WILMOTT Magazine: March 2023 issue

Volume 2023, Issue 124. Pages 1-96

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

In this issue:

  • D. Tudball, “Contents,” Wilmott, vol. 2023, iss. 124, p. 1–1, 2023.
    [Bibtex] [Abstract]
    Contents
    @article{WILM:WILM11095,
    title = {{Contents}},
    author = {Tudball, Daniel},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {1--1},
    doi = {10.54946/wilm.11095},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11095},
    abstract = {Contents}
    }
  • D. Tudball, “I Stand At Your Gate …,” Wilmott, vol. 2023, iss. 124, p. 2–3, 2023.
    [Bibtex]
    @article{WILM:WILM11096,
    title = {{I Stand At Your Gate …}},
    author = {Tudball, Daniel},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {2--3},
    doi = {10.54946/wilm.11096},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11096},
    abstract = {}
    }
  • D. Tudball, “News,” Wilmott, vol. 2023, iss. 124, p. 4–5, 2023.
    [Bibtex] [Abstract]
    News
    @article{WILM:WILM11097,
    title = {{News}},
    author = {Tudball, Daniel},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {4--5},
    doi = {10.54946/wilm.11097},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11097},
    abstract = {News}
    }
  • A. Brown, “The Establishment Clause,” Wilmott, vol. 2023, iss. 124, p. 6–12, 2023.
    [Bibtex] [Abstract]
    Why have quantitative football analysts mostly dismissed the concept of establishing the run despite strong statistical support for it, and near universal acceptance among coaches?
    @article{WILM:WILM11098,
    title = {{The Establishment Clause}},
    author = {Brown, Aaron},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {6--12},
    doi = {10.54946/wilm.11098},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11098},
    abstract = {Why have quantitative football analysts mostly dismissed the concept of establishing the run despite strong statistical support for it, and near universal acceptance among coaches?}
    }
  • R. Poulsen, “We Hold These Truths not to be Self-evident, Part 2: Strong and simple,” Wilmott, vol. 2023, iss. 124, p. 14–15, 2023.
    [Bibtex] [Abstract]
    Continuing with non-self-evident results from quantitative finance. After a short detour into Russian 19th century literature, we look at some of my favorite examples of simple arguments with strong consequences: Carry, parity, convexity, and sufficiency.
    @article{WILM:WILM11099,
    title = {{We Hold These Truths not to be Self-evident, Part 2: Strong and simple}},
    author = {Poulsen, Rolf},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {14--15},
    doi = {10.54946/wilm.11099},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11099},
    abstract = {Continuing with non-self-evident results from quantitative finance. After a short detour into Russian 19th century literature, we look at some of my favorite examples of simple arguments with strong consequences: Carry, parity, convexity, and sufficiency.}
    }
  • U. Wystup, “The Salzburg Financial Scandal ,” Wilmott, vol. 2023, iss. 124, p. 16–17, 2023.
    [Bibtex] [Abstract]
    When Imprisonment Depends on the Value of a Structured Interest Rate Swap
    @article{WILM:WILM11100,
    title = {{The Salzburg Financial Scandal }},
    author = {Wystup, Uwe},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {16--17},
    doi = {10.54946/wilm.11100},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11100},
    abstract = {When Imprisonment Depends on the Value of a Structured Interest Rate Swap}
    }
  • A. Kumiega, G. Sterijevski, and B. Van Vliet, “Synchronizing decisions: A dynamic programming, real option framework for New Product Development with stage-to-stage correlations,” Wilmott, vol. 2023, iss. 124, p. 18–26, 2023.
    [Bibtex] [Abstract]
    Much research has investigated the application of real options to staged, new product development projects. Still, this literature has not addressed an important intuition—that bad projects may stay bad. A new product development project or a technology startup backed venture capital may include stage-to-stage dependencies. Its “state” at one gate may influence the transition probabilities at later gates. We develop a novel real option model that captures this intuition using dynamic programming and serial correlations. In a subsequent paper, we introduce partial derivatives similar to the Greeks that we named “control maps”. These control maps will assist the firm’s management to assess the financial impact of resource reallocations to project success factors. Such reallocations have the intent of turning bad projects into good ones. Thus, the proposed framework enables management to synchronize its management decision with financial ones.
