Calibrating A Market Model To Commodity And Interest Rate Risk

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Calibrating a Market Model to Commodity and Interest Rate Risk

Author : Patrik Karlsson
Publisher :
ISBN 13 :
Total Pages : 24 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Calibrating a Market Model to Commodity and Interest Rate Risk by : Patrik Karlsson

Download or read book Calibrating a Market Model to Commodity and Interest Rate Risk written by Patrik Karlsson and published by . This book was released on 2016 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on the multi-currency LIBOR Market Model (LMM) this paper constructs a hybrid commodity interest rate market model with a time-dependent stochastic local volatility function allowing the model to simultaneously fit the implied volatility surfaces of commodity and interest rate options. Since liquid market prices are only available for options on commodity futures, rather than forwards, a convexity correction formula for the model is derived to account for the difference between forward and futures prices. A procedure for efficiently calibrating the model to interest rate and commodity volatility smiles is constructed. Finally, the model is fitted to an exogenously given correlation structure between forward interest rates and commodity prices (cross-correlation). When calibrating to options on forwards (rather than futures), the fitting of cross-correlation preserves the (separate) calibration in the two markets (interest rate and commodity options), while in the case of futures a (rapidly converging) iterative fitting procedure is presented. The fitting of cross-correlation is reduced to finding an optimal rotation of volatility vectors, which is shown to be an appropriately modified version of the "orthonormal Procrustes" problem in linear algebra. The calibration approach is demonstrated in an application to market data for oil futures.

Calibration and Model Uncertainty of a Two-factor Mean-reverting Diffusion Model for Commodity Prices

Author : Jue Jun Chuah
Publisher :
ISBN 13 :
Total Pages : 92 pages
Book Rating : 4.:/5 (86 download)

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Book Synopsis Calibration and Model Uncertainty of a Two-factor Mean-reverting Diffusion Model for Commodity Prices by : Jue Jun Chuah

Download or read book Calibration and Model Uncertainty of a Two-factor Mean-reverting Diffusion Model for Commodity Prices written by Jue Jun Chuah and published by . This book was released on 2013 with total page 92 pages. Available in PDF, EPUB and Kindle. Book excerpt: With the development of various derivative instruments and index products, commodities have become a distinct asset class which can offer enhanced diversification benefits to the traditional asset allocation of stocks and bonds. In this thesis, we begin by discussing some of the key properties of commodity markets which distinguish them from bond and stock markets. Then, we consider the informational role of commodity futures markets. Since commodity prices exhibit mean-reverting behaviour, we will also review several mean-reversion models which are commonly used to capture and describe the dynamics of commodity prices. In Chapter 4, we focus on discussing a two-factor mean-reverting model proposed by Hikspoors and Jaimungal, as a means of providing additional degree of randomness to the long-run mean level. They have also suggested a method to extract the implied market prices of risk, after estimating both the risk-neutral and real-world parameters from the calibration procedure. Given the usefulness of this model, we are motivated to investigate the robustness of this calibration process by applying the methodology to simulated data. The capability to produce stable and accurate parameter estimates will be assessed by selecting various initial guesses for the optimization process. Our results show that the calibration method had a lot of difficulties in estimating the volatility and correlation parameters of the model. Moreover, we demonstrate that multiple solutions obtained from the calibration process would lead to model uncertainty in extracting the implied market prices of risk. Finally, by using historical crude oil data from the same time period, we can compare our calibration results with those obtained by Hikspoors and Jaimungal.

Handbook of Recent Advances in Commodity and Financial Modeling

Author : Giorgio Consigli
Publisher : Springer
ISBN 13 : 3319613200
Total Pages : 323 pages
Book Rating : 4.3/5 (196 download)

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Book Synopsis Handbook of Recent Advances in Commodity and Financial Modeling by : Giorgio Consigli

Download or read book Handbook of Recent Advances in Commodity and Financial Modeling written by Giorgio Consigli and published by Springer. This book was released on 2017-09-30 with total page 323 pages. Available in PDF, EPUB and Kindle. Book excerpt: This handbook includes contributions related to optimization, pricing and valuation problems, risk modeling and decision making problems arising in global financial and commodity markets from the perspective of Operations Research and Management Science. The book is structured in three parts, emphasizing common methodological approaches arising in the areas of interest: - Part I: Optimization techniques - Part II: Pricing and Valuation - Part III: Risk Modeling The book presents to a wide community of Academics and Practitioners a selection of theoretical and applied contributions on topics that have recently attracted increasing interest in commodity and financial markets. Within a structure based on the three parts, it presents recent state-of-the-art and original works related to: - The adoption of multi-criteria and dynamic optimization approaches in financial and insurance markets in presence of market stress and growing systemic risk; - Decision paradigms, based on behavioral finance or factor-based, or more classical stochastic optimization techniques, applied to portfolio selection problems including new asset classes such as alternative investments; - Risk measurement methodologies, including model risk assessment, recently applied to energy spot and future markets and new risk measures recently proposed to evaluate risk-reward trade-offs in global financial and commodity markets; and derivatives portfolio hedging and pricing methods recently put forward in the financial community in the aftermath of the global financial crisis.

