Technical paper
Stratified approximations for the pricing of options on average
The authors propose stratified approximations of option prices using the gamma and lognormal distributions, with an application to bond pricing in the Dothan model.
The funding invariance principle
Youssef Elouerkhaoui shows how the choice of discounting rate is irrelevant for pricing
Risk management for return enhancement
Lundin and Satchell present a non-linear asymmetric dependence method between two assets
Non-parametric local volatility formula for interest rate swaptions
Gatarek, Jabłecki and Qu introduce a Dupire-like formula for swaptions
Efficient solution of backward jump-diffusion partial integro-differential equations with splitting and matrix exponentials
A unified approach for solving jump-diffusion partial integro differential equations is proposed.
The application of Hermite polynomials to risk allocation
This paper investigates a practical and fast analytic framework for portfolio modeling and tail risk allocation using Hermite polynomials.
On optimal smoothing of density estimators obtained from orthogonal polynomial expansion methods
This paper discusses the application of orthogonal polynomials to the estimation of probability density functions.
Testing interest rate models for Solvency II applications
Alexey Botvinnik and Vladimir Ostrovski propose a validation method for interest rate models
Basel II versus III: a comparative assessment of minimum capital requirements for internal model approaches
This paper provides a comparative assessment of the minimum capital requirement (MCR) in three prominent versions of the Basel regulatory framework.
B-spline techniques for volatility modeling
In this paper the use of B-splines is advocated for volatility modeling within the calibration of stochastic local volatility (SLV) models and for the parameterization of an arbitrage-free implied volatility surface calibrated to sparse option data.
Model uncertainty in risk capital measurement
The authors of this paper propose to quantify the effectiveness of a capital estimation procedure via the notions of residual estimation risk and estimated capital risk.
Hedging error measurement for imperfect strategies
Jack Baczynski, Jonathan da Silva and Rosalino Junior present an index for measuring hedging errors
The efficient application of automatic differentiation for computing gradients in financial applications
Automatic differentiation is the theme of this paper. The authors show that many functions in calibration and inverse problems, exhibit a natural substitution structure. A significant speedup is achieved compared with common reverse-mode AD.
Updating the option implied probability of default methodology
This paper updates the option implied probability of default (iPoD) approach recently suggested in the literature.
Expected shortfall is jointly elicitable with value-at-risk: implications for backtesting
Fissler, Ziegel and Gneiting investigate the role of elicitability in backtesting problems and show how comparative backtests can be implemented for expected shortfall
Diversification benefit of operational risk
Torresetti and Le Pera explore the relevance of the diversification benefit from a theoretical and practical viewpoint
Network centrality, failure prediction and systemic risk
This paper offers a promising new avenue of investigation into how information on firms’ interconnectivity can improve existing credit models.
Systemic risk and the sovereign-bank default nexus: a network vector autoregression approach
This paper investigates European bond markets; looking at credit risk spillover effects between financial institutions and sovereigns in the euro area.
European government bond dynamics and stability policies: taming contagion risks
This paper develops methodologies to measure spillover risks in European sovereign bond markets in the period 2004–15.
Central counterparties in crisis: the Hong Kong Futures Exchange in the crash of 1987
This Forum contribution shows the reader the lessons that can be learned from one of the few occasions in history when a CCP got into severe difficulty.
Interoperability between central counterparties
The authors investigate interoperability from the perspective of the multilateral netting property of central clearing.
Reaction functions of the participants in Colombia’s large-value payment system
This paper investigates how participants react to major incidents in a payment system, contributing to the literature on payment reaction functions.
Identification of over and under provision of liquidity in real-time payment systems
The authors study the issue of liquidity provision in the context of payment systems where participating banks have flexibility on the timing of their outgoing payments during the settlement day.
Are all collections equal? The case of medical debt
This paper examines the predictive value of medical collections in assessing consumer creditworthiness with credit scoring models.