Technical paper/Risk management
Wrong-way risk done right
Jacky Lee and Luca Capriotti present an arbitrage-free valuation method for counterparty exposure of credit derivates portfolios.
On the application of spectral filters in a Fourier option pricing technique
When dealing with nonsmooth functions – such as a combination of a nonsmooth density and a payoff – spectral filters can be applied to deal efficiently with the so-called Gibbs phenomenon. The simplicity and effectiveness of classical filtering…
Counting processes for retail default modeling
The article discusses the use of counting processes for retail (mortgage) default modeling.
A novel Fourier transform B-spline method for option pricing
By means of B-spline interpolation, this paper provides an accurate closed-form representation of the option price under an inverse Fourier transform.
Time series models for credit default swap premiums
This paper analyzes the theoretical properties and statistical behavior of credit default swap (CDS) premiums over time.
Hermite approximations in credit portfolio modeling with probability of default–loss given default correlation
The authors present an analytic framework for credit portfolio modeling using Hermite expansions.
A robust set-valued scenario approach for handling modeling risk in portfolio optimization
By introducing the set-valued scenario, this paper proposes a unified robust portfolio selection approach under downside risk measures.
A simple approximation for the no-arbitrage drifts in Libor market model–SABR-family interest-rate models
This paper presents a simple approximation for the noarbitrage drifts that appear in Libor market model SABR-family term structure models.
Commodity value-at-risk modeling: comparing RiskMetrics, historic simulation and quantile regression
The authors of this paper investigate the risk modeling of commodities. They note that return distributions differ widely across different commodities, both in terms of tail fatness and skewness.
Cave quid optes: waterfalls and central counterparty capital
This paper explores the lines of defense of a central counterparty. The author examines the lines of defence ("the waterfall") of a central counterparty (CCP) inter alia in the context of the requirements set by the Principles for Financial Market…
Communities and driver nodes in the TARGET2 payment system
This paper first describes T2 by means of classic network measures. Then, it applies novel methods developed in network theory to uncover two additional features of T2: driver nodes and communities.
Stress testing and modeling of rating migration under the Vasicek model framework: empirical approaches and technical implementation
This paper is concerned with stress testing the Vasicek model by extending the correlation structure for nondefault ratings. Two models are proposed.
A dynamic approach to intraday liquidity needs
This paper studies the intraday liquidity needs of systemically important entities using simulations of the various Colombian financial market infrastructures (FMIs). The paper shows that if liquidity in another FMI (based on the proprietary positions of…
Backtesting Solvency II value-at-risk models using a rolling horizon
The author of this paper performs an analysis on a review of the equity stress parameter for Dutch pension funds.
Monitoring IT operational risks across US capital markets
This paper suggests an approach for assessing IT risk through an incident-based method for monitoring operational IT risk across an extended enterprise based on the ISACA Risk IT framework.
Biased benchmarks
The authors of this paper contend that recent evidence indicates that benchmarks have, over the last eleven years, exaggerated default risk for nonfinancial corporate entities.
Cutting Edge introduction: Creative stress testing
New stress-testing method offers a break from decades-old traditio
The robustness of estimators in structural credit loss distributions
This paper examines the performance of MM, ML and OLS estimators through Monte Carlo experiments for various sample sizes and correlation values when the true data is from non-Gaussian processes.
Bayesian operational risk models
This paper proposes a methodology to frame risk self-assessment data into suitable prior distributions that can produce posterior distributions from which accurate operational risk measures.
Numerical valuation of derivatives in high-dimensional settings via partial differential equation expansions
This paper presents a new numerical approach to solving high-dimensional partial differential equations that arise in the valuation of exotic derivative securities. The resulting numerical solutions are carefully compared in terms of accuracy and run…
Stress testing in non-normal markets via entropy pooling
Ardia and Meucci introduce a parametric entropy pooling approach to portfolios stress testing
Default predictors in credit scoring: evidence from France’s retail banking institution
This paper presents the set-up of a behavioral credit-scoring model, and estimates such a model using an auto loan data set of one of the largest multinational financial institutions based in France.
A simple, transparent and rational weighting approach to combining different operational risk data sources
The authors propose a generic weighting function based on a nonparametric approach that can be used to weight the different distributions.
Scaling operational loss data and its systemic risk implications
A scaling methodology to include external data in operational risk calculation is introduced