Related papers: Resolving a Clearing Member's Default, A Radner Eq…
We present here a regress later based Monte Carlo approach that uses neural networks for pricing high-dimensional contingent claims. The choice of specific architecture of the neural networks used in the proposed algorithm provides for…
Financial networks model a set of financial institutions (firms) interconnected by obligations. Recent work has introduced to this model a class of obligations called credit default swaps, a certain kind of financial derivatives. The main…
This study contributes to understanding Valuation Adjustments (xVA) by focussing on the dynamic hedging of Credit Valuation Adjustment (CVA), corresponding Profit & Loss (P&L) and the P&L explain. This is done in a Monte Carlo simulation…
We study a rigidity problem for functions \(F:\R_{>0}\to\R_{\ge 0}\) that penalize deviation of a positive ratio from equilibrium \(x=1\). Assuming (i) a d'Alembert-type composition law on \(\R_{>0}\), and (ii) a single quadratic…
Hedging a portfolio containing autocallable notes presents unique challenges due to the complex risk profile of these financial instruments. In addition to hedging, pricing these notes, particularly when multiple underlying assets 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 consider the problem of computing the Value Adjustment of European contingent claims when default of either party is considered, possibly including also funding and collateralization requirements. As shown in Brigo et al. (\cite{BLPS},…
A three-dimensional extension of the structural default model with firms' values driven by correlated diffusion processes is presented. Green's function based semi-analytical methods for solving the forward calibration problem and backward…
Cost-of-capital valuation is a well-established approach to the valuation of liabilities and is one of the cornerstones of current regulatory frameworks for the insurance industry. Standard cost-of-capital considerations typically rely on…
We develop a framework for computing the total valuation adjustment (XVA) of a European claim accounting for funding costs, counterparty credit risk, and collateralization. Based on no-arbitrage arguments, we derive backward stochastic…
In this work we study a finite horizon optimal liquidation problem with multiplicative price impact in algorithmic trading, using market orders. We analyze the case when an agent is trading on a market with two financial assets, whose…
This article develops the theory of risk budgeting portfolios, when we would like to impose weight constraints. It appears that the mathematical problem is more complex than the traditional risk budgeting problem. The formulation of the…
Credit value adjustment (CVA) is the charge applied by financial institutions to the counterparty to cover the risk of losses on a counterpart default event. In this paper we estimate such a premium under the Bates stochastic model (Bates…
We study pricing and (super)hedging for American options in an imperfect market model with default, where the imperfections are taken into account via the nonlinearity of the wealth dynamics. The payoff is given by an RCLL adapted process…
In this paper we present a Bayesian competing risk proportional hazards model to describe mortgage defaults and prepayments. We develop Bayesian inference for the model using Markov chain Monte Carlo methods. Implementation of the model is…
This paper studies the problem of option replication in general stochastic volatility markets with transaction costs, using a new specification for the volatility adjustment in Leland's algorithm \cite{Leland}. We prove several limit…
Currently, most ISOs adopt offer cost minimization (OCM) auction mechanism which minimizes the total offer cost, and then, a settlement rule based on either locational marginal prices (LMPs) or market clearing price (MCP) is used to…
We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment…
In this paper we address the problem of optimal liquidation of a large portfolio composed by securities exposed to default risk. The default time is described in terms of a Brownian motion representing the evolution of the value of the…
PD curve calibration refers to the transformation of a set of rating grade level probabilities of default (PDs) to another average PD level that is determined by a change of the underlying portfolio-wide PD. This paper presents a framework…