Quantitative analysis
Risk USA 2003: Schachter hits out at hedge fund disclosure
Barry Schachter, head of risk management at US hedge fund Sac Capital Advisors, believes quantitative hedge fund information disclosure to investors is relatively meaningless, and that they would be better served by disclosures about the risk management…
Operational risk: a practitioner's view
The Basel Committee on Banking Supervision ("the Committee") released aconsultative document that included a regulatory capital charge for operationalrisk. Since the release of the document, the complexity of the concept of "operationalrisk" has led to…
I will survive
Jon Gregory and Jean-Paul Laurent apply an analytical conditional dependence framework to the valuation of default baskets and synthetic CDO tranches, matching Monte Carlo results for pricing and showing significant improvement in the calculation of…
Bidding principles
Robert Almgren and Neil Chriss show how principal bid programme trades can be priced and evaluated as part of a trading business. By annualising the price impacts and variances of such trades, they construct an information ratio measure that can be used…
Credit barrier models
Claudio Albanese, Giuseppe Campolieti, Oliver Chen and Andrei Zavidonov construct an analytic credit barrier model driven by credit ratings, constrained to fit the term structure of credit spreads
Detecting market transitions: from backwardation to contango and back
Svetlana Borovkova looks at detecting market transitions between backwardation and contango states using the forward curve. In this first part of a two-part article, she introduces two change indicators, which she applies to oil futures prices. Next…
Trying to model reality
Credit Risk
Black smirks
Fei Zhou presents a simple stochastic volatility extension of the Black interest rate option pricing model widely used by traders. Using a perturbative expansion in volatility of volatility, he derives modified Black formulas that correctly fit the…
Real option valuation and equity markets
Many non-financial assets can be viewed as ‘real options’ linked to some underlying variable such as a commodity price. Here, Thomas Dawson and Jennifer Considine show that the stock price of a well-known electricity generating company is significantly…
Pitfalls and alternatives
Correlation
The road to partition
Applying the ensemble approach developed in these pages last month, Kevin Thompson and Roland Ordovas calculate risk contributions and show how to measure higher-order default dependence using the method of partitions. The results provide tools allowing…
Applying modern portfolio theory to optimal gas purchasing
Yijun Du and Xiaorui Hu present a general framework for applying modern portfolio theory to optimal natural gas procurements. They show that successful natural gas procurement involves determining the optimal allocation between fixed-price and floating…
A better approach to operational risk aggregation
Professor Carol Alexander proposes an aggregation methodology that takes account of dependencies between op risk losses that have some common risk drivers.
Credit ensemble
Kevin Thompson and Roland Ordovas address the question of how individual counterparties contribute to the total credit risk of a portfolio. They provide an analytic method, new to credit modelling, to estimate all joint default statistics conditional…
Exceptional operational risks: Three myths debunked
Are there common features among exceptional operational risks beyond their defining characteristics of rarity and severe consequences?
Enhancing CreditRisk+
Of the various analytical approaches to credit portfolio modelling, CreditRisk+ has become the most popular due to its tractability. However, the model suffers from the restrictive assumption of sector independence. Moreover, the recursion relation for…
Credit ensembles
Kevin Thompson and Roland Ordovas address the question of how individual counterparties contribute to the total credit risk of a portfolio. They provide an analytic method, new to credit modelling, to estimate all joint default statistics conditional…
Project risk: improving Monte Carlo value-at-risk
Cashflows from projects and other structured deals can be as complicated as we are willing to allow, but the complexities of Monte Carlo project modelling need not complicate value-at-risk calculation. Here, Andrew Klinger imports least-squares valuation…
Quantifying the op risk in investment fund valuation
Fund management is often forgotten in the wider push towards quantitative operational risk management. Here, François Longin and Gautier Martin take a closer look at the operational risk that accompanies fund valuation.
Contributions to credit risk
Optimisation of credit portfolios requires that risk contributions be quantified. However, there has been disagreement over which of three popular tail risk measures should be used. Here, Alexandre Kurth and Dirk Tasche offer a way forward, showing how…
Advancing op risk management using Japanese banking experience
Junji Hiwatashi and Hiroshi Ashida of the Bank of Japan outline a practical framework for operational risk management, derived from research and experiences in Japan's financial community.
Contributions to credit risk
Optimisation of credit portfolios requires that risk contributions be quantified. However, there has been disagreement over which of three popular tail risk measures should be used. Here, Alexandre Kurth and Dirk Tasche offer a way forward, showing how…
Random tranches
How should economic or regulatory capital be allocated to tranches of securitisations? The standard Basel conditional dependence calculations are complicated in this case by non-linearity effects and complex deal dependence. Here, Michael Gordy and David…
Capturing the smile
Since the discovery that traditional calibration methods fail to capture the dynamics of the smile, new approaches based on mixtures or ensembles of models have been developed. Simon Johnson and Han Lee present a variant of this approach that can be used…