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FREE WEBINAR - Estimation of Real World Drift in Interest Rates and Credit Spread using Local Price of Risk by Alexander Sokol

 
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Presenter: Alexander Sokol: Head of Quant Research, CompatibL

Estimation of Real World Drift in Interest Rates and Credit Spread using Local Price of Risk

*Includes material from a recent paper by Hull, Sokol, and White

http://ssrn.com/abstract=2403067 and Risk Magazine, October, 2014

  • The estimation of real world drift in interest rates and credit spread is usually based on ad-hoc techniques or expert opinion
  • The popular ad-hoc techniques include assuming zero real world drift or substituting the risk neutral drift for the real world drift
  • Both ad-hoc techniques can cause large backtest errors which we will demonstrate on several realistic portfolios
  • We will then review a simple, practical, and non-subjective method of estimating the real world drift from the historical data
  • The method is based on a new concept of “local price of risk”
  • The relationship between local price of risk and market price of risk is similar to the relationship between local volatility and market implied volatility
  • The new method is shown to significantly improve backtest accuracy in models for limits, liquidity, and regulatory capital

     

Long-Term Portfolio Simulation - For XVA, Limits, Liquidity and Regulatory Capital By Alexander Sokol

Long-Term Portfolio Simulation - For XVA, Limits, Liquidity and Regulatory Capital
Receive this exclusive publication at the discount offer price of £60.00 only via The Quants Hub

 

Topic

XVA & Risk Management

Published date

7 November 2014

Price

£0.00

Presenter Bio

Alexander Sokol

Alexander Sokol is CEO and Head of Quant Research at CompatibL and the author of the upcoming book “Long Term Portfolio Simulation”, to be published by Risk Books in 2014.

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