The paper develops a new discount rate for derivatives using imperfect securities as collateral.
problem Inconsistent and non-observable collateral rates in derivatives markets.
method Synthesizes effects of imperfect collateral into a new discount rate, employs break-even repo formulae, and uses linear programming for optimization.
result Liquidity value adjustment (LVA) can be significant for long-term derivatives portfolios.
The importance of collateralization through the change of funding cost is now well recognized among practitioners. In this article, we have extended the previous studies of collateralized derivative pricing to more generic situation, that is asymmetric and imperfect collateralization with the associated counter party c…
Study how network structure affects collateral dynamics in banking systems.
problem Effects of network structure on collateral volume and hoarding in banking systems.
method Simple model of bank interactions via repo contracts and rehypothecation.
result Network structures with concentrated collateral flows are more exposed to large hoarding cascades.
The paper models rating transitions and calibrates them to market data for XVA calculations.
problem Calibrating rating models to both historical and market data for accurate XVA calculations.
method Modeling rating transitions as a Markov chain, calibrating to historical and market data, proposing a novel calibration procedure.
result Improved XVA scheme through better calibration of rating models.
This study examines the collateral choice option and its valuation and hedging.
problem Non-zero collateral basis spreads impact asset valuation and require complex modeling.
method Develops a stochastic valuation model for the collateral choice option and proposes hedging strategies.
result The stochastic model attributes risks to all involved collateral currencies, unlike the deterministic model.
New model prices collateralized financial derivatives considering bankruptcy laws.
problem Inaccurate pricing of collateralized financial derivatives due to neglecting collateral and credit risk.
method Developed a new model that incorporates both collateral posting and credit risk.
result Proper accounting for collateralization is crucial for accurate pricing of financial derivatives.
Develops a new model for collateral choice options under stochastic rates.
problem Challenges in quantifying the value of collateral choice options under stochastic rates.
method Develops a scalable and stable stochastic model of collateral spreads under conditional independence, using a common factor approximation.
result Second order model yields accurate results for the value of the collateral choice option.
Study on collateral currency impact in differential swaps valuation.
problem Impact of collateral currency on differential swap valuation and risk management.
method Replication using futures, explicit pricing and hedging strategies.
result Choice of collateral currency can introduce additional risk exposures.
New model values CDS contracts considering multiple credit risks and collateralization.
problem Valuation of CDS contracts affected by multiple credit risks and collateralization.
method Developed a new model to value CDS contracts, considering default dependency and collateralization.
result Default dependency significantly impacts asset pricing and full collateralization does not eliminate counterparty risk.
Develops a haircut model for non-cash collateral.
problem Addressing the need for accurate non-cash collateral valuation in shadow banking and OTC derivatives markets.
method Expands haircut definitions, uses a double-exponential jump-diffusion model, and solves for credit risk measurements.
result Computational results show potential for collateral agreements and regulatory capital calculations.
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our framework leads to a singl…
Study multi-currency markets with multiple interest rates and collateral.
problem Characterize absence of arbitrage in a multi-currency market.
method Generalize results from Bielecki and Rutkowski (2015) to a multi-currency framework, linking with Piterbarg (2012), Moreni and Pallavicini (2017), and Fujii et al. (2010b). Characterize absence of arbitrage without collateral, then study collateralization schemes under various conventions.
result Complete study of absence of arbitrage and pricing in multi-currency markets with multiple interest rates and collateral.
Debt-financed collateral in DeFi increases stability risks.
problem Financial stability risks in DeFi ecosystems due to debt-financed collateral.
method Categorization and classification algorithm to measure debt-financed collateral.
result Wide-spread use of stablecoins as debt-financed collateral increases financial stability risks.
Extends pricing theory for collateralized derivatives to include jumps and dividends.
problem Pricing collateralized derivatives with jumps and dividends.
method Extends No-Arbitrage theory to semimartingales, deriving pricing, dynamics, and forward prices.
result Derives pricing, dynamics, and forward prices of collateralized derivatives.
This study updates a model for Mexican interest rate swaps post-crisis.
problem Post-crisis divergence of interest rates and new regulatory requirements.
method Used Fujii et al. 2010b model with collateral currencies USD, EUR, MXN.
result Validated model for Mexican interest rate derivatives with collateral currencies.