Financial Modelling in Commodity Markets

Author : Viviana Fanelli
Publisher : CRC Press
ISBN 13 : 1351730959
Total Pages : 145 pages
Book Rating : 4.3/5 (517 download)

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Book Synopsis Financial Modelling in Commodity Markets by : Viviana Fanelli

Download or read book Financial Modelling in Commodity Markets written by Viviana Fanelli and published by CRC Press. This book was released on 2020-01-14 with total page 145 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Modelling in Commodity Markets provides a basic and self-contained introduction to the ideas underpinning financial modelling of products in commodity markets. The book offers a concise and operational vision of the main models used to represent, assess and simulate real assets and financial positions related to the commodity markets. It discusses statistical and mathematical tools important for estimating, implementing and calibrating quantitative models used for pricing and trading commodity-linked products and for managing basic and complex portfolio risks. Key features: Provides a step-by-step guide to the construction of pricing models, and for the applications of such models for the analysis of real data Written for scholars from a wide range of scientific fields, including economics and finance, mathematics, engineering and statistics, as well as for practitioners Illustrates some important pricing models using real data sets that will be commonly used in financial markets

Commodities

Author : M. A. H. Dempster
Publisher : CRC Press
ISBN 13 : 1498712339
Total Pages : 725 pages
Book Rating : 4.4/5 (987 download)

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Book Synopsis Commodities by : M. A. H. Dempster

Download or read book Commodities written by M. A. H. Dempster and published by CRC Press. This book was released on 2015-11-05 with total page 725 pages. Available in PDF, EPUB and Kindle. Book excerpt: Since a major source of income for many countries comes from exporting commodities, price discovery and information transmission between commodity futures markets are key issues for continued economic development.This book covers the fundamental theory of and derivatives pricing for major commodity markets as well as the interaction between commodi

Commodity Price Dynamics

Author : Craig Pirrong
Publisher : Cambridge University Press
ISBN 13 : 1139501976
Total Pages : 238 pages
Book Rating : 4.1/5 (395 download)

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Book Synopsis Commodity Price Dynamics by : Craig Pirrong

Download or read book Commodity Price Dynamics written by Craig Pirrong and published by Cambridge University Press. This book was released on 2011-10-31 with total page 238 pages. Available in PDF, EPUB and Kindle. Book excerpt: Commodities have become an important component of many investors' portfolios and the focus of much political controversy over the past decade. This book utilizes structural models to provide a better understanding of how commodities' prices behave and what drives them. It exploits differences across commodities and examines a variety of predictions of the models to identify where they work and where they fail. The findings of the analysis are useful to scholars, traders and policy makers who want to better understand often puzzling - and extreme - movements in the prices of commodities from aluminium to oil to soybeans to zinc.

Calibration and Filtering for Multi Factor Commodity Models with Seasonality

Author : Gareth Peters
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Calibration and Filtering for Multi Factor Commodity Models with Seasonality by : Gareth Peters

Download or read book Calibration and Filtering for Multi Factor Commodity Models with Seasonality written by Gareth Peters and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We construct a general multi-factor model for estimation and calibration of commodity spot prices and futures valuation. This extends the multi-factor long-short model in Schwartz and Smith (2000) and Yan (2002) in two important aspects: firstly we allow for both the long and short term dynamic factors to be mean reverting incorporating stochastic volatility factors and secondly we develop an additive structural seasonality model. In developing this non-linear continuous time stochastic model we maintain desirable model properties such as being arbitrage free and exponentially affine, thereby allowing us to derive closed form futures prices. In addition the models provide an improved capability to capture dynamics of the futures curve calibration in different commodities market conditions such as backwardation and contango. A Milstein scheme is used to provide an accurate discretized representation of the s.d.e.model. This results in a challenging non-linear non-Gaussian state-space model. To carry out inference, we develop an adaptive particle Markov chain Monte Carlo method. This methodology allows us to jointly calibrate and filter the latent processes for the long-short and volatility dynamics. This methodology is general and can be applied to the estimation and calibration of many of the other multi-factor stochastic commodity models proposed in the literature. We demonstrate the performance of our model and algorithm on both synthetic data and real data for futures contracts on crude oil.