    @article{WILM:WILM11101,
    title = {{Synchronizing decisions: A dynamic programming, real option framework for New Product Development with stage-to-stage correlations}},
    author = {Kumiega, Andrew and Sterijevski, Greg and Van Vliet, Ben},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {18--26},
    doi = {10.54946/wilm.11101},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11101},
    abstract = {Much research has investigated the application of real options to staged, new product development projects. Still, this literature has not addressed an important intuition—that bad projects may stay bad. A new product development project or a technology startup backed venture capital may include stage-to-stage dependencies. Its “state” at one gate may influence the transition probabilities at later gates. We develop a novel real option model that captures this intuition using dynamic programming and serial correlations. In a subsequent paper, we introduce partial derivatives similar to the Greeks that we named “control maps”. These control maps will assist the firm’s management to assess the financial impact of resource reallocations to project success factors. Such reallocations have the intent of turning bad projects into good ones. Thus, the proposed framework enables management to synchronize its management decision with financial ones.}
    }
  • R. Bogni, “On Memory,” Wilmott, vol. 2023, iss. 124, p. 28–29, 2023.
    [Bibtex] [Abstract]
    On Memory, Impostor Syndrome and Investing.
    @article{WILM:WILM11102,
    title = {{On Memory}},
    author = {Bogni, Rudi},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {28--29},
    doi = {10.54946/wilm.11102},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11102},
    abstract = {On Memory, Impostor Syndrome and Investing.}
    }
  • C. Alexander, “Crypto Risks to Watch in 2023 ,” Wilmott, vol. 2023, iss. 124, p. 30–33, 2023.
    [Bibtex] [Abstract]
    Most financial risks originate in mismanaged, misunderstood or fraudulent operations.
    @article{WILM:WILM11103,
    title = {{Crypto Risks to Watch in 2023 }},
    author = {Alexander, Carol},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {30--33},
    doi = {10.54946/wilm.11103},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11103},
    abstract = {Most financial risks originate in mismanaged, misunderstood or fraudulent operations.}
    }
  • J. Andreasen, “Fun with Finite Difference,” Wilmott, vol. 2023, iss. 124, p. 34–40, 2023.
    [Bibtex] [Abstract]
    We summarize most of what you need to know about finite difference solution for one-dimensional partial differential equations in finance. We demonstrate the theoretical results by numerical experiments. The reader is invited and encouraged to replicate the experiments using the C++ code and spreadsheets in our GitHub repository.
    @article{WILM:WILM11104,
    title = {{Fun with Finite Difference}},
    author = {Andreasen, Jesper},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {34--40},
    doi = {10.54946/wilm.11104},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11104},
    abstract = {We summarize most of what you need to know about finite difference solution for one-dimensional partial differential equations in finance. We demonstrate the theoretical results by numerical experiments. The reader is invited and encouraged to replicate the experiments using the C++ code and spreadsheets in our GitHub repository.}
    }
  • G. Giller, “When Building Alphas, Should we Do the Right Thing?,” Wilmott, vol. 2023, iss. 124, p. 42–46, 2023.
    [Bibtex] [Abstract]
    : Taking a closer look at the idea that taking proper account of the evident complexity of realistic descriptions of financial markets doesn’t have a practical effect
    @article{WILM:WILM11105,
    title = {{When Building Alphas, Should we Do the Right Thing?}},
    author = {Giller, Graham},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {42--46},
    doi = {10.54946/wilm.11105},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11105},
    abstract = {: Taking a closer look at the idea that taking proper account of the evident complexity of realistic descriptions of financial markets doesn’t have a practical effect}
    }
  • L. Ballabio, “Handling dependencies in QuantLib,” Wilmott, vol. 2023, iss. 124, p. 48–51, 2023.
    [Bibtex] [Abstract]
    On pointer semantics, wrapper classes and migrations
    @article{WILM:WILM11106,
    title = {{Handling dependencies in QuantLib}},
    author = {Ballabio, Luigi},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {48--51},
    doi = {10.54946/wilm.11106},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11106},
    abstract = {On pointer semantics, wrapper classes and migrations}
    }
  • M. Kelly, “Financial Derivatives,” Wilmott, vol. 2023, iss. 124, p. 52–56, 2023.
