Technical paper
Vanilla option replication for ALM shortfall risk
Technical papers
Smile dynamics III
In two articles published in 2004 and 2005 in Risk, Lorenzo Bergomi assessed the structural limitations of existing models for equity derivatives and introduced a new model based on the direct modelling of the joint dynamics of the spot and the implied…
Rates squared
Vladimir Piterbarg introduces a conveniently parameterised class of multi-factor quadratic Gaussian models, develops calibration formulas and explains the advantages of this class of models over alternatives currently available for the pricing and risk…
Error of VAR by overlapping intervals
When overlapping intervals in time series are used, volatility and price changes' percentiles are underestimated. Consequently, value-at-risk is also underestimated. Heng Sun, Izzy Nelken, Guowen Han and Jiping Guo measure the size of this underestimation
Joining the SABR and Libor models together
Fabio Mercurio and Massimo Morini propose a Libor market model consistent with SABR dynamics and develop approximations that allow for the use of the SABR formula with modified inputs. They verify that the approximations are acceptably precise, imply…
Hedge fund replication products
In 2007 an EDHEC study on passive hedge fund replication1 highlighted the inability of existing products to meet investors' needs for hedge fund replication. The factor replication approach fails to deliver accurate out-of-sample replication because of…
Pricing and hedging of variable annuities
Technical papers
Delta and vega hedging in the SABR and LMM-SABR models
Riccardo Rebonato, Andrey Pogudin and Richard White examine the hedging performance of the SABR and LMM-SABR models using real market data. As a by-product, they gain indirect evidence about how well specified the two models are. The results are…
Robust asset allocation under model risk
Financial investors often develop a multitude of models to explain financial securities' dynamics, none of which they can fully trust. Model risk (also referred to as ambiguity) prevents investors from using the classical framework of expected utility…
Being two-faced over counterparty credit risk
A recent trend in quantifying counterparty credit risk for over-the-counter derivatives has involved taking into account the bilateral nature of the risk so that an institution would consider their counterparty risk to be reduced in line with their own…
Alternatives as inflation hedges
Most of modern asset pricing theory and portfolio selection analysis is based on fund separation theorems. These, in a nutshell, advocate that performance and risk are two conflicting objectives that are best managed separately.
Model selection for loss reserves: The Growing Triangle technique
Technical papers
Zur Validierung von Marktrisikomodellen
Der Neueste Stand - Marktrisiko
Rates squared
Vladimir Piterbarg introduces a conveniently parameterised class of multi-factor quadratic Gaussian models, develops calibration formulas, and explains the advantages of this class of models over alternatives currently available for pricing and risk…
Seasonally adjusted prices for inflation-linked bonds
Inflation-linked bond markets are used ever more frequently by policy-makers, economists and commentators to assess the market's opinion about the future path of inflation and real yields. But important effects such as seasonality and carry are often…