Interest rates
Excess yields in bond hedging
Litterman & Scheinkman (1991) showed that the term structure of interest rates is reliablymodelled by an affine three-factor model using principal component analysis. Such a modelis inconsistent with no arbitrage. Here, Haim Reisman and Gady Zohar derive…
Correlating market models
While swaption prices theoretically contain information on interest rate correlation, Bruce Choy, Tim Dun and Erik Schlögl argue that, for any practical purpose, this information cannot be extracted. Care must therefore be taken when pricing correlation…
DrKW adds to sales and trading in Paris
Dresdner Kleinwort Wasserstein (DrKW) has made a number of sales and trading appointments within its capital markets team in Paris.
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…
Swap vega in BGM: pitfalls and alternatives
Raoul Pietersz and Antoon PelsserPractitioners who are developing the Libor BGM model for risk management of a swap-based interest rate derivative be warned: for certain volatility functions the estimate of swap vega may be poor. This may occur for time…
Shadow interest
Using a Vasicek process for the shadow rate, Viatcheslav Gorovoi and Vadim Linetsky develop an analytical solution for pricing zero-coupon bonds using eigenfunction expansions, and show how to calibrate their model to the Japanese bond market. This…
Black smirks
Fei Zhou presents a simple stochastic volatility extension of the Black interest rate option pricing model widely used by traders. Using a perturbative expansion in volatility of volatility, he derives modified Black formulas that correctly fit the…
Sponsor's article > Redefining risk methodology horizons
Research has suggested that banks may need to address issues not clarified by Basel II and take a long, hard look at whether accepted approaches to evaluating credit risk are adequate. As part of its strategic forum series, SunGard's Panorama business…
The stochastic volatility Libor market model
Interest rates
The relativity of volatility
Stress testing
The essentials of the LMM
Interest rates
Forward thinking
Forward simulation
Applying HJM to credit risk
Credit risk