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Constant Proportion Portfolio Insurance (CPPI) is a strategy designed to give participation in a risky asset while protecting the invested capital. Some gap risk due to extreme events is often kept by the issuer of the product: a put option…
In the top-down approach to multi-name credit modeling, calculation of singe name sensitivities appears possible, at least in principle, within the so-called random thinning (RT) procedure which dissects the portfolio risk into individual…
The global minimum-variance portfolio is a typical choice for investors because of its simplicity and broad applicability. Although it requires only one input, namely the covariance matrix of asset returns, estimating the optimal solution…
Funds at large portfolio management firms may consist of many portfolio managers (PMs), each managing a portion of the fund and optimizing a distinct objective. Although the PMs determine their trades independently, the trade lists may be…
Importance sampling is a promising variance reduction technique for Monte Carlo simulation based derivative pricing. Existing importance sampling methods are based on a parametric choice of the proposal. This article proposes an algorithm…
We consider the problem of pricing path-dependent options on a basket of underlying assets using simulations. As an example we develop our studies using Asian options. Asian options are derivative contracts in which the underlying variable…
Banks are required to use long-term default probabilities (PDs) of their portfolios when calculating credit risk capital under internal ratings-based (IRB) models. However, the calibration models and historical data typically reflect…
Deep reinforcement learning has shown promise in trade execution, yet its use in low-frequency factor portfolio construction remains under-explored. A key obstacle is the high-dimensional, unbalanced state space created by stocks that enter…
Credit Valuation Adjustment is a balance sheet item which is nowadays subject to active risk management by specialized traders. However, one of the most important risk factors, which is the vector of default intensities of the counterparty,…
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear…
In this paper we introduce a simple continuous-time asset pricing framework, based on general multi-dimensional diffusion processes, that combines semi-analytic pricing with a nonlinear specification for the market price of risk. Our…
Matrix factor model has been growing popular in scientific fields such as econometrics, which serves as a two-way dimension reduction tool for matrix sequences. In this article, we for the first time propose the matrix elliptical factor…
We study infinite-horizon Discounted Markov Decision Processes (DMDPs) under a generative model. Motivated by the Algorithm with Advice framework Mitzenmacher and Vassilvitskii 2022, we propose a novel framework to investigate how a…
Income and risk coexist, yet investors are often so focused on chasing high returns that they overlook the potential risks that can lead to high losses. Therefore, risk forecasting and risk control is the cornerstone of investment. To…
Using tools from spectral analysis, singular and regular perturbation theory, we develop a systematic method for analytically computing the approximate price of a derivative-asset. The payoff of the derivative-asset may be path-dependent.…
The discrete-time multifactor Vasi\v{c}ek model is a tractable Gaussian spot rate model. Typically, two- or three-factor versions allow one to capture the dependence structure between yields with different times to maturity in an…
This paper considers the modelling of collateralized debt obligations (CDOs). We propose a top-down model via forward rates generalizing Filipovi\'c, Overbeck and Schmidt (2009) to the case where the forward rates are driven by a finite…
We investigate a multi-factor extension of the asymptotic single risk factor (ASRF) model that underlies the capital charges of the "Basel II Accord". In this extended model, it is still possible to derive closed-form solutions for the risk…
Financial portfolios are often optimized for maximum profit while subject to a constraint formulated in terms of the Conditional Value-at-Risk (CVaR). This amounts to solving a linear problem. However, in its original formulation this…
This paper studies the equal risk pricing (ERP) framework for the valuation of European financial derivatives. This option pricing approach is consistent with global trading strategies by setting the premium as the value such that the…