Backward SDEs help price XVA for OTC derivatives.
problem XVA valuation for OTC derivatives with default risk.
method Review and apply BSDEs with random horizon.
result Explicit formula for XVA correction terms.
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48 results for “OTC Derivatives”
Study uncovers CDS anomalies leading to arbitrage profits.
problem Identifying arbitrage opportunities in CDS term structures.
method Derive No-arbitrage conditions for CDS term structures, analyze extensive dataset.
result Presented 2,416 pairs of anomalous CDS contracts.
Paper calculates robust FVA for OTC derivatives under distributional uncertainty.
problem Distributional uncertainty in over the counter derivatives valuation.
method Wasserstein distance as ambiguity measure, dual formulation of robust FVA optimization.
result Additional FVA charge due to distributional uncertainty measured under various configurations.
Counterparty risk denotes the risk that a party defaults in a bilateral contract. This risk not only depends on the two parties involved, but also on the risk from various other contracts each of these parties holds. In rather informal markets, such as the OTC (over-the-counter) derivative market, institutions only rep…
We study the impact of central clearing of over-the-counter (OTC) transactions on counterparty exposures in a market with OTC transactions across several asset classes with heterogeneous characteristics. The impact of introducing a central counterparty (CCP) on expected interdealer exposure is determined by the tradeof…
Model analyzes OTC market making with reputation feedback.
problem Optimizing electronic OTC liquidity provision considering reputation.
method Developed a stochastic-control model with feedback loops.
result Policy alternates between reputation-building and franchise monetization phases.
Model analyzes how reputation feedback affects OTC market making.
problem Understanding and optimizing OTC market making strategies.
method Developed a stochastic-control model with feedback loops.
result Policy alternates between reputation building and franchise monetization.
MVA Transfer Pricingq-fin.PR
This article prices OTC derivatives with either an exogenously determined initial margin profile or endogenously approximated initial margin. In the former case, margin valuation adjustment (MVA) is defined as the liability-side discounted expected margin profile, while in the latter, an extended partial differential e…
Study competition in OTC CDS market through CCP and interdealer choice models.
problem Analyze competition dynamics in OTC credit default swap market.
method Developed models for CCP choice and interdealer counterpart selection using semi-supervised learning and game theory.
result Introduced novel metrics and algorithms for understanding market dynamics.
The research presented in this work is motivated by some recent papers regarding hedging and valuation of financial securities subject to funding costs, collateralization and counterparty credit risk. Our goal is to provide a sound theoretical underpinning for some results presented in these papers by developing a unif…
Model predicts OTC dealers' trading behavior using historical data.
problem Predicting the trading decisions of OTC dealers for US corporate bonds.
method Applied machine learning methods, including neural networks and clustering.
result PPRZ Transformer model outperforms other models in predicting dealer behavior.
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…
Paper proposes auction method for smart derivatives to avoid disputes.
problem Disputes over derivative liquidation processes in smart contracts.
method Defines an auction type resolution for smart derivatives.
result Proposes a beneficial method for smart derivatives participants.
Optimal liquidation model reduces trading costs in OTC markets.
problem Minimizing trading costs in Over-The-Counter markets.
method Developed an optimal portfolio liquidation model in Locally Linear Order Book framework.
result Optimal liquidation time is proportional to the square root of the traded volume.
Paper uses reinforcement learning to optimize bid-ask spreads in OTC markets.
problem Optimizing bid-ask spreads in over-the-counter markets with dynamic order sizes.
method Reinforcement learning to solve high-dimensional stochastic control problem.
result Optimal bid-ask spreads follow a Gaussian distribution under certain conditions.
Paper details how to smoothly transition from EONIA to ESTR without significant financial impact.
problem Transition from EONIA to ESTR impacts financial instruments, especially OTC derivatives.
method Detailed analysis of how clean discounting approach based on ESTR affects pricing of OIS, IRS, and XVAs.
result The transition to EONIA-free pricing framework is safe and consistent, ensuring complete elimination of EONIA.
The extended Wild sums considered in this article generalize the classi- cal Wild sums of statistical physics. We first show how to obtain explicit solutions for the evolution equation of a large system where the interactions are given by a single, but general, interacting kernel which involves m components, for a fixe…
Paper improves ISDA margin calculation using LSMC.
problem Efficiently calculating initial margin for financial contracts.
method Extends Least Squares Monte-Carlo (LSMC) technique.
result Improved efficiency in estimating margin sensitivities.