International Convergence of Capital Measurement and Capital Standards

Author :
Publisher : Lulu.com
ISBN 13 : 9291316695
Total Pages : 294 pages
Book Rating : 4.2/5 (913 download)

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Book Synopsis International Convergence of Capital Measurement and Capital Standards by :

Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Structural Modeling of Short-run Price Dynamics in Commodities Markets

Author : Ali Nouri Dariani
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (89 download)

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Book Synopsis Structural Modeling of Short-run Price Dynamics in Commodities Markets by : Ali Nouri Dariani

Download or read book Structural Modeling of Short-run Price Dynamics in Commodities Markets written by Ali Nouri Dariani and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation addresses the gap between commodity price models in economics and finance. The literature in finance often abstracts from market forces and calibrates a stochastic process of price dynamics in order to follow them closely and to price commodity derivatives, most importantly futures contracts. On the other hand models in economics literature often focus on supply, demand and inventories in the long-run. I have developed short-run structural models of commodity prices. These models provide a better description of price dynamics by considering the underlying structure of the economy. Since these models incorporate actions of market participants, they have the advantage of being able to process information signals about probabilities of future supply/demand shocks. The other advantage of short-run structural models is their power in prediction of unobservable states of the economy. Hence, these models provide a better description of forward curves in commodities markets. Recent advances in the theory of storage have been able to associate specific behaviors of commodity prices with inventory dynamics. These models assume producers and consumers who only consider current price, and storage units who consider the whole stochastic process of price in the future. This thesis improves upon these models in two aspects. First, I remove the assumption that the producers and consumers take into account only the current price. For depletable commodities specifically, and for many commodities in general, it is more plausible to assume that the producer has the option to sell the commodity now or postpone the extraction until a future time. The expected future dynamics of prices can change the current production decisions and as a result the current and future prices. My model characterizes the equilibrium of such a system and its comparative dynamics. Second, I introduce an advanced calibration algorithm for this model. Traditional models calibrate their parameters by minimizing their prediction error on aggregate measures such as the average volatility of forward prices. My approach considers the instances of forwards curves and tries to matches each of them. One advantage of this model is the ability to estimate the state of the system (e.g. remaining inventories) as well as the transient and permanent shocks in supply/demand. The theoretical framework of this dissertation shows that actions of rational market participants impose certain price dynamics to the market. Most examples in this work consider crude oil as it is the most traded commodity, with liquid future contracts for longer horizons. Calibration results demonstrate the improvements that short-run structural models could create in describing price dynamics.

Calibration and Parameterization Methods for the Libor Market Model

Author : Christoph Hackl
Publisher : Springer Science & Business Media
ISBN 13 : 3658046880
Total Pages : 69 pages
Book Rating : 4.6/5 (58 download)

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Book Synopsis Calibration and Parameterization Methods for the Libor Market Model by : Christoph Hackl

Download or read book Calibration and Parameterization Methods for the Libor Market Model written by Christoph Hackl and published by Springer Science & Business Media. This book was released on 2013-12-27 with total page 69 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Libor Market Model (LMM) is a mathematical model for pricing and risk management of interest rate derivatives and has been built on the framework of modelling forward rates. For the conceptual understanding of the model a strong background in the fields of mathematics, statistics, finance and especially for implementation, computer science is necessary. The book provides the ne cessary groundwork to understand the LMM and delivers a framework to implement a working model where possible calibration and parameterization methods for volatility and correlation are explained. Special emphasis lies also on the trade off of speed and correctness where differences in choosing random number generators and the advantages of factor reduction are shown.

XVA

Author : Andrew Green
Publisher : John Wiley & Sons
ISBN 13 : 1118556755
Total Pages : 536 pages
Book Rating : 4.1/5 (185 download)

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Book Synopsis XVA by : Andrew Green

