Quantitative analysis
A measure of survival
Credit derivatives
Hedging of corporate pension liabilities
Bernd Scherer here proposes a normative theory of asset/liability management that views externally funded pension funds exclusively from a corporate finance point. Standard asset management solutions are derived after the corporate finance problem has…
Quantifying operational risk
This is the fifth of Charles Smithson's latest series of Class Notes, which will run in alternate issues of Risk through to the end of 2004. Class Notes is an educational series, designed to pull together the threads of recent developments and thinking…
Component proponents II
Christophe Pérignon and Christophe Villa propose a novel method of extracting the risk factors driving interest rates that allows both the covariance matrix of interest rates and the variances of the risk factors to vary through time. To illustrate the…
Local cross-entropy
One way of addressing the inconsistency between exchange-traded options prices and the Black-Scholes model is to attempt to find alternative risk-neutral distributions that are more consistent. However, non-uniqueness means an additional criterion is…
A credit loss control variable
Viktor Tchistiakov, Jeroen de Smet and Peter-Paul Hoogbruin explain and demonstrate how the efficiency of Monte Carlo simulation in valuing a portfolio of credit risky exposures is improved by the use of the Vasicek distribution as a control variable. An…
Quality junk
market graphics
Monthly snapshot
market data
Correlated defaults: let's go back to the data
Estimates of asset value correlation are a key element of Merton-style credit portfoliomodels. Many practitioners have access to asset value data for a large universe of listedfirms, so estimation is within reach. Alan Pitts describes a statistical…
FX Concepts hires in options
FX Concepts, a New York-based currency manager, has hired two options specialists to enhance its quantitative research, foreign exchange options and non-directional strategies management.
Arbitrage under power
When one knows the correct value of a tradable asset and the asset price diverges from that value, future convergence may present a good trading opportunity. However, the trader still has to decide when and how aggressively to open the position, and when…
Generalising universal performance measures
Performance and risk measurement are fundamental quantitative activities in finance, andnew ways of measuring them are always of interest. A recently proposed procedure is theuniversal performance measure. Theofanis Darsinos and Stephen Satchell show…
Correlated defaults: let’s go back to the data
Estimates of asset value correlation are a key element of Merton-style credit portfolio models. Many practitioners have access to asset value data for a large universe of listed firms, so estimation is within reach. Alan Pitts describes a statistical…
Monthly snapshot
market data
A balancing act
market graphics
Time to adapt copula methods for modelling credit risk correlation
In an evolving market, a new standard for the price quotation of credit products that models correlated changes in credit spreads as well as default times is needed, argues Darrell Duffie.
Smile at the uncertainty
Smile-consistent alternatives to the Black-Scholes model are often too cumbersome to be used for large portfolios of exotic options. Damiano Brigo, Fabio Mercurio and Francesco Rapisarda propose an intuitive stochastic volatility model that is easy to…
An arbitrage-free interpolation of volatilities
Nabil Kahalé describes a new construction of an implied volatilities surface from a discrete set of implied volatilities that is arbitrage-free and satisfies some smoothness conditions. His method provides an excellent fit to the smile of the local…
Practical relative-value volatility trading
The rapid growth of fixed-income hedge funds has resulted in increased interest in identifying relative-value trade opportunities. Here, the author presents a consistent framework for finding value within interest rate options markets.
Monthly snapshot
market data
Cash holdings grow
market graphics
Observations on the differences between operational risk regulatory and economic capital
In this article, Niklas Hageback takes a practical look at the difficulties in reconciling regulatory and economic capital calculation in the discipline of operational risk.
Cross-market valuation
This article takes the guesswork out of what credit margin to use when valuing credit-risky derivatives, and also sheds light on how relative value trading and capital structure arbitrage may be analysed quantitatively.