M. Fleming, J. Jackson, Ada Li, Asani Sarkar, Patricia Zobel
This paper examines the over-the-counter (OTC) interest rate derivatives (IRD) market in order to inform the design of post-trade price reporting. Our analysis uses a novel transaction-level data set to examine trading activity, the composition of market participants, levels of product standardization, and market-making behavior. We find that trading activity in the IRD market is dispersed across a broad array of product types, currency denominations, and maturities, leading to more than 10,500 observed unique product combinations. While a select group of standard instruments trade with relative frequency and may provide timely and pertinent price information for market participants, many other IRD instruments trade infrequently and with diverse contract terms, limiting the impact on price formation from the reporting of those transactions. Nonetheless, we find evidence of dealers hedging rapidly after large interest rate swap trades, suggesting that, for this product, a price-reporting regime could be designed in a manner that does not disrupt market-making activity.
{"title":"An Analysis of OTC Interest Rate Derivatives Transactions: Implications for Public Reporting","authors":"M. Fleming, J. Jackson, Ada Li, Asani Sarkar, Patricia Zobel","doi":"10.2139/ssrn.2030461","DOIUrl":"https://doi.org/10.2139/ssrn.2030461","url":null,"abstract":"This paper examines the over-the-counter (OTC) interest rate derivatives (IRD) market in order to inform the design of post-trade price reporting. Our analysis uses a novel transaction-level data set to examine trading activity, the composition of market participants, levels of product standardization, and market-making behavior. We find that trading activity in the IRD market is dispersed across a broad array of product types, currency denominations, and maturities, leading to more than 10,500 observed unique product combinations. While a select group of standard instruments trade with relative frequency and may provide timely and pertinent price information for market participants, many other IRD instruments trade infrequently and with diverse contract terms, limiting the impact on price formation from the reporting of those transactions. Nonetheless, we find evidence of dealers hedging rapidly after large interest rate swap trades, suggesting that, for this product, a price-reporting regime could be designed in a manner that does not disrupt market-making activity.","PeriodicalId":280702,"journal":{"name":"ERN: Econometric Studies of Derivatives Markets (Topic)","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124024639","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In their work, Brigo and Capponi (2010) introduce a numerical approach for calculating credit valuation adjustments (CVA) for credit default swaps (CDS). In contrast to previous research, they consider the default of the party doing the calculation, and its correlation to the defaults of the counterparty and the reference entity. Assuming bilateral counterparty credit risk, this approach generates symmetric and arbitrage free CVA. The most elaborate part of this computation is the generation of the default probability structure of the reference entity conditional on the default of either the investor or the counterparty. Brigo and Capponi (2010) suggest the use of the Fractional Fourier Transformation (FRFT) technique for this purpose. In this paper, we introduce the precise and practical algorithm for this numerical approach and display the steps needed for the FRFT technique. In addition, we offer a computational tune-up for the calculation of the conditional value of the CDS through a lognormal approximation. Throughout a variety of examples we show that this robust approximation delivers satisfying results, while requiring less computational power and less excessive implementation than the FRFT approach.
{"title":"Valuation of Credit Default Swaps with Wrong Way Risk – Model Implementation and a Computational Tune-Up","authors":"Dmitri Grominski, Daniel Schwake, T. Sudmann","doi":"10.2139/ssrn.2000782","DOIUrl":"https://doi.org/10.2139/ssrn.2000782","url":null,"abstract":"In their work, Brigo and Capponi (2010) introduce a numerical approach for calculating credit valuation adjustments (CVA) for credit default swaps (CDS). In contrast to previous research, they consider the default of the party doing the calculation, and its correlation to the defaults of the counterparty and the reference entity. Assuming bilateral counterparty credit risk, this approach generates symmetric and arbitrage free CVA. The most elaborate part of this computation is the generation of the default probability structure of the reference entity conditional on the default of either the investor or the counterparty. Brigo and Capponi (2010) suggest the use of the Fractional Fourier Transformation (FRFT) technique for this purpose. In this paper, we introduce the precise and practical algorithm for this numerical approach and display the steps needed for the FRFT technique. In addition, we offer a computational tune-up for the calculation of the conditional value of the CDS through a lognormal approximation. Throughout a variety of examples we show that this robust approximation delivers satisfying results, while requiring less computational power and less excessive implementation than the FRFT approach.","PeriodicalId":280702,"journal":{"name":"ERN: Econometric Studies of Derivatives Markets (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-02-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128093481","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
According to general asset pricing theory, options should reward their holders for the systematic risk they are bearing. In this paper, we study the returns of foreign exchange options. We find that, by sorting options according to the distance of their implied volatility from the historical volatility, we obtain portfolios with positive average monthly returns. These returns are not explained by standard aggregate risk factors, which suggest either that additional risk factors should be accounted for, or that investors behavior differs from the traditional paradigm of rational agents.
