Modelling
EU banks aim to block new counterparty risk guidance
Requirement to include exposure spikes linked to swap payments within EEPE models prompts blowback
APG hires in-house weatherman to interpret climate data
Europe’s wettest summer in a century prompts asset managers to calculate flood risk for real estate
NLP and transformer models for credit risk
News feeds are factored into models to predict credit events
Building forward-looking scenarios: why you’re doing it wrong
Rick Bookstaber and colleagues describe a process for constructing effective scenarios
Show your workings: lenders push to demystify AI models
Machine learning could help with loan decisions – but only if banks can explain how it works. And that’s not easy
Model change cuts Barclays’ VAR 21% in H1
Reducing historical lookback period from two years to one shaves £5m off bank’s average VAR
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Goldman tackles climate risk controls
Lender joins other banks in translating physical and transition threats into controls framework
Risk managers urge consolidation of climate scenarios
Converging financial and corporate scenarios would provide better data for stress-testing
Nomura understated VAR capital charges by 13% in H2 2020
VAR RWAs should have been ¥122 billion higher than originally stated at end-December
How algos are helping inflation-wary investors
Buy-siders look to machine learning for clues on the effect of rising prices on portfolios
Deep XVAs and the promise of super-fast pricing
Intelligent robots can value complex derivatives in minutes rather than hours
Banks fear Fed crackdown on AI models
Dealers say agencies’ request for info could prompt new rules that stifle model innovation
Libor transition nears its end – Five topics you need to know
As the deadline to Libor cessation approaches, Liang Wu, executive director of financial engineering and head of cross-asset product management at Numerix, presents a series of market themes that warrant closer inspection
Sign prediction and sign regression
This paper proposes an approach whereby the loss function regularizes the errors in prediction in different ways.
The volatility paradigm that’s stirring up options pricing
‘Rough volatility’ models promise better pricing and hedging of options. But will they catch on?
A verification model to capture option risk and hedging based on a modified underlying beta
This paper analyzes the relationship between option risk and expected return from the perspective of the underlying beta, and estimates the degree of correlation.
The impact of energy costs on industrial performance: identifying price and quantity effects in the aluminum industry using a data envelopment analysis approach
The authors build a frontier function model with technical and cost efficiency measures to assess the impact of energy costs on competitiveness in the aluminum industry, a heavy energy consumer, by identifying what may be attributed to price and quantity…
My kingdom for the right copula
Copulas can still deliver if chosen with due attention to intuition and data, says quant fund chair
Ex-SunGard chief Cris Conde’s random walk to fintech and beyond
Technologist talks artificial intelligence, angel investing and accidentally contributing to the Basel framework
How accurate is the accuracy ratio in credit risk model validation?
The author presents four methods to estimate the sample variance of the accuracy ratio and the area under the curve.
Body and tail: an automated tail-detecting procedure
The quality of a tail model, which is determined by data from an unknown distribution, depends critically on the subset of data used to model the tail. Based on a suitably weighted mean square error, the authors present a completely automated method that…
Standard errors of risk and performance estimators for serially dependent returns
In this paper, a new method for computing the standard errors (SEs) of returns-based risk and performance estimators for serially dependent returns is developed.
Can CCPs zone in on improved margin buffers?
Dynamically adjusting margin add-ons could reduce cyclical funding demands