WILMOTT Magazine: September 2022 issue

Volume 2022, Issue 121. Pages 1-120

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

In this issue:

  • “Contents,” Wilmott, vol. 2022, iss. 121, p. 1–1, 2022.
    [Bibtex] [Abstract]
    Contents
    @Article {WILM:WILM11035, title = {Contents}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11035}, doi = {10.1002/wilm.11035}, pages = {1--1}, year = {2022}, abstract ={Contents},}
  • “It’s easy to remember,” Wilmott, vol. 2022, iss. 121, p. 2–4, 2022.
    [Bibtex] [Abstract]
    Editor’s Letter
    @Article {WILM:WILM11036, title = {It's Easy To Remember}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11036}, doi = {10.1002/wilm.11036}, pages = {2--4}, year = {2022}, abstract ={Editor's Letter},}
  • “It’s buried under a big w,” Wilmott, vol. 2022, iss. 121, p. 6–21, 2022.
    [Bibtex] [Abstract]
    Dan Tudball takes us on a journey through twenty years of Wilmott Magazine told in quotes and extracts that helped get rid of some muddleheadedness
    @Article {WILM:WILM11038, title = {It’s Buried Under a Big W}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11038}, doi = {10.1002/wilm.11038}, pages = {6--21}, year = {2022}, abstract ={Dan Tudball takes us on a journey through twenty years of Wilmott Magazine told in quotes and extracts that helped get rid of some muddleheadedness},}
  • “A new dawn,” Wilmott, vol. 2022, iss. 121, p. 22–23, 2022.
    [Bibtex] [Abstract]
    Dilip Madan argues that one has to discard the old clothes borrowed from statistics and economics and take up an understanding of risk anew. One has to move away from the theory of expectations and martingales towards the fast-developing theory of nonlinear expectations and nonlinear martingales.
    @Article {WILM:WILM11039, title = {A New Dawn}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11039}, doi = {10.1002/wilm.11039}, pages = {22--23}, year = {2022}, abstract ={Dilip Madan argues that one has to discard the old clothes borrowed from statistics and economics and take up an understanding of risk anew. One has to move away from the theory of expectations and martingales towards the fast-developing theory of nonlinear expectations and nonlinear martingales.},}
  • “Stochastic volatility – a story of two decades of sabr and wilmott magazine,” Wilmott, vol. 2022, iss. 121, p. 24–26, 2022.
    [Bibtex] [Abstract]
    In ‘Managing Smile Risk’, the SABR model with the iconic approximation formula for implied log-normal volatility given strike K and maturity t was introduced. In ‘Stochastic Volatility – a story of two decades of SABR and Wilmott Magazine’ Jörg Kienitz discusses developments with applications of SABR in the ensuing twenty years.
    @Article {WILM:WILM11040, title = {Stochastic Volatility – a story of two decades of SABR and Wilmott Magazine}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11040}, doi = {10.1002/wilm.11040}, pages = {24--26}, year = {2022}, abstract ={In ‘Managing Smile Risk’, the SABR model with the iconic approximation formula for implied log-normal volatility given strike K and maturity t was introduced. In ‘Stochastic Volatility – a story of two decades of SABR and Wilmott Magazine’ Jörg Kienitz discusses developments with applications of SABR in the ensuing twenty years. },}
  • “A short history of computational finance 1990-2020,” Wilmott, vol. 2022, iss. 121, p. 28–29, 2022.
    [Bibtex] [Abstract]
    A Short History of Computational Finance 1990-2020, a Partial Differential (PDE/FDM) Approach
    @Article {WILM:WILM11041, title = {A Short History of Computational Finance 1990-2020}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11041}, doi = {10.1002/wilm.11041}, pages = {28--29}, year = {2022}, abstract ={A Short History of Computational Finance 1990-2020, a Partial Differential (PDE/FDM) Approach},}
  • “The behavior of bitcoin implied volatility,” Wilmott, vol. 2022, iss. 121, p. 30–33, 2022.
