WILMOTT Magazine: January 2019 issue

Volume 2019, Issue 99. Pages 1–72

Every issue we bring you original material from some of the best columnists, educators and cutting-edge researchers. Subscribe here.

In this issue:

Bibliography

  • “Contents,” Wilmott, vol. 2019, iss. 99, p. 1–1, 2019.
    [Bibtex]
    @article {WILM:WILM10727,
    title = {Contents},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10727},
    doi = {10.1002/wilm.10727},
    pages = {1--1},
    year = {2019},
    }

  • D. Tudball, “Lock your door and call the law,” Wilmott, vol. 2019, iss. 99, p. 2–3, 2019.
    [Bibtex] [Abstract]

    Quant finance could learn much from other disciplines that revel in the fact that you don't' need perfect models to be a science.

    @article {WILM:WILM10728,
    author = {Tudball, Dan},
    title = {Lock Your Door and Call the Law},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10728},
    doi = {10.1002/wilm.10728},
    pages = {2--3},
    year = {2019},
    abstract = {Quant finance could learn much from other disciplines that revel in the fact that you don't' need perfect models to be a science.},
    }

  • “News,” Wilmott, vol. 2019, iss. 99, p. 4–7, 2019.
    [Bibtex]
    @article {WILM:WILM10729,
    title = {News},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10729},
    doi = {10.1002/wilm.10729},
    pages = {4--7},
    year = {2019},
    }

  • A. Brown, “Kelly attention,” Wilmott, vol. 2019, iss. 99, p. 8–11, 2019.
    [Bibtex] [Abstract]

    The logic behind the Kelly criterion gives a great simplification that converts the risk manager's ‘attention problem’ from impossible to just very difficult.

    @article {WILM:WILM10730,
    author = {Brown, Aaron},
    title = {Kelly Attention},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10730},
    doi = {10.1002/wilm.10730},
    pages = {8--11},
    year = {2019},
    abstract = {The logic behind the Kelly criterion gives a great simplification that converts the risk manager's ‘attention problem’ from impossible to just very difficult.},
    }

  • E. G. Haug, “Philosophy of randomness: time in relation to uncertainty,” Wilmott, vol. 2019, iss. 99, p. 12–13, 2019.
    [Bibtex] [Abstract]

    The infinitesimally small intervals of Planck time might hold some useful food for thought in finance.

    @article {WILM:WILM10731,
    author = {Haug, Espen Gaardner},
    title = {Philosophy of Randomness: Time in Relation to Uncertainty},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10731},
    doi = {10.1002/wilm.10731},
    pages = {12--13},
    year = {2019},
    abstract = {The infinitesimally small intervals of Planck time might hold some useful food for thought in finance.},
    }

  • R. Poulsen, “Kelly gone bad,” Wilmott, vol. 2019, iss. 99, p. 14–15, 2019.
    [Bibtex] [Abstract]

    Analysis of the economics that lead to massive migration and the economics of migration itself is inadequate.

    @article {WILM:WILM10732,
    author = {Poulsen, Rolf},
    title = {Kelly Gone Bad},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10732},
    doi = {10.1002/wilm.10732},
    pages = {14--15},
    year = {2019},
    abstract = {Analysis of the economics that lead to massive migration and the economics of migration itself is inadequate.},
    }

  • U. Wystup, “Fx greeks,” Wilmott, vol. 2019, iss. 99, p. 16–19, 2019.
    [Bibtex] [Abstract]

    Covering the possibilities that Greeks in FX create…

    @article {WILM:WILM10733,
    author = {Wystup, Uwe},
    title = {FX Greeks},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10733},
    doi = {10.1002/wilm.10733},
    pages = {16--19},
    year = {2019},
    abstract = {Covering the possibilities that Greeks in FX create…},
    }

  • P. Wilmott and D. Orrell, “No laws, only toys,” Wilmott, vol. 2019, iss. 99, p. 20–29, 2019.
    [Bibtex] [Abstract]

    In the September 2018 issue, we ran an excerpt from The Money Formula Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets, where Paul Wilmott and David Orrell considered the dual nature of quantitative finance, as exemplified by two men – John Law and Isaac Newton. In this issue Paul and David argue that Quantitative Finance could learn much from other disciplines (like Mathematical Biology) that revel in the fact that you don't need perfect models to be a science, and still produce useful insights into mechanisms and behaviors despite the scarcity of applicable, reliable physical laws in the models.