    [Bibtex] [Abstract]
    Dr Michael Kelly puts Mathematica to work deriving the mathematical and numerical results for option prices by solving PDEs, SDEs using the discounted expectation of stochastic variables and simulations of underlying expiry prices, as well as discovering the risk-neutral value of the rate of return and establishing theorems such as the Put-Call parity formula
    @article{WILM:WILM11107,
    title = {{Financial Derivatives}},
    author = {Kelly, Michael},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {52--56},
    doi = {10.54946/wilm.11107},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11107},
    abstract = {Dr Michael Kelly puts Mathematica to work deriving the mathematical and numerical results for option prices by solving PDEs, SDEs using the discounted expectation of stochastic variables and simulations of underlying expiry prices, as well as discovering the risk-neutral value of the rate of return and establishing theorems such as the Put-Call parity formula}
    }
  • D. Orrell and L. Richards, “Keep on smiling: Market imbalance, option pricing, and the volatility smile,” Wilmott, vol. 2023, iss. 124, p. 58–64, 2023.
    [Bibtex] [Abstract]
    This article argues that the volatility smile is “real” in the sense that volatility and price change are correlated through the degree of market imbalance.
    @article{WILM:WILM11108,
    title = {{Keep on smiling: Market imbalance, option pricing, and the volatility smile}},
    author = {Orrell, David and Richards, Larry},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {58--64},
    doi = {10.54946/wilm.11108},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11108},
    abstract = {This article argues that the volatility smile is “real” in the sense that volatility and price change are correlated through the degree of market imbalance.}
    }
  • P. Balan, “Designing Banking Book balance forecasting models to support multiple use cases,” Wilmott, vol. 2023, iss. 124, p. 66–69, 2023.
    [Bibtex] [Abstract]
    In this introductory article we discuss, in the context of a few key usage areas, why fine-tuning models to the needs of each can introduce inconsistencies and hard to detect errors into reporting and decision making
    @article{WILM:WILM11109,
    title = {{Designing Banking Book balance forecasting models to support multiple use cases}},
    author = {Balan, Priya},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {66--69},
    doi = {10.54946/wilm.11109},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11109},
    abstract = {In this introductory article we discuss, in the context of a few key usage areas, why fine-tuning models to the needs of each can introduce inconsistencies and hard to detect errors into reporting and decision making}
    }
  • L. Ballotta, “Demystifying generic beliefs on jump models,” Wilmott, vol. 2023, iss. 124, p. 70–73, 2023.
    [Bibtex] [Abstract]
    Despite a history of convincing results, jump-based models are often met by skepticism. Typical criticisms include limited tractability, incomplete markets and associations with market crashes. Are these beliefs valid?
    @article{WILM:WILM11110,
    title = {{Demystifying generic beliefs on jump models}},
    author = {Ballotta, Laura},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {70--73},
    doi = {10.54946/wilm.11110},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11110},
    abstract = {Despite a history of convincing results, jump-based models are often met by skepticism. Typical criticisms include limited tractability, incomplete markets and associations with market crashes. Are these beliefs valid?}
    }
  • R. Ziemba, “Finding an Edge: Lessons from the Work of William T Ziemba,” Wilmott, vol. 2023, iss. 124, p. 74–76, 2023.
    [Bibtex] [Abstract]
    William T Ziemba, known as Dr Z, has been a contributor to Wilmott Magazine since its inception 20 years ago and a major player in the field. He passed away in June 2022. This column, written by his daughter Rachel Ziemba, a political economist, market strategist and occasional collaborator, pays tribute to some of his contributions to the field and to related areas of investment research. It draws on and extends some of the work presented at the November 2022 Quantitative Finance Conference and on work previously presented in this magazine.
    @article{WILM:WILM11111,
    title = {{Finding an Edge: Lessons from the Work of William T Ziemba}},
    author = {Ziemba, Rachel},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {74--76},
    doi = {10.54946/wilm.11111},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11111},
    abstract = {William T Ziemba, known as Dr Z, has been a contributor to Wilmott Magazine since its inception 20 years ago and a major player in the field. He passed away in June 2022. This column, written by his daughter Rachel Ziemba, a political economist, market strategist and occasional collaborator, pays tribute to some of his contributions to the field and to related areas of investment research. It draws on and extends some of the work presented at the November 2022 Quantitative Finance Conference and on work previously presented in this magazine.}
    }
  • C. Huber, “Asset Allocation Hands-On, with Examples in R,” Wilmott, vol. 2023, iss. 124, p. 78–87, 2023.
