axioms is…