{"title":"Understanding Foreign Exchange Option Returns: The Information Content of Volatility","authors":"L. Kermiche, Philippe Dupuy","doi":"10.2139/ssrn.2009289","DOIUrl":"https://doi.org/10.2139/ssrn.2009289","url":null,"abstract":"According to general asset pricing theory, options should reward their holders for the systematic risk they are bearing. In this paper, we study the returns of foreign exchange options. We find that, by sorting options according to the distance of their implied volatility from the historical volatility, we obtain portfolios with positive average monthly returns. These returns are not explained by standard aggregate risk factors, which suggest either that additional risk factors should be accounted for, or that investors behavior differs from the traditional paradigm of rational agents.","PeriodicalId":280702,"journal":{"name":"ERN: Econometric Studies of Derivatives Markets (Topic)","volume":"106 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131605683","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
C. Chiarella, Samuel C. Maina, Christina Sklibosios Nikitopoulos
This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.
{"title":"Credit Derivative Pricing with Stochastic Volatility Models","authors":"C. Chiarella, Samuel C. Maina, Christina Sklibosios Nikitopoulos","doi":"10.2139/ssrn.2165638","DOIUrl":"https://doi.org/10.2139/ssrn.2165638","url":null,"abstract":"This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.","PeriodicalId":280702,"journal":{"name":"ERN: Econometric Studies of Derivatives Markets (Topic)","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131426383","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mean-Risk portfolio optimization method proposes an efficient frontier that consists of portfolios not dominated by any portfolio. Consequently, this method reduces the choice set by excluding inefficient portfolios. Different risk measures offer different efficient frontiers, which can be interpreted as different optimal choice sets. The question is whether these different risk measures lead to significantly different efficient frontiers for the investors, and which risk measure should be used. My purpose is to present a method to assess the effect of the choice set reduction from different Return-Risk models and to answer the question presented earlier. The most important contribution of the paper is the creation of a two-dimensional space “Risk-Aversion – Certainty Equivalence (CE)” as a platform for comparisons. The curves, representing different risk-averse investors and different models, on this space are called “Certainty Equivalence Curves (CEC)”. The empirical analysis shows that the Mean-Variance method is very effective in ranking portfolios for exponential utility investors. Therefore, it is not recommended to use more complicated methods such as Mean-CVaR.
{"title":"Comparing Return-Risk and Direct Utility Maximization Portfolio Optimization Methods by ‘Certainty Equivalence Curves’","authors":"H. Vu","doi":"10.2139/ssrn.1354383","DOIUrl":"https://doi.org/10.2139/ssrn.1354383","url":null,"abstract":"Mean-Risk portfolio optimization method proposes an efficient frontier that consists of portfolios not dominated by any portfolio. Consequently, this method reduces the choice set by excluding inefficient portfolios. Different risk measures offer different efficient frontiers, which can be interpreted as different optimal choice sets. The question is whether these different risk measures lead to significantly different efficient frontiers for the investors, and which risk measure should be used. My purpose is to present a method to assess the effect of the choice set reduction from different Return-Risk models and to answer the question presented earlier. The most important contribution of the paper is the creation of a two-dimensional space “Risk-Aversion – Certainty Equivalence (CE)” as a platform for comparisons. The curves, representing different risk-averse investors and different models, on this space are called “Certainty Equivalence Curves (CEC)”. The empirical analysis shows that the Mean-Variance method is very effective in ranking portfolios for exponential utility investors. Therefore, it is not recommended to use more complicated methods such as Mean-CVaR.","PeriodicalId":280702,"journal":{"name":"ERN: Econometric Studies of Derivatives Markets (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-06-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132031915","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
京公网安备 11010802042870号
京ICP备2023020795号-1
扫码关注我们
求助内容：
应助结果提醒方式：