    [Bibtex] [Abstract]
    This paper suggests a framework for building an Asset Allocation tool and comes with about 300 lines of R code that implements its building blocks, which are calculation of Excess Returns including FX effects, as well as FX Forward Hedging, Optimization and Risk Decomposition. It draws on data from public sources and references the R code in the relevant passages of the text. All data and the R code are available for download. Four use cases are discussed: 1) drawing Efficient Frontiers based on different risk measures, like standard deviation or Expected Tail Loss; 2) studying the impact of varying FX Forward Hedge Ratios; 3) changing the Base Currency; and 4) Risk Decomposition. The examples are chosen with a view on practical implementation, reproducibility, and self-study.
    @article{WILM:WILM11112,
    title = {{Asset Allocation Hands-On, with Examples in R}},
    author = {Huber, Claus},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {78--87},
    doi = {10.54946/wilm.11112},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11112},
    abstract = {This paper suggests a framework for building an Asset Allocation tool and comes with about 300 lines of R code that implements its building blocks, which are calculation of Excess Returns including FX effects, as well as FX Forward Hedging, Optimization and Risk Decomposition. It draws on data from public sources and references the R code in the relevant passages of the text. All data and the R code are available for download. Four use cases are discussed: 1) drawing Efficient Frontiers based on different risk measures, like standard deviation or Expected Tail Loss; 2) studying the impact of varying FX Forward Hedge Ratios; 3) changing the Base Currency; and 4) Risk Decomposition. The examples are chosen with a view on practical implementation, reproducibility, and self-study.}
    }
  • M. Arnsdorf, “The Two KVAs,” Wilmott, vol. 2023, iss. 124, p. 88–93, 2023.
    [Bibtex] [Abstract]
    The capital valuation adjustment (KVA) is one of the more recent additions to the XVA family. In this article, we examine two key questions surrounding KVA: What is the correct return on equity (RoE) that should be assigned to a derivatives portfolio and what impact should changes in a firm’s equity capital levels or leverage have on valuation? Addressing these questions leads naturally to the definition of two distinct valuation adjustments we refer to as KVA1 and KVA2. KVA1 is a reflection of unpriced risk which can be present in incomplete markets. At the firm level it is proportional to the RoE but insensitive to changes in leverage. KVA2 on the other hand represents the shareholder cost of changes in leverage and is proportional to capital levels. However, the effective rate on the capital is the form’s junior funding rate and not the RoE. This article is a high-level summary of two more detailed recent papers by the author.
    @article{WILM:WILM11113,
    title = {{The Two KVAs}},
    author = {Arnsdorf, Matthias},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {88--93},
    doi = {10.54946/wilm.11113},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11113},
    abstract = {The capital valuation adjustment (KVA) is one of the more recent additions to the XVA family. In this article, we examine two key questions surrounding KVA: What is the correct return on equity (RoE) that should be assigned to a derivatives portfolio and what impact should changes in a firm's equity capital levels or leverage have on valuation? Addressing these questions leads naturally to the definition of two distinct valuation adjustments we refer to as KVA1 and KVA2. KVA1 is a reflection of unpriced risk which can be present in incomplete markets. At the firm level it is proportional to the RoE but insensitive to changes in leverage. KVA2 on the other hand represents the shareholder cost of changes in leverage and is proportional to capital levels. However, the effective rate on the capital is the form's junior funding rate and not the RoE. This article is a high-level summary of two more detailed recent papers by the author.}
    }
  • M. Radley, “Four Tune/Live Wire,” Wilmott, vol. 2023, iss. 124, p. 94–95, 2023.
    [Bibtex] [Abstract]
    BMW launches its most pared-back M4 in the shape of the limited edition M4 CSL
    @article{WILM:WILM11114,
    title = {{Four Tune/Live Wire}},
    author = {Radley, Milford},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {94--95},
    doi = {10.54946/wilm.11114},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11114},
    abstract = {BMW launches its most pared-back M4 in the shape of the limited edition M4 CSL}
    }
  • J. Darasz, “The Skewed World of Jan Darasz,” Wilmott, vol. 2023, iss. 124, p. 96–96, 2023.
    [Bibtex] [Abstract]
    Cartoon
    @article{WILM:WILM11115,
    title = {{The Skewed World of Jan Darasz}},
    author = {Darasz, Jan},
    year = 2023,
    journal = {Wilmott},
    publisher = {Wilmott Magazine, Ltd},
    volume = 2023,
    number = 124,
    pages = {96--96},
    doi = {10.54946/wilm.11115},
    issn = {1541-8286},
    url = {http://dx.doi.org/10.54946/wilm.11115},
    abstract = {Cartoon}
    }

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