Related papers: Corrected XVA Modelling Framework and Formulae for…
We discuss the binary nature of funding impact in derivative valuation. Under some conditions, funding is either a cost or a benefit, i.e., one of the lending/borrowing rates does not play a role in pricing derivatives. When derivatives are…
In a stochastic volatility framework, we find a general pricing equation for the class of payoffs depending on the terminal value of a market asset and its final quadratic variation. This allows a pricing tool for European-style claims…
We revisit the problem of pricing and hedging plain vanilla single-currency interest rate derivatives using multiple distinct yield curves for market coherent estimation of discount factors and forward rates with different underlying rate…
In this paper, we develop a theoretical framework for bounding the CVaR of a random variable $X$ using another related random variable $Y$, under assumptions on their cumulative and density functions. Our results yield practical tools for…
In an environment of increasingly volatile financial markets, the accurate estimation of risk remains a major challenge. Traditional econometric models, such as GARCH and its variants, are based on assumptions that are often too rigid to…
This paper develops risk-averse models to support system operators in planning and operating the electricity grid under uncertainty from renewable power generation. We incorporate financial risk hedging using conditional value at risk…
Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account…
Measuring model risk is required by regulators on financial and insurance markets. We separate model risk into parameter estimation risk and model specification risk, and we propose expected shortfall type model risk measures applied to…
This article is the second one in a series on the use of scaling invariance in finance. In the first article (cond-mat/9906048), we introduced a new formalism for the pricing of derivative securities, which focusses on tradable objects…
A critical problem in the financial world deals with the management of risk, from regulatory risk to portfolio risk. Many such problems involve the analysis of securities modelled by complex dynamics that cannot be captured analytically,…
An uncollateralized swap hedged back-to-back by a CCP swap is used to introduce FVA. The open IR01 of FVA, however, is a sure sign of risk not being fully hedged, a theoretical no-arbitrage pricing concern, and a bait to lure market risk…
We introduce a new framework for optimal routing and arbitrage in AMM driven markets. This framework improves on the original best-practice convex optimization by restricting the search to the boundary of the optimal space. We can…
We study factor models that combine latent factors with firm characteristics and propose a new framework for modeling, estimating, and inferring pricing errors. Following Zhang (2024), our approach decomposes mispricing into two distinct…
We extend the now classic structural credit modeling approach of Black and Cox to a class of "two-factor" models that unify equity securities such as options written on the stock price, and credit products like bonds and credit default…
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for…
We introduce a new model for pricing corporate bonds, which is a modification of the classical model of Merton. In this new model, we drop the liquidity assumption of the firm's asset value process, and assume that there is a liquidly…
Robust and reliable covariance estimates play a decisive role in financial and many other applications. An important class of estimators is based on Factor models. Here, we show by extensive Monte Carlo simulations that covariance matrices…
During the COVID-19 pandemic, many institutions have announced that their counterparties are struggling to fulfill contracts.Therefore, it is necessary to consider the counterparty default risk when pricing options. After the 2008 financial…
The goal of this paper is to investigate how the marginal and dependence structures of a variety of multivariate L\'evy models affect calibration and pricing. To this aim, we study the approaches of Luciano and Semeraro (2010) and Ballotta…
In this paper, we compare static and dynamic (reduced form) approaches for modeling wrong-way risk in the context of CVA. Although all these approaches potentially suffer from arbitrage problems, they are popular (respectively) in industry…