    [Bibtex] [Abstract]
    the implications for exchange-traded products and delta-hedging options
    @Article {WILM:WILM11042, title = {The Behavior of Bitcoin Implied Volatility}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11042}, doi = {10.1002/wilm.11042}, pages = {30--33}, year = {2022}, abstract ={the implications for exchange-traded products and delta-hedging options },}
  • “Alice through the crypto glass,” Wilmott, vol. 2022, iss. 121, p. 34–39, 2022.
    [Bibtex] [Abstract]
    a hard look at the foundational technology of distributed ledgers. This is the first in a four part series
    @Article {WILM:WILM11043, title = {Alice Through The Crypto Glass}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11043}, doi = {10.1002/wilm.11043}, pages = {34--39}, year = {2022}, abstract ={a hard look at the foundational technology of distributed ledgers. This is the first in a four part series},}
  • “Going for broke,” Wilmott, vol. 2022, iss. 121, p. 40–43, 2022.
    [Bibtex] [Abstract]
    . In this issue, a potentially useful call buying strategy is considered
    @Article {WILM:WILM11044, title = {Going for broke}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11044}, doi = {10.1002/wilm.11044}, pages = {40--43}, year = {2022}, abstract ={. In this issue, a potentially useful call buying strategy is considered },}
  • “Things i learned this semester the fourth,” Wilmott, vol. 2022, iss. 121, p. 44–46, 2022.
    [Bibtex] [Abstract]
    The fundamental theorem of derivative trading extends to non-simple claims! Stop worrying and love the Dirac-δ-function! Selection bias lurks!
    @Article {WILM:WILM11045, title = {Things I Learned This Semester the Fourth}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11045}, doi = {10.1002/wilm.11045}, pages = {44--46}, year = {2022}, abstract ={The fundamental theorem of derivative trading extends to non-simple claims! Stop worrying and love the Dirac-δ-function! Selection bias lurks!},}
  • “Can butterfly be negative and why do we use the probability density to check for butterfly arbitrage?,” Wilmott, vol. 2022, iss. 121, p. 48–49, 2022.
    [Bibtex] [Abstract]
    can a Butterfly be negative, and why do we use the probability density to check for Butterfly arbitrage?
    @Article {WILM:WILM11046, title = {Can Butterfly be Negative and Why Do We Use the Probability Density to Check for Butterfly Arbitrage?}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11046}, doi = {10.1002/wilm.11046}, pages = {48--49}, year = {2022}, abstract ={can a Butterfly be negative, and why do we use the probability density to check for Butterfly arbitrage? },}
  • “By the rivers of babylon,” Wilmott, vol. 2022, iss. 121, p. 50–54, 2022.
    [Bibtex] [Abstract]
    an algorithm for computing square roots of option smiles is remarkably similar to a method invented nearly 4 millennia ago
    @Article {WILM:WILM11047, title = {By the Rivers of Babylon}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11047}, doi = {10.1002/wilm.11047}, pages = {50--54}, year = {2022}, abstract ={an algorithm for computing square roots of option smiles is remarkably similar to a method invented nearly 4 millennia ago},}
  • “The normal distribution doesn’t work, it’s time to stop using it!,” Wilmott, vol. 2022, iss. 121, p. 56–61, 2022.
    [Bibtex] [Abstract]
    The Normal is a beautiful and compelling thing that, unfortunately, does a terrible job of describing the returns of financial assets
    @Article {WILM:WILM11048, title = {THE NORMAL DISTRIBUTION DOESN’T WORK, IT’S TIME TO STOP USING IT!}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11048}, doi = {10.1002/wilm.11048}, pages = {56--61}, year = {2022}, abstract ={The Normal is a beautiful and compelling thing that, unfortunately, does a terrible job of describing the returns of financial assets},}
  • “Is digital killing productivity?,” Wilmott, vol. 2022, iss. 121, p. 62–63, 2022.