ABM simulates OTC government bond market dynamics, enhancing liquidity and stability.
problem Understanding and ensuring market stability and liquidity in OTC government bond markets.
method Developed a bespoke ABM to simulate market-maker interactions and test hypotheses.
result Greater agent diversity enhances market liquidity and reducing market-making costs improves stability.
We review the main changes in the interbank market after the financial crisis started in August 2007. In particular, we focus on the fixed income market and we analyse the most relevant empirical evidences regarding the divergence of the existing basis between interbank rates with different tenor, such as Libor and OIS…
This paper tackles multi-asset market making by reducing dimensionality and considering different transaction sizes.
problem Optimizing bid and ask prices for multiple assets while managing inventory risk in volatile markets.
method Proposes a dimensionality reduction technique using a factor model and considers different transaction sizes.
result Generalizes existing market making models by incorporating different transaction sizes and prices.
Gaussian Process Regression for Derivative Portfolio Modeling and Application to CVA Computationsq-fin.CP
A new method uses Gaussian processes to efficiently model and compute counterparty credit valuation adjustments (CVA).
problem Efficiently modeling and computing CVA for large OTC derivative portfolios.
method Multi-Gaussian process regression approach to learn a metamodel for the mark-to-market cube of a derivative portfolio.
result The method accurately and efficiently computes CVA for interest rate swap portfolios.
Haircutting Non-cash Collateralq-fin.PR
Haircutting non-cash collateral has become a key element of the post-crisis reform of the shadow banking system and OTC derivatives markets. This article develops a parametric haircut model by expanding haircut definitions beyond the traditional value-at-risk measure and employing a double-exponential jump-diffusion mo…
Broker uses multi-task dynamic pricing to learn competitive prices in credit markets.
problem Lack of data and infrequent trading in credit markets.
method Two-Stage Multi-Task (TSMT) algorithm that leverages shared structure across securities.
result TSMT algorithm achieves a regret bound of , outperforming baselines.
The recent financial crisis have generated renewed interests in fragilities of global financial networks among economists and regulatory authorities. In particular, a potential vulnerability of the financial networks is the "financial contagion" process in which insolvencies of individual entities propagate through the…
We introduce and study a class of over-the-counter market models specified by systems of Ordinary Differential Equations (ODE's), in the spirit of Duffie- G^arleanu-Pedersen [6]. The key innovation is allowing for multiple assets. We show the existence and uniqueness of a steady state for these ODE's.
In recent years, the counterparty credit risk measure, namely the default risk in \emph{Over The Counter} (OTC) derivatives contracts, has received great attention by banking regulators, specifically within the frameworks of \emph{Basel II} and \emph{Basel III.} More explicitly, to obtain the related risk figures, one …
Study on time-zero efficiency of European power derivatives markets using statistical tests and trading rules.
problem Assessing time-zero efficiency in European power derivatives markets.
method Statistical tests based on the law of one price and trading rules based on price differentials and no-arbitrage violations applied to daily data of three European power markets.
result Definite conclusions on time-zero efficiency are not possible for French and Spanish markets due to liquidity and representativeness challenges.
Extends micro-price concept to RFQ markets for fair pricing.
problem Valuing securities in illiquid RFQ markets.
method Bidimensional Markov-modulated Poisson processes for liquidity.
result Introduces Fair Transfer Price for fair securities valuation.
Study multi-agent RL in OTC markets, learning from agents' interactions.
problem Designing efficient RL solutions for OTC market interactions.
method Parameterized reward functions, shared policy learning, RL calibration.
result Agents learn to balance hedging and skewing in market simulations.
