Technical paper
Pricing the bail-out
In an introduction to this month’s Cutting Edge, Risk’s technical editor, Mauro Cesa, and assistant technical editor, Laurie Carver, look at a new model proposed by a former Risk magazine quant of the year, which attempts to quantify the effect of state…
Smile dynamics IV
Lorenzo Bergomi addresses the relationship between the smile that stochastic volatility models produce and the dynamics they generate for implied volatilities. He introduces a new quantity, the skew stickiness ratio (SSR), and shows how, at order one in…
Information of interest
The flow of information in financial markets on future liquidity risk generates the rise and fall of demand for default-free bonds. Here, Dorje Brody and Robyn Friedman present an approach to pricing these bonds and the associated derivatives, based on…
Shortfall: who contributes and how much?
Understanding risk contributions is a key part of successful risk management and portfolio optimisation. Richard Martin extends the discussion from value-at-risk to expected shortfall and shows that saddlepoint approximation preserves the convexity proper
Performance of passive hedge fund replication strategies
Following initiatives by major investment banks, the financial industry has expressed renewed interest in passive hedge fund replication.
A market model on the iTraxx
A market model for the dynamics of credit-risky baskets and indexes such as the iTraxx has long been sought, but because of difficulties with the natural numéraire has remained elusive. Here, Philippe Carpentier proposes using hedging arguments to…
Variance-covariance-based risk allocation in credit portfolios
Mikhail Voropaev proposes high-precision analytical approximation for variance-covariance-based risk allocation in a portfolio of risky assets. A general case of a single-period multi-factor Merton-type model with stochastic recovery is considered. The…
Risk Management After Lehman
Can the constants used by quants and risk managers be trusted in the post-Lehman environment? Chris Schlegel of Southern Company looks at some of the pitfalls risk managers need to look out for when using constants and assesses why they are both vitally…
Fund performance raises specific issues
Unlike the returns of common stocks and mutual funds, hedge fund returns are generally not normally distributed.1,i This has considerable consequences on a number of hedge fund risk measures, as presented in last month’s article, which was drawn from the…
A rotationally invariant technique for rare event simulation
Because of their low probability, including extreme events in Monte Carlo calculations of the value-at-risk of a credit-risky portfolio requires many simulations. Here, Susanne Klöppel, Ranja Reda and Walter Schachermayer demonstrate a geometrically…
Cutting edge: Visualising value-at-risk
Risk transparency is an important yet elusive goal of any risk management process. One challenge is to understand the diversification effects of the portfolio elements. Wentao Zhao and Kevin Kindall introduce a graphical technique based on value-at-risk…
Shortfall: who contributes and how much?
Understanding risk contributions is a key part of successful risk management and portfolio optimisation. Richard Martin extends the discussion from value-at-risk to expected shortfall and shows that saddlepoint approximation preserves the convexity…
Estimation of intra-sector asset correlations
Research Papers
Stress-testing German credit portfolios
Research Papers