    [Bibtex] [Abstract]
    Bogni presents a few egregious examples of the pervasive idiocy of many digital processes and procedures
    @Article {WILM:WILM11049, title = {IS DIGITAL KILLING PRODUCTIVITY?}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11049}, doi = {10.1002/wilm.11049}, pages = {62--63}, year = {2022}, abstract ={Bogni presents a few egregious examples of the pervasive idiocy of many digital processes and procedures },}
  • “Stochastic modelling of hft big data in finance manifesto,” Wilmott, vol. 2022, iss. 121, p. 64–66, 2022.
    [Bibtex] [Abstract]
    his experience with big data in finance, namely, high-frequency and algorithmic trading (HFT) data, including limit order books (LOB), and stochastic modeling of those data
    @Article {WILM:WILM11050, title = {Stochastic Modelling of HFT Big Data in Finance Manifesto}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11050}, doi = {10.1002/wilm.11050}, pages = {64--66}, year = {2022}, abstract ={his experience with big data in finance, namely, high-frequency and algorithmic trading (HFT) data, including limit order books (LOB), and stochastic modeling of those data },}
  • “Powering up fourier valuation to any dimension,” Wilmott, vol. 2022, iss. 121, p. 68–71, 2022.
    [Bibtex] [Abstract]
    Even the powerful need a hand to achieve their full potential. Laura Ballotta looks at what happens when Fourier meets Monte Carlo integration
    @Article {WILM:WILM11051, title = {Powering up Fourier valuation to any dimension}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11051}, doi = {10.1002/wilm.11051}, pages = {68--71}, year = {2022}, abstract ={Even the powerful need a hand to achieve their full potential. Laura Ballotta looks at what happens when Fourier meets Monte Carlo integration },}
  • “The us housing bubble, credit crisis, crash, and recovery 2006 to 2015,” Wilmott, vol. 2022, iss. 121, p. 72–73, 2022.
    [Bibtex] [Abstract]
    Bill’s take on ‘The US Housing Bubble, Credit Crisis, Crash and Recovery 2006 to 2015’
    @Article {WILM:WILM11052, title = {The US housing bubble, credit crisis, crash, and recovery 2006 to 2015}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11052}, doi = {10.1002/wilm.11052}, pages = {72--73}, year = {2022}, abstract ={Bill’s take on ‘The US Housing Bubble, Credit Crisis, Crash and Recovery 2006 to 2015’},}
  • “Toward an efficient hybrid method for pricing barrier options on assets with stochastic volatility,” Wilmott, vol. 2022, iss. 121, p. 74–88, 2022.
    [Bibtex] [Abstract]
    Alexander Lipton and Artur Sepp combine the one-dimensional Monte Carlo simulation and the semi-analytical one-dimensional heat potential method to design an efficient technique for pricing barrier options on assets with correlated stochastic volatility. The authors’ approach to barrier options valuation utilizes two loops. First, the authors run the outer loop by generating volatility paths via the Monte Carlo method. Second, the authors condition the price dynamics on a given volatility path and apply the method of heat potentials to solve the conditional problem in closed form in the inner loop. Lipton and Sepp illustrate the accuracy and efficacy of their semi-analytical approach by comparing it with the two-dimensional Monte Carlo simulation and a hybrid method, which combines the finite-difference technique for the inner loop and the Monte Carlo simulation for the outer loop. The authors apply their method for computation of state probabilities (Green’s function), survival probabilities, and values of call options with barriers. The approach provides better accuracy and is orders of magnitude faster than the existing methods. As a by-product of their analysis, Lipton and Sepp generalize Willard’s (1997) conditioning formula for valuation of path-independent options to path-dependent options and derive a novel expression for the joint probability density for the value of drifted Brownian motion and its running minimum.
