Develops a robust hedging valuation adjustment measure for dynamic hedging under liquidity-demand stress.
problem Dynamic hedging under liquidity-demand stress
method Define robust HVA as the worst-case expected loss over a relative-entropy neighborhood of the loss distribution generated by simulated rebalancing and maturity-unwind trades.
result Distinguishes fixed-radius convention from fixed benchmark-stress convention and shows wider no-trade bands lower rebalancing costs but raise hedge-error risk.
Study cash-flow forecasting for derivatives, aligning with replication strategy and addressing timing frictions.
problem Inconsistencies in cash-flow forecasting under different measures and stochastic payment times.
method Use discounting sensitivities (funding-curve hedge ratios) for replication and propose a liquidity valuation adjustment.
result Aligns forecasting with replication strategy and avoids measure-mixing issues.
Paper develops a robust HVA measure for dynamic hedging under liquidity stress.
problem Valuation of dynamic hedging under liquidity stress.
method Defines robust HVA as worst-case expected loss over a relative-entropy neighborhood of loss distributions for no-trade bands.
result Wider no-trade bands lower rebalancing costs but increase hedge-error risk.
The paper models battery valuation in intraday electricity markets, incorporating liquidity costs.
problem Valuing batteries in intraday electricity markets considering liquidity costs.
method Stochastic model for mid-prices combined with a deterministic model for liquidity costs, using dynamic programming for optimization.
result Liquidity costs significantly impact battery valuation, especially with multiple batteries.
We study the valuation and hedging problem of European options in a market subject to liquidity shocks. Working within a Markovian regime-switching setting, we model illiquidity as the inability to trade. To isolate the impact of such liquidity constraints, we focus on the case where the market is completely static in …
Unified methods for hedging impermanent loss in decentralized exchanges.
problem Hedging impermanent loss in liquidity provision at decentralized exchanges.
method Static and dynamic approaches using arbitrage-based methods for valuation and risk management.
result Unified valuation and hedging formulas for IL protection claims.
Study finds Indian mutual funds adjust cash holdings based on inflows, impacting stock purchases.
problem Active liquidity management by mutual funds in India.
method Examined cash holdings and stock purchases of Indian equity mutual funds.
result Funds with active liquidity choices outperform, highlighting the importance of this strategy.
Derives pricing formulas for liquidity tokens in CPMMs, showing riskless growth.
problem Liquidity token pricing and hedging in CPMMs.
method Derives risk-neutral pricing and hedging formulas for CPMM liquidity tokens using derivative pricing perspective.
result Shows that hedging CPMM liquidity tokens should grow at the risk-free rate, contradicting empirical observations.
This paper studies the optimal timing to liquidate credit derivatives in a general intensity-based credit risk model under stochastic interest rate. We incorporate the potential price discrepancy between the market and investors, which is characterized by risk-neutral valuation under different default risk premia speci…
The paper uses option theory to estimate corporate bond liquidity spreads.
problem Estimating liquidity spreads for corporate bonds.
method Option-theoretic approach considering risk-free rate volatility and credit risk.
result The model provides a robust tool for pricing illiquid bonds.
Study on CFMMs pricing and hedging, developing models for LP and derivatives valuation.
problem Valuation and hedging of liquidity provider mechanisms in CFMMs.
method Developed a model with two types of traders, simulated their behavior, and calculated PnL.
result Foundations for estimating CFMM derivatives and understanding fair price distribution.
Cryptocurrencies are examined through the asset flow equations and experimental asset markets. Since tangible value of a typical cryptocurrency is non-existent, the theory suggests that price will gravitate toward liquidity value, i.e., the total amount of cash available for purchase of the asset divided by the number …
In this paper we describe how to include funding and margining costs into a risk-neutral pricing framework for counterparty credit risk. We consider realistic settings and we include in our models the common market practices suggested by the ISDA documentation without assuming restrictive constraints on margining proce…
Paper introduces a new pricing model for Uniswap V3 positions.
problem Valuation of Uniswap V3 liquidity positions.
method Stochastic processes and Martingale Stopping Theorem.
result Model provides significant insights into risk exposure and hedging strategies.
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…
The main result of this paper is a collateralized counterparty valuation adjusted pricing equation, which allows to price a deal while taking into account credit and debit valuation adjustments (CVA, DVA) along with margining and funding costs, all in a consistent way. Funding risk breaks the bilateral nature of the va…
The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related Credit Valuation Adjustment, (CVA), Debt Valuation Adjustment (DVA), Liquidity Valuation Adjustment (LVA) and Replacement Cost (RC) issues, jointly referred to in t…
Blockchain markets with paid-priority trading can lead to biased prices and reduced liquidity.
problem Discrete clearing and paid-priority in blockchain markets lead to biased prices and reduced liquidity.
method Developed a model to evaluate the viability of blockchain markets under discrete clearing and paid-priority.
result Paid-priority ordering induces endogenous selection, leading to biased prices and reduced liquidity.
The introduction of CCPs in most derivative transactions will dramatically change the landscape of derivatives pricing, hedging and risk management, and, according to the TABB group, will lead to an overall liquidity impact about 2 USD trillions. In this article we develop for the first time a comprehensive approach fo…
Revisits Jarrow & Turnbull model for credit and liquidity risk.
problem Modeling credit and liquidity risk in financial markets.
method Uses foreign exchange analogy and partially observable exchange rate.
result Derives tractable term structure models and explicit valuation formulae.
