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We develop an arbitrage-free framework for consistent valuation of derivative trades with collateralization, counterparty credit gap risk, and funding costs, following the approach first proposed by Pallavicini and co-authors in 2011. Based…
In this article we propose a study of market models starting from a set of axioms, as one does in the case of risk measures. We define a market model simply as a mapping from the set of adapted strategies to the set of random variables…
Optimal execution of a portfolio have been a challenging problem for institutional investors. Traders face the trade-off between average trading price and uncertainty, and traditional methods suffer from the curse of dimensionality. Here,…
Total value adjustment (XVA) is the change in value to be added to the price of a derivative to account for the bilateral default risk and the funding costs. In this paper, we compute such a premium for American basket derivatives whose…
We present a unified framework for computing CVA sensitivities, hedging the CVA, and assessing CVA risk, using probabilistic machine learning meant as refined regression tools on simulated data, validatable by low-cost companion Monte Carlo…
We introduce an innovative theoretical framework to model derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on Credit and Debit…
Modeling counterparty risk is computationally challenging because it requires the simultaneous evaluation of all the trades with each counterparty under both market and credit risk. We present a multi-Gaussian process regression approach,…
A new challenge to quantitative finance after the recent financial crisis is the study of credit valuation adjustment (CVA), which requires modeling of the future values of a portfolio. In this paper, following recent work in [Weinan…
We investigate the optimal execution of contracts that are used in merger\&acquisition deals. We consider cash-settled and physically delivered contracts between a broker and a counterpart. Contracts are linear (total returns swaps),…
Cash collateral is perfect in that it provides simultaneous counterparty credit risk protection and derivatives funding. Securities are imperfect collateral, because of collateral segregation or differences in CSA haircuts and repo…
This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized…
Absence-of-Arbitrage (AoA) is the basic assumption underpinning derivatives pricing theory. As part of the OTC derivatives market, the CDS market not only provides a vehicle for participants to hedge and speculate on the default risks of…
This paper investigates calculations of robust XVA, in particular, credit valuation adjustment (CVA) and funding valuation adjustment (FVA) for over-the-counter derivatives under distributional uncertainty using Wasserstein distance as the…
The centrality in a network is often used to measure nodes' importance and model network effects on a certain outcome. Empirical studies widely adopt a two-stage procedure, which first estimates the centrality from the observed noisy…
We present a new model for credit index derivatives, in the top-down approach. This model has a dynamic loss intensity process with volatility and jumps and can include counterparty risk. It handles CDS, CDO tranches, Nth-to-default and…
We introduce a fairly general, recombining trinomial tree model in the natural world. Market-completeness is ensured by considering a market consisting of two risky assets, a riskless asset, and a European option. The two risky assets…
The Chicago Board Options Exchange Volatility Index (VIX) is calculated from SPX options and derivatives of VIX are also traded in market, which leads to the so-called ``consistent modeling" problem. This paper proposes a time-changed…
The aim of this paper is to present a dual-term structure model of interest rate derivatives in order to solve the two hardest problems in financial modeling: the exact volatility calibration of the entire swaption matrix, and the…
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with…
This paper studies the optimal VIX futures trading problems under a regime-switching model. We consider the VIX as mean reversion dynamics with dependence on the regime that switches among a finite number of states. For the trading…