During recent years the counterparty risk subject has received a growing attention because of the so called Basel Accord. In particular the Basel III Accord asks the banks to fulfill finer conditions concerning counterparty credit exposures arising from banks' derivatives, securities financing transactions, default and…
We study the solution's existence for a generalized Dynkin game of switching type which is shown to be the natural representation for general defaultable OTC contract with contingent CSA. This is a theoretical counterparty risk mitigation mechanism that allows the counterparty of a general OTC contract to switch from z…
In [1] Zawadoski introduces a banking network model in which the asset and counter-party risks are treated separately and the banks hedge their assets risks by appropriate OTC contracts. In his model, each bank has only two counter-party neighbors, a bank fails due to the counter-party risk only if at least one of its …
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark v…
Learning Bermudansq-fin.PR
New SL algorithms improve Bermudan Swaption pricing efficiency.
problem Efficient pricing of Bermudan Swaptions using Monte Carlo methods.
method Supervised Learning algorithms linking Bermudan Swaption to European Swaptions and other financial quantities.
result SL algorithms (Ridge, ANN, Gradient Boosted Regression Tree) are reliable and fast, overcoming Monte Carlo computational bottleneck.
Study bond market making with hit-ratio target using optimal control and HJB equations.
problem Optimizing bond market making with hit-ratio target in OTC markets.
method Stochastic optimal control approach, dualizing hit-ratio target, HJB equation, Riccati equation, linearization.
result Explicit quote decompositions into riskless spread, inventory-risk correction, and hit-ratio correction.
In this paper we discuss the issue of computation of the bilateral credit valuation adjustment (CVA) under rating triggers, and in presence of ratings-linked margin agreements. Specifically, we consider collateralized OTC contracts, that are subject to rating triggers, between two parties -- an investor and a counterpa…
Regulators require financial institutions to estimate counterparty default risks from liquid CDS quotes for the valuation and risk management of OTC derivatives. However, the vast majority of counterparties do not have liquid CDS quotes and need proxy CDS rates. Existing methods cannot account for counterparty-specific…
We introduce a natural generalization of the forward-starting options, first discussed by M. Rubinstein. The main feature of the contract presented here is that the strike-determination time is not fixed ex-ante, but allowed to be random, usually related to the occurrence of some event, either of financial nature or no…
The strengthening of capital requirements has induced banks and traders to consider charging a so called capital valuation adjustment (KVA) to the clients in OTC transactions. This roughly corresponds to charge the clients ex-ante the profit requirement that is asked to the trading desk. In the following we try to deli…
Enhances initial margin to manage warehoused credit risk effectively.
problem Limited access to hedging services for high-risk counterparties.
method Extend CVA risk-neutral framework to compute Specific Initial Margin (SIM) based on counterparty credit quality.
result Transforms effective credit rating to AAA, ensuring operational viability of warehoused risk management.
This paper examines pricing and hedging strategies for cross-currency equity protection swaps.
problem Dynamic requirements from EPS buyers in cross-currency equity protection swaps.
method Detailed analysis of two hedging paradigms, including separate and aggregated returns, with consideration of different types of returns.
result Proposes various hedging strategies with practical implications for EPS providers and investors.
We present a study of price impact in the over-the-counter credit index market, where no limit order book is used. Contracts are traded via dealers, that compete for the orders of clients. Despite this distinct microstructure, we successfully apply the propagator technique to estimate the price impact of individual tra…
Investigates optimal strategies for market makers using internal liquidity.
problem Optimizing strategies for market makers with internal liquidity.
method Investigates optimal multi-objective strategy for market makers with internal liquidity.
result Draws important qualitative insights for real-world trading.
This paper presents a method to estimate mid-prices of European corporate bonds using real-time dealer information.
problem Estimating mid-prices in illiquid markets where direct market prices are not available.
method Bayesian approach using particle filtering and sequential Monte Carlo.
result A new method for real-time mid-price estimation of corporate bonds.
A dealer manages quotes and rejection rules to control slippage risk in FX markets.
problem Managing inventory risk and latency risk in OTC FX market making.
method Dynamic programming and adiabatic-quadratic approximation to optimize quotes and rejection rules.
result Developed a method to optimize quotes and rejection rules for managing slippage risk.
The research presented in this work is motivated by recent papers by Brigo et al. (2011), Burgard and Kjaer (2009), Crépey (2012), Fujii and Takahashi (2010), Piterbarg (2010) and Pallavicini et al. (2012). Our goal is to provide a sound theoretical underpinning for some results presented in these papers by developing …
A new GCN model detects cryptocurrency fraud by considering network evolution and balance theory.
problem Detecting fraud in evolving signed cryptocurrency trust networks.
method Motif-aware temporal GCN using balance theory and learnable weights.
result The model outperforms existing methods on bitcoin datasets.