Related papers: How to hedge extrapolated yield curves
Yield curve forecasting is an important problem in finance. In this work we explore the use of Gaussian Processes in conjunction with a dynamic modeling strategy, much like the Kalman Filter, to model the yield curve. Gaussian Processes…
We investigate LIBOR-based derivatives using a parsimonious field theory interest rate model capable of instilling imperfect correlation between different maturities. Delta and Gamma hedge parameters are derived for LIBOR Caps against…
In computational materials science, predicting the yield strain of crosslinked polymers remains a challenging task. A common approach is to identify yield via the first critical point of stress-strain curves produced by molecular dynamics…
We develop a modelling framework for multiple yield curves driven by continuous-state branching processes with immigration (CBI processes). Exploiting the self-exciting behavior of CBI jump processes, this approach can reproduce the…
We study U.S. Treasury yield curve forecasting under distributional uncertainty and recast forecasting as an operations research and managerial decision problem. Rather than minimizing average forecast error, the forecaster selects a…
We present a PDE-based approach for the multidimensional extrapolation of smooth scalar quantities across interfaces with kinks and regions of high curvature. Unlike the commonly used method of [2] in which normal derivatives are…
This study deals with the pricing and hedging of single-tranche collateralized debt obligations (STCDOs). We specify an affine two-factor model in which a catastrophic risk component is incorporated. Apart from being analytically tractable,…
We present a robust Deep Hedging framework for the pricing and hedging of option portfolios that significantly improves training efficiency and model robustness. In particular, we propose a neural model for training model embeddings which…
The traditional way of building a yield curve is to choose an interpolation on discount factors, implied by the market tradable instruments. Since then, constructions based on specific interpolations of the forward rates have become the…
This paper deals with the solving of variational inequality problem where the constrained set is given as the intersection of a number of fixed-point sets. To this end, we present an extrapolated sequential constraint method. At each…
We consider the theory of bond discounts, defined as the difference between the terminal payoff of the contract and its current price. Working in the setting of finite-dimensional realizations in the HJM framework, under suitable notions of…
This paper investigates the deep hedging framework, based on reinforcement learning (RL), for the dynamic hedging of swaptions, contrasting its performance with traditional sensitivity-based rho-hedging. We design agents under three…
We derive an equation of motion for interest-rate yield curves by applying a minimum Fisher information variational approach to the implied probability density. By construction, solutions to the equation of motion recover observed bond…
We use granular regulatory data on euro interest rate swap trades between January 2021 and June 2023 to assess whether derivative positions of Italian banks can offset losses on their debt securities holdings should interest rates rise…
We study in this paper the function approximation error of multivariate linear extrapolation. The sharp error bound of linear interpolation already exists in the literature. However, linear extrapolation is used far more often in…
This work studies the dynamic risk management of the risk-neutral value of the potential credit losses on a portfolio of derivatives. Sensitivities-based hedging of such liability is sub-optimal because of bid-ask costs, pricing models…
We investigate model risk and distributionally robust optimization (DRO) under marginal and martingale constraints. Building on our previous work, we address the previously open case of static hedging with second-period maturity vanilla…
The main purpose of the paper is to derive Thiele's differential equation for unit-linked policies in the Heston-Hawkes stochastic volatility model introduced in arXiv:2210.15343. This model is an extension of the well-known Heston model…
We introduce a new method to calculate the credit exposure of European and path-dependent options. The proposed method is able to calculate accurate expected exposure and potential future exposure profiles under the risk-neutral and the…
We consider the problem of option hedging in a market with proportional transaction costs. Since super-replication is very costly in such markets, we replace perfect hedging with an expected loss constraint. Asymptotic analysis for small…