The paper uses machine learning and Lie groups to improve rating transitions and XVA calculations.
problem Improving rating transitions and XVA calculations using machine learning and Lie groups.
method Modeling rating transitions as SDEs on Lie groups, calibrating to historical and market data, applying Girsanov theorem, and using Deep Learning.
result Improves rating transitions and XVA calculations, making the model more robust.
This paper generalizes the framework for arbitrage-free valuation of bilateral counterparty risk to the case where collateral is included, with possible re-hypotecation. We analyze how the payout of claims is modified when collateral margining is included in agreement with current ISDA documentation. We then specialize…
The paper tackles dynamic collateral control for spot-perpetual basis trading in decentralized finance.
problem Dynamic control of collateral in spot-perpetual basis trading in decentralized finance.
method Solves a static control problem and derives an asymmetric dynamic extension, validated with live execution.
result The dynamic control approach provides a more robust operating benchmark and shows significant rebalancing effects.
Model explains deleveraging risks in non-custodial stablecoins.
problem Deleveraging risks in non-custodial stablecoins during market crises.
method Developed a stochastic model incorporating speculators' profit optimization and collateral liquidation costs.
result Identified deflationary deleveraging spirals and higher price variance in unstable domains.
The paper develops a new formula for financial pricing under multiple interest rates and collateralization.
problem Financial pricing under multiple interest rates and collateralization.
method Derives a change of measure formula for recursive conditional expectations in a jump-diffusion setting.
result Generalizes the change of numéraire technique for multiple interest rates and collateralization.
We present a general derivation of the arbitrage-free pricing framework for multiple-currency collateralized products. We include the impact on option pricing of the policy adopted to fund in foreign currency, so that we are able to price contracts with cash flows and/or collateral accounts expressed in foreign currenc…
Paper offers a fast method to assess DeFi liquidation risk.
problem Assessing liquidation risk in DeFi stablecoin lending.
method Modeling collateral exchange rate as zero-drift geometric Brownian motion.
result Derives an exact formula for liquidation probability.
New method improves IL from imperfect demos using confidence scores.
problem Learning optimal policies from imperfect demonstrations is challenging.
method Proposes two confidence-based IL methods: 2IWIL and IC-GAIL.
result Confidence scores from sub-optimal demos significantly improve IL performance.
A framework for fair derivative contract pricing and risk-sharing between parties with funding differences.
problem Price asymmetry due to funding differences in bilateral contracts.
method Defines a negotiation problem that maximizes the sum of utilities for two parties, deriving optimal prices and collateral.
result Optimal negotiation price and collateral can be used to interpret margin requirements.
A quantum framework optimizes collateral allocation for derivatives.
problem Legal constraints and operational rules in collateral allocation for derivatives.
method Certified higher-order quantum framework that normalizes margin requirements and builds a bounded neighborhood of actions.
result Quantum framework improves certified sample quality compared to classical methods.
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 pricing under credit, collateral and funding risks into term structure modellin…
Collateralization with daily margining has become a new standard in the post-crisis market. Although there appeared vast literature on a so-called multi-curve framework, a complete picture of a multi-currency setup with cross-currency basis can be rarely found since our initial attempts. This work gives its extension r…
The paper explores how regularization can lead to convergence in imperfect information games.
problem Finding equilibrium in imperfect information games with imperfect information.
method Investigates Follow the Regularized Leader dynamics and how adding a regularization term can lead to strong convergence guarantees.
result The approach leads to algorithms that converge exactly to the Nash equilibrium in imperfect information games.
The paper tackles learning from imperfect human feedback, especially in dueling bandit problems.
problem Learning from human feedback that can be irrational or imperfect.
method Developed a Robustified Stochastic Mirror Descent for Imperfect Dueling (RoSMID) algorithm.
result Achieved nearly optimal regret for dueling bandit problems under imperfect human feedback.
Model learns tensor representations from imperfect multimodal data.
problem Learning from imperfect multimodal data with noise or missing entries.
method Tensor rank minimization to regularize rank of tensor representations.
result Model effectively learns tensor representations from imperfect data.