    @article {WILM:WILM10734,
    author = {Wilmott, Paul and Orrell, David},
    title = {No Laws, Only Toys},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10734},
    doi = {10.1002/wilm.10734},
    pages = {20--29},
    year = {2019},
    abstract = {In the September 2018 issue, we ran an excerpt from The Money Formula Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets, where Paul Wilmott and David Orrell considered the dual nature of quantitative finance, as exemplified by two men – John Law and Isaac Newton. In this issue Paul and David argue that Quantitative Finance could learn much from other disciplines (like Mathematical Biology) that revel in the fact that you don't need perfect models to be a science, and still produce useful insights into mechanisms and behaviors despite the scarcity of applicable, reliable physical laws in the models.},
    }

  • L. MacLean and B. Ziemba, “The efficiency of nfl betting markets,” Wilmott, vol. 2019, iss. 99, p. 30–35, 2019.
    [Bibtex] [Abstract]

    Do the odds reflect all the relevant information?

    @article {WILM:WILM10735,
    author = {MacLean, Leonard and Ziemba, Bill},
    title = {The Efficiency of NFL Betting Markets},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10735},
    doi = {10.1002/wilm.10735},
    pages = {30--35},
    year = {2019},
    abstract = {Do the odds reflect all the relevant information?},
    }

  • C. Huber, “R tutorial on machine learning: how to visualize option-like hedge fund returns for risk analysis,” Wilmott, vol. 2019, iss. 99, p. 36–41, 2019.
    [Bibtex] [Abstract]

    Nonlinearity in financial market returns is commonplace, and in particular in hedge fund returns. Hedge funds are known to generate option-like returns based on the products they trade, as well as their trading strategies. This tutorial describes how Kohonen's self-organizing map (SOM), a method of machine learning, can help to analyze nonlinearity in returns. We focus on simple examples that help the reader to understand where nonlinear hedge returns come from, why linear correlation analysis is inappropriate, and how SOMs can help to visualize nonlinear returns to enhance risk analysis. R code and step-by-step instructions enable the reader to reproduce the creation of the SOM. Readers are encouraged to change parameters and study the impacts on results.

    @article {WILM:WILM10736,
    author = {Huber, Claus},
    title = {R Tutorial on Machine Learning: How to Visualize Option-Like Hedge Fund Returns for Risk Analysis},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10736},
    doi = {10.1002/wilm.10736},
    pages = {36--41},
    keywords = {R tutorial, machine learning, self-organizing map, Kohonen map, nonlinear returns, hedge fund returns},
    year = {2019},
    abstract = {Nonlinearity in financial market returns is commonplace, and in particular in hedge fund returns. Hedge funds are known to generate option-like returns based on the products they trade, as well as their trading strategies. This tutorial describes how Kohonen's self-organizing map (SOM), a method of machine learning, can help to analyze nonlinearity in returns. We focus on simple examples that help the reader to understand where nonlinear hedge returns come from, why linear correlation analysis is inappropriate, and how SOMs can help to visualize nonlinear returns to enhance risk analysis. R code and step-by-step instructions enable the reader to reproduce the creation of the SOM. Readers are encouraged to change parameters and study the impacts on results.},
    }

  • C. M. Puetter, S. Renzitti, and A. Cowan, “Ccr kva relief through cva: a regression-based monte carlo approach,” Wilmott, vol. 2019, iss. 99, p. 42–61, 2019.
    [Bibtex] [Abstract]

    We present and examine, by example of a USD interest rate swap and a EUR/USD cross-currency basis swap, a regression-based Monte Carlo approach to counterparty credit default risk (CCR) capital and CCR capital valuation adjustment (KVA) calculations [assuming the standardized approach to counterparty credit risk for exposura-et-default (SA-CCR EAD) and the internal ratings-based (IRB) approach for CCR risk weights]. This approach allows to incorporate the capital lowering effect of credit valuation adjustment (CVA) in an efficient manner, without having to resort to lengthy nested Monte Carlo simulations. We find that the regression-based Monte Carlo approach works well in most situations. In other situations, the accuracy of the approach is sensitively controlled by the choice of explanatory variables. We discuss in detail the conditions and underlying dynamics under which this happens. In computing and presenting a selection of numerical examples, we also explore the impact of dynamic CCR risk weights on CCR KVA, and compare regression-based CCR KVA results with CCR KVA results from nested Monte Carlo, alternative frequently used CCR KVA simplifications, and standardized CVA KVA.

