Quantitative analysis
An indirect view from the saddle
The saddlepoint method has become established as a tool for portfolio analysis. In this article, Richard Martin and Roland Ordovas review the main concepts and show that there are two essentially distinct ways of applying it to conditional independence…
Dynamic frailties and credit portfolio modelling
Martin Delloye, Jean-David Fermanian and Mohammed Sbai estimate and discuss a reduced-form credit portfolio model in a proportional hazard framework. They propose an innovative method of generating flexible amounts of dependence between underlying…
Dealing with seller's risk
The risk of trade receivables securitisations comes from both the pool of assets and the seller of the assets. Vivien Brunel develops a model for securitisation exposures that deals with both risks, and analyses in detail the interplay between debtors'…
The price of mortality
Cutting Edge: Mortality Assumptions
BMW Personal Finance
BMW Personal Finance recently entered the UK retail market with this balance bond, in partnership with Newcastle Building Society. While this is the first such UK offering for the car manufacturer's financial division, a structured certificate has also…
ING Bank
ING Bank recently launched this DJ Eurostoxx 50-linked product in both the Netherlands and Germany. This product was offered as an alternative to Dutch investors for the similarly structured 130% Dutch Bonus Note, based on the AEX
Deutsche Bank
This product, issued by Deutsche Bank, is distributed by Citibank in Belgium. While 20 out of the 368 products recorded so far in 2006 were linked to Euribor, this product, now in its third issue, is based on a unique payoff
Bank of Ireland
Bank of Ireland's Isle of Man operation has recently celebrated its 25th anniversary on the island with the launch of the sterling-denominated Silver Anniversary Bond. The product was also made available via the Isle of Man local post offices as the…
Intensity gamma
Mark Joshi and Alan Stacey develop a new model for correlation of credit defaults based on a financially intuitive concept of business time similar to that in the variance gamma model for stock price evolution
Beyond Black-Litterman in practice
In principle, the copula-opinion pooling (COP) approach extends the Black-Litterman methodology to non-normally distributed markets and views. However, the implementations of the COP framework presented so far rely on restrictive quasi-normal assumptions…
Modelling and estimating dependent loss given default
Martin Hillebrand proposes a portfolio credit risk model with dependent loss given default (LGD), offering a reasonable economic interpretation that is easily applicable to real data. He builds a precise mathematical framework, and stresses some…
Smiling at convexity
The price of a constant maturity swap (CMS)-based derivative is largely determined by the value of swaption volatilities at extreme strikes. Fabio Mercurio and Andrea Pallavicini propose a simple procedure for stripping consistently implied volatilities…
Cracking VAR with kernels
Value-at-risk analysis has become a key measure of portfolio risk in recent years, but how can we calculate the contribution of some portfolio component? Eduardo Epperlein and Alan Smillie show how kernel estimators can be used to provide a fast,…
Low-default portfolios without simulation
Low-default portfolios are a key Basel II implementation challenge, and various statistical techniques have been proposed for use in PD estimation for such portfolios. To produce estimates using these techniques, typically Monte Carlo simulation is…
Margining insurance liabilities
Cutting edge: Solvency II
UBS
Quant Analysis
Deutsche Bank
Quant Analysis
Caixa Laietana
Quant Analysis
Nvesta
Quant Analysis
CMCDS valuation with market models
There is little, if any, literature available on constant-maturity credit default swap (CDS) valuation. Here, Damiano Brigo builds on his no-arbitrage dynamic CDS market model to derive a formula involving a 'convexity adjustment' feature correction,…
A saddle for complex credit portfolio models
Guido Giese applies the saddle-point approximation to analyse tail losses for very general credit portfolios, including correlated defaults, stochastic recovery rates, and dependency between default probabilities and recovery rates. The numerical…
Intensity gamma
Mark Joshi and Alan Stacey develop a new model for correlation of credit defaults based on a financially intuitive concept of business time similar to that in the variance gamma model for stock price evolution
A model of op risk with imperfect controls
Jorge Sobehart considers a model for the loss severity of operational risk events whose distribution is determined by risk control and risk mitigation. In particular, he shows that ineffective risk controls can lead to heavy-tailed distributions of…
Inflation swaps - Mechanics of inflation swaps
Inflation swaps can reduce the complexity of hedging calculations in liability-driven investment. But is this tool really suitable for corporate pension funds?