Download or read book XVA written by Andrew Green and published by John Wiley & Sons. This book was released on 2015-10-23 with total page 536 pages. Available in PDF, EPUB and Kindle. Book excerpt: Thorough, accessible coverage of the key issues inXVA XVA – Credit, Funding and Capital ValuationAdjustments provides specialists and non-specialists alikewith an up-to-date and comprehensive treatment of Credit, Debit,Funding, Capital and Margin Valuation Adjustment (CVA, DVA, FVA,KVA and MVA), including modelling frameworks as well as broader ITengineering challenges. Written by an industry expert, this booknavigates you through the complexities of XVA, discussing in detailthe very latest developments in valuation adjustments including theimpact of regulatory capital and margin requirements arising fromCCPs and bilateral initial margin. The book presents a unified approach to modelling valuationadjustments including credit risk, funding and regulatory effects.The practical implementation of XVA models using Monte Carlotechniques is also central to the book. You'll also find thoroughcoverage of how XVA sensitivities can be accurately measured, thetechnological challenges presented by XVA, the use of gridcomputing on CPU and GPU platforms, the management of data, and howthe regulatory framework introduced under Basel III presentsmassive implications for the finance industry. Explores how XVA models have developed in the aftermath of thecredit crisis The only text to focus on the XVA adjustments rather than thebroader topic of counterparty risk. Covers regulatory change since the credit crisis includingBasel III and the impact regulation has had on the pricing ofderivatives. Covers the very latest valuation adjustments, KVA and MVA. The author is a regular speaker and trainer at industry events,including WBS training, Marcus Evans, ICBI, Infoline and RISK If you're a quantitative analyst, trader, banking manager, riskmanager, finance and audit professional, academic or studentlooking to expand your knowledge of XVA, this book has youcovered.

Calibration of Interest Rate and Option Models Using Differential Evolution

Author : Ian Vollrath
Publisher :
ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Calibration of Interest Rate and Option Models Using Differential Evolution by : Ian Vollrath

Download or read book Calibration of Interest Rate and Option Models Using Differential Evolution written by Ian Vollrath and published by . This book was released on 2009 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We describe in detail the Differential Evolution algorithm and tune it to be suitable for a wide range of minimization problems using a testbed of various cost functions. We then use the algorithm in the calibration of the one-factor Hull-White model to caplets and the Libor market model to European swaption data. We also calibrate the Heston model of stochastic volatility to European option data. We find that Differential Evolution consistently results in successful model calibrations and outperforms the Downhill Simplex and Levenberg-Marquardt algorithms. We propose an efficient method for using Differential Evolution to provide fast, reliable calibrations for any pricing model.

Risk Management in Commodity Markets

Author : Helyette Geman
Publisher : John Wiley & Sons
ISBN 13 : 0470740817
Total Pages : 320 pages
Book Rating : 4.4/5 (77 download)

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Book Synopsis Risk Management in Commodity Markets by : Helyette Geman

Download or read book Risk Management in Commodity Markets written by Helyette Geman and published by John Wiley & Sons. This book was released on 2009-01-22 with total page 320 pages. Available in PDF, EPUB and Kindle. Book excerpt: Commodities represent today the fastest growing markets worldwide. Historically misunderstood, generally under- studied and under- valued, certainly under- represented in the literature, commodities are suddenly receiving the attention they deserve. Bringing together some of the best authors in the field, this book focuses on the risk management issues associated with both soft and hard commodities: energy, weather, agriculturals, metals and shipping. Taking the reader through every part of the commodities markets, the authors discuss the intricacies of modelling spot and forward prices, as well as the design of new Futures markets. The book also looks at the use of options and other derivative contract forms for hedging purposes, as well as supply management in commodity markets. It looks at the implications for climate policy and climate research and analyzes the various freight derivatives markets and products used to manage shipping and freight risk in a global commodity world. It is required reading for energy and mining companies, utilities’ practitioners, commodity and cash derivatives traders in investment banks, CTA’s and hedge funds

Understanding and Managing Model Risk

Author : Massimo Morini
Publisher : John Wiley & Sons
ISBN 13 : 0470977612
Total Pages : 452 pages
Book Rating : 4.4/5 (79 download)

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Book Synopsis Understanding and Managing Model Risk by : Massimo Morini

Download or read book Understanding and Managing Model Risk written by Massimo Morini and published by John Wiley & Sons. This book was released on 2011-11-07 with total page 452 pages. Available in PDF, EPUB and Kindle. Book excerpt: A guide to the validation and risk management of quantitative models used for pricing and hedging Whereas the majority of quantitative finance books focus on mathematics and risk management books focus on regulatory aspects, this book addresses the elements missed by this literature--the risks of the models themselves. This book starts from regulatory issues, but translates them into practical suggestions to reduce the likelihood of model losses, basing model risk and validation on market experience and on a wide range of real-world examples, with a high level of detail and precise operative indications.