    @article {WILM:WILM10737,
    author = {Puetter, Christoph M. and Renzitti, Stefano and Cowan, Allan},
    title = {CCR KVA Relief Through CVA: A Regression-Based Monte Carlo Approach},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10737},
    doi = {10.1002/wilm.10737},
    pages = {42--61},
    keywords = {regression-based Monte Carlo, CCR capital, CCR KVA, SA-CCR EAD, incurred/forward CVA},
    year = {2019},
    abstract = {We present and examine, by example of a USD interest rate swap and a EUR/USD cross-currency basis swap, a regression-based Monte Carlo approach to counterparty credit default risk (CCR) capital and CCR capital valuation adjustment (KVA) calculations [assuming the standardized approach to counterparty credit risk for exposura-et-default (SA-CCR EAD) and the internal ratings-based (IRB) approach for CCR risk weights]. This approach allows to incorporate the capital lowering effect of credit valuation adjustment (CVA) in an efficient manner, without having to resort to lengthy nested Monte Carlo simulations. We find that the regression-based Monte Carlo approach works well in most situations. In other situations, the accuracy of the approach is sensitively controlled by the choice of explanatory variables. We discuss in detail the conditions and underlying dynamics under which this happens. In computing and presenting a selection of numerical examples, we also explore the impact of dynamic CCR risk weights on CCR KVA, and compare regression-based CCR KVA results with CCR KVA results from nested Monte Carlo, alternative frequently used CCR KVA simplifications, and standardized CVA KVA.}
    }

  • T. Sakuma, “Homotopy analysis method applied sabr and xva,” Wilmott, vol. 2019, iss. 99, p. 62–69, 2019.
    [Bibtex] [Abstract]

    The SABR models are very popular in the financial industry. Their evaluation using asymptotic formulas for implied volatilities is fast and widely used but becomes less accurate and exhibits negative probability distribution values around zero strikes for long maturities. In addition, alternative version for more accurate valuation exists but involves numerical integration. In this paper, we apply the homotopy analysis method (HAM) to derive approximated option prices under a SABR model. This scheme is simple and our numerical examples demonstrate that the derived price can be evaluated easily and gives a good approximation with a computational cost that is only several times heavier than that of the Black-Scholes model. We also discuss the application of HAM to XVA evaluation.

    @article {WILM:WILM10738,
    author = {Sakuma, Takayuki},
    title = {Homotopy Analysis Method Applied SABR and XVA},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10738},
    doi = {10.1002/wilm.10738},
    pages = {62--69},
    keywords = {SABR, XVA, Stochastic volatility, PDE, HAM},
    year = {2019},
    abstract = {The SABR models are very popular in the financial industry. Their evaluation using asymptotic formulas for implied volatilities is fast and widely used but becomes less accurate and exhibits negative probability distribution values around zero strikes for long maturities. In addition, alternative version for more accurate valuation exists but involves numerical integration. In this paper, we apply the homotopy analysis method (HAM) to derive approximated option prices under a SABR model. This scheme is simple and our numerical examples demonstrate that the derived price can be evaluated easily and gives a good approximation with a computational cost that is only several times heavier than that of the Black-Scholes model. We also discuss the application of HAM to XVA evaluation.},
    }

  • M. Radley, “Cars,” Wilmott, vol. 2019, iss. 99, p. 70–71, 2019.
    [Bibtex] [Abstract]

    Arguably the world's finest supercar manufacturer, Lamborghini, has turned up the performance pipes on its top-of-the-line product, the formidable Aventador.

    @article {WILM:WILM10739,
    author = {Radley, Milford},
    title = {Cars},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10739},
    doi = {10.1002/wilm.10739},
    pages = {70--71},
    year = {2019},
    abstract = {Arguably the world's finest supercar manufacturer, Lamborghini, has turned up the performance pipes on its top-of-the-line product, the formidable Aventador.},
    }

  • J. Darasz, “The skewed world of jan darasz,” Wilmott, vol. 2019, iss. 99, p. 72–72, 2019.
    [Bibtex]
    @article {WILM:WILM10740,
    author = {Darasz, Jan},
    title = {The skewed world of Jan Darasz},
    journal = {Wilmott},
    volume = {2019},
    number = {99},
    publisher = {John Wiley & Sons, Ltd},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.1002/wilm.10740},
    doi = {10.1002/wilm.10740},
    pages = {72--72},
    year = {2019},
    }

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