This study uses a comprehensive data set of VIX and CDS markets to propose pairs trading strategies that represent the dynamic relation between market risk and credit risk in an equilibrium framework with a common non stationary factor. This involves the analysis of price discovery between VIX...

This paper uses an exclusive proprietary data set of European Credit Derivatives and VIX markets, covering a sample of 5 to 7 years, to study the nature of the link between credit risk and market risk, widely acknowledged in the academic literature. This allows us to establish cointegration in...

Artificial Neural Networks (ANNs) have recently been proposed as accurate and fast approximators in various derivatives pricing applications. ANNs typically excel in fitting functions they approximate at the input parameters they are trained on, and often are quite good in interpolating between...

We develop a new option pricing framework that tightly integrates with how institutional investors manage options positions. The framework starts with the near-term dynamics of the implied volatility surface and derives no-arbitrage constraints on its current shape. Within this framework, we...

Banks must manage their trading books, not just value them. Pricing includes valuation adjustments collectively known as XVA (at least credit, funding, capital and tax), so management must also include XVA. In trading book management we focus on pricing, hedging, and allocation of prices or...

Classic option pricing theory values a derivative contract via dynamic replication, and views the derivative as redundant relative to the replicating portfolio. In practice, while dynamic replication proves highly effective in drastically reducing the risk in derivative investments, the...

We develop two neo-classical methods for function approximations, the generalized stochastic sampling (gSS) and the functional tensor train (fTT) methods, that are high-performing alternatives to generic deep neural networks (DNNs) currently routinely proposed for function approximations in...

This paper develops a decentralized theory that determines the fair value of the yield-to-maturity of a bond or bond portfolio based purely on the near-term dynamics of the yield itself. The theory decomposes the yield into three components: its expected change, its risk premium, and its...

This note derives a hedging rule under the assumption of noisy forward prices. Forward prices are assumed to be noisy due to non-storability of the underlying product and the resulting lack of carry arbitrage. The minimum-variance hedge ratio increases nonlinearly with decreasing time to...

In this paper, we propose a model based on multivariate decomposition of multiplicative - absolute values and signs - components of several returns. In the m-variate case, the marginals for the m absolute values and the binary marginals for the m directions are linked through a 2m-dimensional...