Technical paper
Quantifying operational risk
This is the fifth of Charles Smithson's latest series of Class Notes, which will run in alternate issues of Risk through to the end of 2004. Class Notes is an educational series, designed to pull together the threads of recent developments and thinking…
Getting physical
Technology
Component proponents II
Christophe Pérignon and Christophe Villa propose a novel method of extracting the risk factors driving interest rates that allows both the covariance matrix of interest rates and the variances of the risk factors to vary through time. To illustrate the…
Local cross-entropy
One way of addressing the inconsistency between exchange-traded options prices and the Black-Scholes model is to attempt to find alternative risk-neutral distributions that are more consistent. However, non-uniqueness means an additional criterion is…
A credit loss control variable
Viktor Tchistiakov, Jeroen de Smet and Peter-Paul Hoogbruin explain and demonstrate how the efficiency of Monte Carlo simulation in valuing a portfolio of credit risky exposures is improved by the use of the Vasicek distribution as a control variable. An…
Quality junk
market graphics
Monthly snapshot
market data
Correlated defaults: let's go back to the data
Estimates of asset value correlation are a key element of Merton-style credit portfoliomodels. Many practitioners have access to asset value data for a large universe of listedfirms, so estimation is within reach. Alan Pitts describes a statistical…
Covering all the bases
Natural Gas
Arbitrage under power
When one knows the correct value of a tradable asset and the asset price diverges from that value, future convergence may present a good trading opportunity. However, the trader still has to decide when and how aggressively to open the position, and when…
Generalising universal performance measures
Performance and risk measurement are fundamental quantitative activities in finance, andnew ways of measuring them are always of interest. A recently proposed procedure is theuniversal performance measure. Theofanis Darsinos and Stephen Satchell show…
Correlated defaults: let’s go back to the data
Estimates of asset value correlation are a key element of Merton-style credit portfolio models. Many practitioners have access to asset value data for a large universe of listed firms, so estimation is within reach. Alan Pitts describes a statistical…
Monthly snapshot
market data
A balancing act
market graphics
A history lesson
Abstract: The size of bid/ask spreads in electricity options has both valuationand credit implications. Here, Ted Kury of The Energy Authority shows how toderive theoretical spreads using historical option price data so they can beused as liquidity…
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…