Tokenized RWAs face liquidity issues despite promising markets.
problem Low trading volumes and limited investor participation in tokenized assets.
method Empirical analysis of tokenized real estate, private credit, and treasury funds.
result Most tokenized assets exhibit low transfer activity and limited secondary trading.
Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account the production cost of financial contracts so that a profitability analysis can b…
The paper examines how insurers manage risks and liquidity in a dynamic market.
problem Model uncertainty in insurance pricing and competitive equilibrium.
method Analyzes insurers' robustness preferences and optimization strategies for underwriting and liquidity management.
result Robust insurance pricing leads to higher premiums and equity valuations compared to a benchmark.
The practice of valuation by marking-to-market with current trading prices is seriously flawed. Under leverage the problem is particularly dramatic: due to the concave form of market impact, selling always initially causes the expected leverage to increase. There is a critical leverage above which it is impossible to e…
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…
Crashes have fascinated and baffled many canny observers of financial markets. In the strict orthodoxy of the efficient market theory, crashes must be due to sudden changes of the fundamental valuation of assets. However, detailed empirical studies suggest that large price jumps cannot be explained by news and are the …
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 …
This paper studies convex duality in optimal investment and contingent claim valuation in markets where traded assets may be subject to nonlinear trading costs and portfolio constraints. Under fairly general conditions, the dual expressions decompose into tree terms, corresponding to the agent's risk preferences, tradi…
The general problem of asset pricing when the discount rate differs from the rate at which an asset's cash flows accrue is considered. A pricing kernel framework is used to model an economy that is segmented into distinct markets, each identified by a yield curve having its own market, credit and liquidity risk charact…
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 on the risk-neutral pricing principle, we derive a general pricing equation whe…
We propose a model for price formation in financial markets based on clearing of a standard call auction with random orders, and verify its validity for prediction of the daily closing price distribution statistically. The model considers random buy and sell orders, placed following demand- and supply-side valuation di…
Paper develops a risk scoring framework for tokenized RWA markets.
problem Tokenized assets may not reflect true risk due to illiquidity and concentration.
method Develops a risk scoring framework based on observable indicators.
result Assets with limited transfer activity and concentrated ownership have high empirical risk.
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…
Study shows price impact increases with order-flow imbalance, using machine learning.
problem Understanding price impact in financial markets.
method Empirical investigation using Kyle's model and machine learning.
result Machine learning models can predict market impact more accurately than traditional methods.
After the beginning of the credit and liquidity crisis, financial institutions have been considering creating a convertible-bond type contract focusing on Capital. Under the terms of this contract, a bond is converted into equity if the authorities deem the institution to be under-capitalized. This paper discusses this…
It turns out that in the bivariate Black-Scholes economy Margrabe type options exhibit symmetry properties leading to semi-static hedges of rather general barrier options. Some of the results are extended to variants obtained by means of Brownian subordination. In order to increase the liquidity of the hedging instrume…
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…
Credit Value Adjustment (CVA) is the difference between the value of the default-free and credit-risky derivative portfolio, which can be regarded as the cost of the credit hedge. Default probabilities are therefore needed, as input parameters to the valuation. When liquid CDS are available, then implied probabilities …
An uncollateralized swap hedged back-to-back by a CCP swap is used to introduce FVA. The open IR01 of FVA, however, is a sure sign of risk not being fully hedged, a theoretical no-arbitrage pricing concern, and a bait to lure market risk capital, a practical business concern. By dynamically trading the CCP swap, with t…
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.
Paper introduces non-linear discounting models for default compensation and climate valuation.
problem Valuation of non-replicable value and damage under default risk.
method Develops two models: one for risk-neutralising discounting and another for survival probability dependent discounting.
result Non-decaying discount factors (negative discount rates) are possible under certain scenarios.
We propose a class of discrete-time stochastic models for the pricing of inflation-linked assets. The paper begins with an axiomatic scheme for asset pricing and interest rate theory in a discrete-time setting. The first axiom introduces a "risk-free" asset, and the second axiom determines the intertemporal pricing rel…
This paper describes a consistent and arbitrage-free pricing methodology for bespoke CDO tranches. The proposed method is a multi-factor extension to the (Li 2009) model, and it is free of the known flaws in the current standard pricing method of base correlation mapping. This method assigns a distinct market factor to…
Study examines Trump's crypto influence on markets, revealing conflicts and vulnerabilities.
problem Presidential power and cryptocurrency markets during Trump's second term.
method Mixed-methods approach combining quantitative and qualitative data.
result Political-linked digital assets became a distinct class with systemic vulnerabilities.
This paper simplifies hedge ratios in financial models using pathwise algorithmic differentiation.
problem Expensive and unstable computation of hedge ratios from pathwise sensitivities.
method Develops reduced stochastic hedge ratios of the form φ_j^r = Σ_j^r ξ_j^q X_q, retaining sensitivity tensor through empirical averages.
result Two coefficient criteria are introduced to minimize pathwise residuals and satisfy moment equations.
Paper introduces new actuarial-consistent valuations for insurance liabilities.
problem Valuation of insurance liabilities considering both financial and actuarial risks.
method Proposes two-step actuarial valuations and actuarial-consistent procedures.
result Actuarial-consistent valuations are equivalent to two-step actuarial valuations under coherence.
The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty exposure with liquid options. We say "start from" because we demonstrate that a nai…
For an infinite-horizon continuous-time optimal stopping problem under non-exponential discounting, we look for an optimal equilibrium, which generates larger values than any other equilibrium does on the entire state space. When the discount function is log sub-additive and the state process is one-dimensional, an opt…