    @Article {WILM:WILM11053, title = {Toward an efficient hybrid method for pricing barrier options on assets with stochastic volatility}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11053}, doi = {10.1002/wilm.11053}, pages = {74--88}, year = {2022}, abstract ={Alexander Lipton and Artur Sepp combine the one-dimensional Monte Carlo simulation and the semi-analytical one-dimensional heat potential method to design an efficient technique for pricing barrier options on assets with correlated stochastic volatility. The authors’ approach to barrier options valuation utilizes two loops. First, the authors run the outer loop by generating volatility paths via the Monte Carlo method. Second, the authors condition the price dynamics on a given volatility path and apply the method of heat potentials to solve the conditional problem in closed form in the inner loop. Lipton and Sepp illustrate the accuracy and efficacy of their semi-analytical approach by comparing it with the two-dimensional Monte Carlo simulation and a hybrid method, which combines the finite-difference technique for the inner loop and the Monte Carlo simulation for the outer loop. The authors apply their method for computation of state probabilities (Green's function), survival probabilities, and values of call options with barriers. The approach provides better accuracy and is orders of magnitude faster than the existing methods. As a by-product of their analysis, Lipton and Sepp generalize Willard's (1997) conditioning formula for valuation of path-independent options to path-dependent options and derive a novel expression for the joint probability density for the value of drifted Brownian motion and its running minimum.},}
  • “Anchoring options on variance and volatility to terminal risk neutral distributions,” Wilmott, vol. 2022, iss. 121, p. 90–95, 2022.
    [Bibtex] [Abstract]
    in this paper the ratio of realized variance to the terminal squared return is modeled as independently distributed. Variance and volatility options are then first priced conditional on the terminal stock price. The variance and volatility options and their risk exposures are associated with option portfolios hedging the conditional price function. In particular the volatility swap vega is observed to be near a point above the variance swap vega. The residual uncertainty given the terminal stock price is modeled both using a log normal model and the empirical distribution.
    @Article {WILM:WILM11054, title = {Anchoring Options on Variance and Volatility to Terminal Risk Neutral Distributions}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11054}, doi = {10.1002/wilm.11054}, pages = {90--95}, year = {2022}, abstract ={in this paper the ratio of realized variance to the terminal squared return is modeled as independently distributed. Variance and volatility options are then first priced conditional on the terminal stock price. The variance and volatility options and their risk exposures are associated with option portfolios hedging the conditional price function. In particular the volatility swap vega is observed to be near a point above the variance swap vega. The residual uncertainty given the terminal stock price is modeled both using a log normal model and the empirical distribution.},}
  • “A note on modelling of portfolio losses,” Wilmott, vol. 2022, iss. 121, p. 96–99, 2022.
    [Bibtex] [Abstract]
    This paper formulates necessary and sufficient conditions for arbitrage-free dynamics of the process of portfolio losses. First Gatarek defines basic instruments of portfolio loss and express various prices as their compositions, Then the author investigates Markov models of losses and applies them to the problem of absence of arbitrage. Gatarek closes the paper with a brief discussion on the Gaussian model of portfolio losses.
    @Article {WILM:WILM11055, title = {A note on modelling of portfolio losses}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11055}, doi = {10.1002/wilm.11055}, pages = {96--99}, year = {2022}, abstract ={This paper formulates necessary and sufficient conditions for arbitrage-free dynamics of the process of portfolio losses. First Gatarek defines basic instruments of portfolio loss and express various prices as their compositions, Then the author investigates Markov models of losses and applies them to the problem of absence of arbitrage. Gatarek closes the paper with a brief discussion on the Gaussian model of portfolio losses.},}
  • “Excess out-of-sample risk and fleeting modes,” Wilmott, vol. 2022, iss. 121, p. 100–105, 2022.
    [Bibtex] [Abstract]
    propose a universal and versatile tool to reveal the existence of “fleeting modes”, i.e. portfolios that carry statistically significant excess risk, signalling ex-post a change in the correlation structure in the underlying asset space. The authors’ proposed test is furthermore independent of the “true” (but unknown) underlying correlation structure. The authors show empirically that such fleeting modes exist both in futures markets and in equity markets. A metric is proposed to quantify the alignment between known factors and fleeting modes and identify momentum as a source of excess risk in the equity space.
