Technical paper
Using Bayesian networks to predict op risk
By combining qualitative and quantitative data, Bayesian networks offer the perfect solution to the compelling need for an integrated approach to operational risk management, say Martin Neil and Ed Tranham.
Modelling weather-sensitive electrical loads
Here Véronique Bugnion, Aram Sogomonian and Glen Swindle introduce a new methodology for forecasting and jointly simulating temperature and electrical load
Risk and probability measures
Although its drawbacks are well known, VAR has become institutionalised as the market risk measure of choice among trading firms and regulators. Now there is a growing feeling that a reappraisal is overdue, exemplified here by Phelim Boyle, Tak Kuen Siu…
On the log-log linearity of the size distribution of growth stocks
Mauboussin & Schay (2000)1 discovered an almost linear relationship between the logarithm of the market capitalisation and the logarithm of the rank for growth stocks. Kou & Kou (2001)2 proposed an explanation for this observation based on the theory of…
A two-factor mean-reverting model
Commodity markets exhibit multi-factor behaviour as well as mean reversion. Building upon their previous paper, David Beaglehole and Alain Chebanier conclude the current Masterclass series by developing a two-factor mean-reverting model for crude oil…
The maturity effect on credit risk capital
In a mark-to-market approach to credit risk capital, ratings or spread volatility has the effect of making longer-maturity loans more capital-intensive. This is incorporated in the current Basel II proposals via a maturity adjustment factor. Arguing that…
The maturity effect on credit risk capital
In a mark-to-market approach to credit risk capital, ratings or spread volatility has the effect of making longer-maturity loans more capital-intensive. This is incorporated in the current Basel II proposals via a maturity adjustment factor. Arguing that…
Mean-reverting smiles
Commodity markets such as crude oil exhibit mean reversion as well as option smiles. David Beaglehole and Alain Chebanier meet this challenge, constructing a model suitable for pricing exotic options in these markets
Long or short in CDOs
Masterclass with Deutsche Bank
Extreme events and default baskets
Credit derivatives
Unified Asian pricing
Options
Testing assumptions
In calculating value-at-risk forecasts for trading portfolios, distributional assumptions are asimportant as the choice of risk factors, but it is not easy to determine the source of errorwhen rejected forecasts occur. Here, Jeremy Berkowitz develops a…
Substitute hedging
Derivatives on assets that are difficult to trade are of growing importance. Pricing suchderivatives requires the use of utility theory and proxy assets for hedging. Here, VickyHenderson and David Hobson review the theory and discuss several topical…
Universal Barriers
As our survey in this issue shows, there is an increasing volume of barrier products traded in the forex options market. Here, Alexander Lipton and William McGhee discuss the pricing of barriers under various model frameworks, with particular focus on…
Credit risk in asset securitisations: an analytical model
How much capital should banks reserve against investments in portfolio securitisations? Asserting that recent proposals on this subject by Basel are inconsistent, Michael Pykhtin and Ashish Dev propose a new analytical model suitable for tranches of…