We present a detailed analysis of interest rate derivatives valuation under credit risk and collateral modeling. We show how the credit and collateral extended valuation framework in Pallavicini et al (2011), and the related collateralized valuation measure, can be helpful in defining the key market rates underlying th…
New PFL method addresses counterparty risk challenges.
problem Challenges with PFE for counterparty limits.
method Introducing PFL combining ES and LGD, and variants aPFL and paPFL.
result PFL and variants provide a better measure of counterparty risk.
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 counterparty risk provision, and show that it is a unique bounded and continuous fi…
Abstract framework for cross-currency interest rate contracts.
problem Handling cross-currency markets with collateral and incompleteness.
method Developed a general HJM framework for abstract market indices.
result Enabled simultaneous description of multiple currency interest rate products.
Investigates a Kyle model with imperfect information and risk aversion.
problem Tackles a Kyle model with imperfect information and risk-averse informed traders.
method Solves an optimal transport problem and a filtering problem under specific measures.
result Constructs an equilibrium for the Gaussian Kyle model with imperfect information and risk aversion.
Modeling bank portfolio risk under climate transition impacts.
problem Evaluating risk measures for a bank's collateralized loans in a climate transition economy.
method Developed an end-to-end modeling framework using stochastic processes and dynamic macroeconomic variables.
result Derived expressions for risk measures as functions of climate transition parameters.
Study confirms eurozone interbank market stability but finds higher collateral reuse.
problem Analyzing eurozone interbank market behavior and stability.
method Examined secured transactions data from ECB, tested stylized facts, measured network properties.
result Observed higher collateral reuse and network symmetry compared to unsecured markets.
New method tackles simulator imperfection in data assimilation.
problem Handling simulator imperfection in data assimilation.
method Ensemble-based kernel learning approach.
result Functional approximation through machine learning can handle simulator imperfection.
Study on how imperfect labels affect classification methods.
problem Effect of imperfect training labels on classification performance.
method Bounding excess risk for various classifiers under noisy labels.
result Imperfect labels can improve performance of k-NN and SVM classifiers.
Over-the-counter derivatives have contributed significantly to the effectiveness and efficiency of the international financial system but also entail significant counterparty credit risk. Collateralization is one of the most important and widespread credit risk mitigation techniques used in derivatives transactions. Ho…
We analyze the counterparty risk embedded in CDS contracts, in presence of a bilateral margin agreement. First, we investigate the pricing of collateralized counterparty risk and we derive the bilateral Credit Valuation Adjustment (CVA), unilateral Credit Valuation Adjustment (UCVA) and Debt Valuation Adjustment (DVA).…
In this paper, we have studied the pricing of a continuously collateralized CDS. We have made use of the "survival measure" to derive the pricing formula in a straightforward way. As a result, we have found that there exists irremovable trace of the counter party as well as the investor in the price of CDS through thei…
The present work studies and analyzes general defaultable OTC contract in presence of a contingent CSA, which is a theoretical counterparty risk mitigation mechanism of switching type that allows the counterparty of a general OTC contract to switch from zero to full/perfect collateralization and switch back whenever sh…
Proposes a decentralized insurance protocol for DeFi.
problem Over-insurance and inefficiencies in DeFi collateral.
method Smart contract-based economic model without external dependencies.
result Solves over-insurance and capital inefficiencies.
Policy gradient method proves convergence in imperfect-information games.
problem Policy gradient methods in imperfect-information games (EFGs).
method Policy gradient approach with best-iterate convergence.
result Policy gradient leads to provable best-iterate convergence in self-play EFGs.
New method robustly discovers causal relationships from imperfect data.
problem Challenges in causal discovery from imperfect structural constraints.
method Prior alignment and conflict resolution through surrogate model and multi-task learning.
result Proposes a robust method for causal discovery under imperfect constraints.
Volatility smiles emerge from imperfect hedging in financial markets.
problem Imperfect hedging in financial markets leads to volatility smiles.
method Examined option prices as fair game agreements based on expected payoffs and risk.
result Resulting prices lead to the volatility smile.
Study on teaching with imperfect knowledge, showing its impact on optimal teaching sets.
problem Effect of imperfect teacher knowledge on effective teaching.
method Connections to machine teaching problem, optimal teaching sets.
result Teacher's success or failure depends on imperfect knowledge.