    @Article {WILM:WILM11056, title = {Excess Out-of-Sample Risk and Fleeting Modes}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11056}, doi = {10.1002/wilm.11056}, pages = {100--105}, year = {2022}, abstract ={propose a universal and versatile tool to reveal the existence of “fleeting modes”, i.e. portfolios that carry statistically significant excess risk, signalling ex-post a change in the correlation structure in the underlying asset space. The authors’ proposed test is furthermore independent of the “true” (but unknown) underlying correlation structure. The authors show empirically that such fleeting modes exist both in futures markets and in equity markets. A metric is proposed to quantify the alignment between known factors and fleeting modes and identify momentum as a source of excess risk in the equity space.},}
  • “Caplet pricing with backward-looking rates,” Wilmott, vol. 2022, iss. 121, p. 106–109, 2022.
    [Bibtex] [Abstract]
    Colin Turfus considers the Hull-White short rate model and extends the known closed-form pricing kernel to include the integrated short rate as a separate independent variable, applying it to cap/floor pricing.
    @Article {WILM:WILM11057, title = {Caplet Pricing with Backward-Looking Rates}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11057}, doi = {10.1002/wilm.11057}, pages = {106--109}, year = {2022}, abstract ={Colin Turfus considers the Hull-White short rate model and extends the known closed-form pricing kernel to include the integrated short rate as a separate independent variable, applying it to cap/floor pricing.},}
  • “Cryptocurrencies – hype or here to stay?,” Wilmott, vol. 2022, iss. 121, p. 110–117, 2022.
    [Bibtex] [Abstract]
    Cryptocurrencies are an innovative alternative to the traditional banking system. Currently the primary application is the execution and verification of financial transactions. Arguably the most valuable property of cryptocurrencies is the underlying Blockchain technology, a decentralized ledger, which executes and verifies financial transactions without an expensive and slow intermediary. Bitcoin increased from $354 in 2016 to $67,500 in November 2021, so there is definitely a hype. Cryptocurrencies need a big network to fend off criminal 51% network attacks. Therefore, only a few cryptocurrencies will survive, but those will be a disruptive technology, challenging the existing banking system.
    @Article {WILM:WILM11058, title = {Cryptocurrencies – Hype or Here to Stay?}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11058}, doi = {10.1002/wilm.11058}, pages = {110--117}, year = {2022}, abstract ={Cryptocurrencies are an innovative alternative to the traditional banking system. Currently the primary application is the execution and verification of financial transactions. Arguably the most valuable property of cryptocurrencies is the underlying Blockchain technology, a decentralized ledger, which executes and verifies financial transactions without an expensive and slow intermediary. Bitcoin increased from $354 in 2016 to $67,500 in November 2021, so there is definitely a hype. Cryptocurrencies need a big network to fend off criminal 51% network attacks. Therefore, only a few cryptocurrencies will survive, but those will be a disruptive technology, challenging the existing banking system.},}
  • “End game/ the long goodbye,” Wilmott, vol. 2022, iss. 121, p. 118–119, 2022.
    [Bibtex] [Abstract]
    Lotus Emira/ Aston Martin V12 Vantage
    @Article {WILM:WILM11059, title = {End Game/ The Long Goodbye}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11059}, doi = {10.1002/wilm.11059}, pages = {118--119}, year = {2022}, abstract ={Lotus Emira/ Aston Martin V12 Vantage},}
  • “The skewed world of jan darasz,” Wilmott, vol. 2022, iss. 121, p. 120–120, 2022.
    [Bibtex] [Abstract]
    Cartoon
    @Article {WILM:WILM11060, title = {The Skewed World of Jan Darasz}, journal = {Wilmott}, volume = {2022}, number = {121}, publisher = {Wilmott Magazine, Ltd}, issn = {1541-8286}, url = {http://dx.doi.org/10.1002/wilm.11060}, doi = {10.1002/wilm.11060}, pages = {120--120}, year = {2022}, abstract ={Cartoon},}

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