Technical paper
An arbitrage-free interpolation of volatilities
Nabil Kahalé describes a new construction of an implied volatilities surface from a discrete set of implied volatilities that is arbitrage-free and satisfies some smoothness conditions. His method provides an excellent fit to the smile of the local…
Practical relative-value volatility trading
The rapid growth of fixed-income hedge funds has resulted in increased interest in identifying relative-value trade opportunities. Here, the author presents a consistent framework for finding value within interest rate options markets.
Monthly snapshot
market data
Cash holdings grow
market graphics
Observations on the differences between operational risk regulatory and economic capital
In this article, Niklas Hageback takes a practical look at the difficulties in reconciling regulatory and economic capital calculation in the discipline of operational risk.
The matrix
Abstract: Portfolio-wide risk management requires a model that accounts correctlyfor the volatility of, and the correlations between electricity forward products.In this paper Kjersti Aas and KjetilK°aresen discuss a joint model for electricityforward…
Cross-market valuation
This article takes the guesswork out of what credit margin to use when valuing credit-risky derivatives, and also sheds light on how relative value trading and capital structure arbitrage may be analysed quantitatively.
PD estimates for Basel II
One of the main issues banks will have to face to comply with the new Basel II internal ratings-based approach is to prove that the long-run average probabilities of default they assign to their clients, which will be used as the basis for regulatory…
The effect of volatility
market graphics
Monthly snapshot
market data
An integrated framework for the governance of companies
Cases of insolvencies, losses and internal frauds have been increasing of late. As a result, the question is asked more and more often whether such cases could have been avoided with better governance of companies or a clearer organisational handbook. In…
String theory
Awards 2004
Constructing an operational event database
Michael Haubenstock of US bank Capital One outlines a framework for an event database, formulated with current US regulatory guidance on the subject in mind. The text is an abstract from The Basel Handbook, which has just been published by Risk Books.
The score for credit
Jorge Sobehart and Sean Keenan discuss the benefits and limitations of model performance measures for default and credit spread prediction, and highlight several common pitfalls in the model comparison found in the literature and vendor documentation. To…
Unifying volatility models
This article introduces a method for building analytically tractable option pricing models that combine state-dependent volatility, stochastic volatility and jumps. The eigenfunction expansion method is used to add jumps and stochastic volatility to…
Multi-factor adjustment
The author presents an analytical method for calculating portfolio value-at-risk and expected shortfall in the multi-factor Merton framework. This method is essentially an extension of the granularity adjustment technique to a new dimension.