Search Results (7)

This study proposes a neural-augmented Libor Market Model (LMM) for swaption surface calibration that enhances expressive power while maintaining the interpretability, arbitrage-free structure, and numerical stability of the classical framework. Classical LMM parametrizations, based on exponential decay volatility functions and static correlation kernels, are known to perform poorly in sparsely quoted and long-tenor regions of swaption volatility cubes. Machine learning–based diffusion models offer flexibility but often lack transparency, stability, and measure-consistent dynamics. To reconcile these requirements, the present approach embeds a compact neural network within the volatility and correlation layers of the LMM, constrained by structural diagnostics, low-rank correlation construction, and HJM-consistent drift. Empirical tests across major currencies (EUR, GBP, USD) and multiple quarterly datasets from 2024 to 2025 show that the neural-augmented LMM consistently outperforms the classical model. Improvements of approximately 7–10% in implied volatility RMSE and 10–15% in PV RMSE are observed across all datasets, with no deterioration in any region of the surface. These results reflect the model’s ability to represent cross-tenor dependencies and surface curvature beyond the reach of classical parametrizations, while remaining economically interpretable and numerically tractable. The findings support hybrid model designs in quantitative finance, where small neural components complement robust analytical structures. The approach aligns with ongoing industry efforts to integrate machine learning into regulatory-compliant pricing models and provides a pathway for future generative LMM variants that retain an arbitrage-free diffusion structure while learning data-driven volatility geometry. Full article

The class of forward-LIBOR market models can, under certain volatility structures, produce unrealistically high long-dated forward rates, particularly for maturities and tenors beyond the liquid market calibration instruments. This paper presents a diagnostic tool for analysing the quantiles of distributions for forward term rates in a displaced lognormal forward-LIBOR model (DLFM). In particular, we provide a quantile approximation that can be used to assess whether the modelled term rates remain within realistic bounds with a high probability. Applying this diagnostic tool (verified using Quasi-Monte Carlo (QMC) simulations), we show that realised forward term rates for long time horizons may be kept within realistic limits by appropriately damping the tail of the DLFM volatility function. Full article

We study power exchange options written on zero-coupon bonds under a stochastic string term-structure framework. Closed-form expressions for pricing and hedging bond power exchange options are obtained and, as particular cases, the corresponding expressions for call power options and constant underlying elasticity in strikes (CUES) options. Sufficient conditions for the equivalence of the European and the American versions of bond power exchange options are provided and the put-call parity relation for European bond power exchange options is established. Finally, we consider several applications of our results including duration and convexity measures for bond power exchange options, pricing extendable/accelerable maturity zero-coupon bonds, options to price a zero-coupon bond off of a shifted term-structure, and options on interest rates and rate spreads. In particular, we show that standard formulas for interest rate caplets and floorlets in a LIBOR market model can be obtained as special cases of bond power exchange options under a stochastic string term-structure model. Full article

Starting from an original portfolio of life insurance policies, in this article we propose a methodology to select model points portfolios that reproduce the original one, preserving its market risk under a certain measure. In order to achieve this goal, we first define an appropriate risk functional that measures the market risk associated to the interest rates evolution. Although other alternative interest rate models could be considered, we have chosen the LIBOR (London Interbank Offered Rate) market model. Once we have selected the proper risk functional, the problem of finding the model points of the replicating portfolio is formulated as a problem of minimizing the distance between the original and the target model points portfolios, under the measure given by the proposed risk functional. In this way, a high-dimensional global optimization problem arises and a suitable hybrid global optimization algorithm is proposed for the efficient solution of this problem. Some examples illustrate the performance of a parallel multi-CPU implementation for the evaluation of the risk functional, as well as the efficiency of the hybrid Basin Hopping optimization algorithm to obtain the model points portfolio. Full article

In this work we investigate whether information theory measures like mutual information and transfer entropy, extracted from a bank network, Granger cause financial stress indexes like LIBOR-OIS (London Interbank Offered Rate-Overnight Index Swap) spread, STLFSI (St. Louis Fed Financial Stress Index) and USD/CHF (USA Dollar/Swiss Franc) exchange rate. The information theory measures are extracted from a Gaussian Graphical Model constructed from daily stock time series of the top 74 listed US banks. The graphical model is calculated with a recently developed algorithm (LoGo) which provides very fast inference model that allows us to update the graphical model each market day. We therefore can generate daily time series of mutual information and transfer entropy for each bank of the network. The Granger causality between the bank related measures and the financial stress indexes is investigated with both standard Granger-causality and Partial Granger-causality conditioned on control measures representative of the general economy conditions. Full article

Financialization has contributed to economic growth but has caused scandals, misselling, rogue trading, tax evasion, and market speculation. To a certain extent, it has also created problems in social and economic instability. It is an important aspect of Enterprise Security, Privacy, and Risk (ESPR), particularly in risk research and analysis. In order to minimize the damaging impacts caused by the lack of regulatory compliance, governance, ethical responsibilities, and trust, we propose a Business Integrity Modeling and Analysis (BIMA) framework to unify business integrity with performance using big data predictive analytics and business intelligence. Comprehensive services include modeling risk and asset prices, and consequently, aligning them with business strategies, making our services, according to market trend analysis, both transparent and fair. The BIMA framework uses Monte Carlo simulation, the Black–Scholes–Merton model, and the Heston model for performing financial, operational, and liquidity risk analysis and present outputs in the form of analytics and visualization. Our results and analysis demonstrate supplier bankruptcy modeling, risk pricing, high-frequency pricing simulations, London Interbank Offered Rate (LIBOR) rate simulation, and speculation detection results to provide a variety of critical risk analysis. Our approaches to tackle problems caused by financial services and the operational risk clearly demonstrate that the BIMA framework, as the outputs of our data analytics research, can effectively combine integrity and risk analysis together with overall business performance and can contribute to operational risk research. Full article

The general problem of asset pricing when the discount rate differs from the rate at which an asset’s cash flows accrue is considered. A pricing kernel framework is used to model an economy that is segmented into distinct markets, each identified by a yield curve having its own market, credit and liquidity risk characteristics. The proposed framework precludes arbitrage within each market, while the definition of a curve-conversion factor process links all markets in a consistent arbitrage-free manner. A pricing formula is then derived, referred to as the across-curve pricing formula, which enables consistent valuation and hedging of financial instruments across curves (and markets). As a natural application, a consistent multi-curve framework is formulated for emerging and developed inter-bank swap markets, which highlights an important dual feature of the curve-conversion factor process. Given this multi-curve framework, existing multi-curve approaches based on HJM and rational pricing kernel models are recovered, reviewed and generalised and single-curve models extended. In another application, inflation-linked, currency-based and fixed-income hybrid securities are shown to be consistently valued using the across-curve valuation method. Full article