Commodities and Commodity Derivatives

Author : Helyette Geman
Publisher : John Wiley & Sons
ISBN 13 : 0470687738
Total Pages : 479 pages
Book Rating : 4.4/5 (76 download)

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Book Synopsis Commodities and Commodity Derivatives by : Helyette Geman

Download or read book Commodities and Commodity Derivatives written by Helyette Geman and published by John Wiley & Sons. This book was released on 2009-09-24 with total page 479 pages. Available in PDF, EPUB and Kindle. Book excerpt: The last few years have been a watershed for the commodities, cash and derivatives industry. New regulations and products have led to an explosion in the commodities markets, creating a new asset for investors that includes hedge funds as well as University endowments, and has resulted in a spectacular growth in spot and derivative trading. This book covers hard and soft commodities (energy, agriculture and metals) and analyses: Economic and geopolitical issues in commodities markets Commodity price and volume risk Stochastic modelling of commodity spot prices and forward curves Real options valuation and hedging of physical assets in the energy industry It is required reading for energy companies and utilities practitioners, commodity cash and derivatives traders in investment banks, the Agrifood business, Commodity Trading Advisors (CTAs) and Hedge Funds. In Commodities and Commodity Derivatives, Hélyette Geman shows her powerful command of the subject by combining a rigorous development of its mathematical modelling with a compact institutional presentation of the arcane characteristics of commodities that makes the complex analysis of commodities derivative securities accessible to both the academic and practitioner who wants a deep foundation and a breadth of different market applications. It is destined to be a "must have" on the subject.” —Robert Merton, Professor, Harvard Business School "A marvelously comprehensive book of interest to academics and practitioners alike, by one of the world's foremost experts in the field." —Oldrich Vasicek, founder, KMV

The xVA Challenge

Author : Jon Gregory
Publisher : John Wiley & Sons
ISBN 13 : 1119109434
Total Pages : 498 pages
Book Rating : 4.1/5 (191 download)

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Book Synopsis The xVA Challenge by : Jon Gregory

Download or read book The xVA Challenge written by Jon Gregory and published by John Wiley & Sons. This book was released on 2015-09-22 with total page 498 pages. Available in PDF, EPUB and Kindle. Book excerpt: A detailed, expert-driven guide to today's major financial point of interest The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital is a practical guide from one of the leading and most influential credit practitioners, Jon Gregory. Focusing on practical methods, this informative guide includes discussion around the latest regulatory requirements, market practice, and academic thinking. Beginning with a look at the emergence of counterparty risk during the recent global financial crisis, the discussion delves into the quantification of firm-wide credit exposure and risk mitigation methods, such as netting and collateral. It also discusses thoroughly the xVA terms, notably CVA, DVA, FVA, ColVA, and KVA and their interactions and overlaps. The discussion of other aspects such as wrong-way risks, hedging, stress testing, and xVA management within a financial institution are covered. The extensive coverage and detailed treatment of what has become an urgent topic makes this book an invaluable reference for any practitioner, policy maker, or student. Counterparty credit risk and related aspects such as funding, collateral, and capital have become key issues in recent years, now generally characterized by the term 'xVA'. This book provides practical, in-depth guidance toward all aspects of xVA management. Market practice around counterparty credit risk and credit and debit value adjustment (CVA and DVA) The latest regulatory developments including Basel III capital requirements, central clearing, and mandatory collateral requirements The impact of accounting requirements such as IFRS 13 Recent thinking on the applications of funding, collateral, and capital adjustments (FVA, ColVA and KVA) The sudden realization of extensive counterparty risks has severely compromised the health of global financial markets. It's now a major point of action for all financial institutions, which have realized the growing importance of consistent treatment of collateral, funding, and capital alongside counterparty risk. The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital provides expert perspective and real-world guidance for today's institutions.

The LIBOR Market Model in Practice

Author : Dariusz Gatarek
Publisher : John Wiley & Sons
ISBN 13 : 0470060417
Total Pages : 290 pages
Book Rating : 4.4/5 (7 download)

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Book Synopsis The LIBOR Market Model in Practice by : Dariusz Gatarek

Download or read book The LIBOR Market Model in Practice written by Dariusz Gatarek and published by John Wiley & Sons. This book was released on 2007-01-30 with total page 290 pages. Available in PDF, EPUB and Kindle. Book excerpt: The LIBOR Market Model (LMM) is the first model of interest rates dynamics consistent with the market practice of pricing interest rate derivatives and therefore it is widely used by financial institution for valuation of interest rate derivatives. This book provides a full practitioner's approach to the LIBOR Market Model. It adopts the specific language of a quantitative analyst to the largest possible level and is one of first books on the subject written entirely by quants. The book is divided into three parts - theory, calibration and simulation. New and important issues are covered, such as various drift approximations, various parametric and nonparametric calibrations, and the uncertain volatility approach to smile modelling; a version of the HJM model based on market observables and the duality between BGM and HJM models. Co-authored by Dariusz Gatarek, the 'G' in the BGM model who is internationally known for his work on LIBOR market models, this book offers an essential perspective on the global benchmark for short-term interest rates.