Technical paper
Inflation ist normal
Der Neueste Stand - Inflationsderivate
Inflation is normal
Chris Kenyon introduces normal-based smile models for year-on-year inflation motivated by the observation that market lognormal caplet volatilities of less than 1% imply normality for maturities of up to 30 years. He is also motivated by the range of…
Convexity adjustments in inflation-linked derivatives
Dorje Brody, John Crosby and Hongyun Li value several types of inflation-linked derivatives using a multi-factor version of the Hughston (1998) and Jarrow & Yildirim (2003) model. Expressions for the prices of zero-coupon inflation swaps with delayed…
Gamma loss and prepayment
Peter Jackel presents a model for the dynamics of fractional notional losses and prepayments on asset-backed securities for the valuation and risk management of derivatives, including waterfall structures and other structured debt obligations on bespoke…
Let's jump together: pricing credit derivatives
Joao Garcia, Serge Goossens and Wim Schoutens introduce a dynamic multivariate jump-driven model for credit spreads. The model parameters come from a calibration on swaptions and a correlation-matching procedure. The authors apply the model to credit…
Combining the SABR and LMM models
Pierre Henry-Labordere analyses a stochastic volatility Libor market model that combines the SABR and Brace-Gatarek-Musiela (BGM) models in a natural way. Using an innovative geometrical method, he explains how to obtain analytical formulas for swaption…
A free lunch and the credit crunch
Monoline insurers act as triple-A guarantors of the senior risks in structured finance. A purchaser of credit insurance or protection from a monoline may argue that they take only a small amount of the counterparty risk that is a common side-effect of…
Estimating credit contagion in a standard factor model
State-of-the-art credit risk portfolio models and the new Basel capital Accord consider only symmetric dependencies between borrowers in a portfolio, such as correlations. Recently, asymmetric dependencies have been introduced by Davis & Lo (2001), among…
Structural modelling of subprime mortgages
With the economy still suffering from the waves of the credit crunch, triggered by a housing price slump, Yong Kim provides a structural model of subprime mortgages based on housing market risks. Given the enormity of the subprime mortgage market failure…
Valuation and risk analysis for Dutch pension schemes
Technical papers
A multi-state Vasicek model for correlated default rate and loss severity
Correlation between default and recovery has a major bearing on credit risk capital. Rahul Sen shows the effect can be modelled efficiently by allowing multiple loss states in the Vasicek framework. Heavy-tailed distributions result for arbitrary loss…
Explaining the Levy base correlation smile
Joao Garcia and Serge Goossens look at base expected loss at maturity both in the Gaussian copula and Levy-based models, and link it to base correlation in these frameworks. They report on the existence of smile in both base correlation curves and…
Inflation is normal
Chris Kenyon introduces normal-based smile models for year-on-year inflation motivated by the observation that market lognormal caplet volatilities of less than 1% imply normality for maturities of up to 30 years. He is also motivated by the range of…
Estimating intrinsic currency values
Forex market practitioners constantly talk about the strengthening or weakening of individual currencies. In this article, Jian Chen and Paul Doust present a new methodology to quantify these statements in a manner that is consistent with forex market…
Performance of statistical arbitrage in petroleum futures markets
Regulation Update