Insurance Risk/Technical paper

Quanto adjustments in the presence of stochastic volatility

It is well known that the quanto adjustment in the drift of the underlying has a significant impact on the prices of quanto options. Alexander Giese points out that an additional quanto adjustment in the underlying’s volatility needs to be considered in…

Market-consistent equity risk premiums

The capital asset pricing model used to determine excess return for a given risk level and allocate assets typically uses historical data, which can be a poor predictor of risk. By adapting the model to be consistent with market-implied distributions,…

Confidence in controlling risk measures

Insurers increasingly use stochastic simulation approaches for estimating risk capital, but numerical errors are rarely measured. A control variate method can improve the accuracy dramatically without increasing the number of simulations.

Assessment of longevity risk under Solvency II

As the implementation of Solvency II looms, the calibration of the standard formula remains a controversial issue as the industry runs the fifth quantitative impact study. But the current design overshoots the one in 200 year confidence level.

Two curves, one price

The financial crisis multiplied the yield curves used to price interest rate derivatives, making traditional no arbitrage pricing no longer valid. By taking into account the basis adjustment bootstrapped from market basis swaps and using a foreign…

Validating interest rate models under Solvency II

With Solvency II fast approaching, obtaining approval for your internal model is increasingly important. A key part of this process will be to demonstrate the ability of the model’s scenario generation to describe the evolution of interest rates…

Factors on demand

Linear factor models are commonly used by portfolio managers to capture sources of risk, traditionally split between systematic and idiosyncratic types. By using the conditional link between flexible bottom-up estimation, and top-down attribution, factor…

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