arXiv · arXiv · 2023
There is a persistent lack of funding, especially for SMEs, that cyclically worsens. The factoring and invoice discounting market appears to address delays in paying commercial invoices: sellers bring still-to-be-paid invoices to financial organizations, intermediaries, typically banks that provide an advance payment. This article contains research on novel decentralized approaches to said lending services without in…
Peplluis R. Esteva, Alberto Ballesteros Rodríguez
arXiv · arXiv · 2019
In this paper we extend the existing literature on xVA along three directions. First, we enhance current BSDE-based xVA frameworks to include initial margin in presence of defaults. Next, we solve the consistency problem that arises when the front-office desk of the bank uses trade-specific discount curves (CSA discounting) which differ from the discount rate adopted by the xVA desk. Finally, we clarify the impact of…
Francesca Biagini, Alessandro Gnoatto, Immacolata Oliva
arXiv · arXiv · 2012
We illustrate a problem in the self-financing condition used in the papers "Funding beyond discounting: collateral agreements and derivatives pricing" (Risk Magazine, February 2010) and "Partial Differential Equation Representations of Derivatives with Counterparty Risk and Funding Costs" (The Journal of Credit Risk, 2011). These papers state an erroneous self-financing condition. In the first paper, this is equivale…
Damiano Brigo, Cristin Buescu, Andrea Pallavicini, Qing Liu
arXiv · arXiv · 2017
Cash collateral is perfect in that it provides simultaneous counterparty credit risk protection and derivatives funding. Securities are imperfect collateral, because of collateral segregation or differences in CSA haircuts and repo haircuts. Moreover, the collateral rate term structure is not observable in the repo market, for derivatives netting sets are perpetual while repo tenors are typically in months. This arti…
Wujiang Lou
arXiv · arXiv · 2009
We revisit the problem of pricing and hedging plain vanilla single-currency interest rate derivatives using multiple distinct yield curves for market coherent estimation of discount factors and forward rates with different underlying rate tenors. Within such double-curve-single-currency framework, adopted by the market after the credit-crunch crisis started in summer 2007, standard single-curve no-arbitrage relations…
Marco Bianchetti
arXiv · arXiv · 2026
Persistent shifts in term-structure dynamics undermine the stability of single-regime models in long samples. We develop an arbitrage-free regime-switching generalized CIR (RS-GCIR) model that jointly prices the Chinese government bond (CGB) curve and corporate bond curves. To capture the systematic transmission from interest-rate conditions to credit spreads, we structure the model into two blocks and price corporat…
Maochun Xu, Yunqi Liang, Yi Hong
arXiv · arXiv · 2024
We introduce an infinite-horizon, continuous-time portfolio selection problem faced by an agent with periodic S-shaped preference and present bias. The inclusion of a quasi-hyperbolic discount function leads to time-inconsistency and we characterize the optimal portfolio for a pre-committing, naive and sophisticated agent respectively. In the more theoretically challenging problem with a sophisticated agent, the time…
Yushi Hamaguchi, Alex S. L. Tse
arXiv · arXiv · 2023
We present a thorough empirical study on real interest rates by also including risk aversion through the introduction of the market price of risk. With the view of complex systems science and its multidisciplinary approach, we use the theory of bond pricing to study the long term discount rate. Century-long historical records of 3 month bonds, 10 year bonds, and inflation allow us to estimate real interest rates for …
J. Doyne Farmer, John Geanakoplos, Matteo G. Richiardi, Miquel Montero, Josep Perelló
arXiv · arXiv · 2026
We study cash-flow forecasting for derivatives used in liquidity management and clarify its relation to risk-neutral valuation and replication. While it is well known that expectations under different measures (e.g., $\mathbb{P}$ vs. $\mathbb{Q}$) can yield different undiscounted cash-flows, further inconsistencies arise when payment times are stochastic. We show that using discounting sensitivities (funding-curve he…
Christian P. Fries
arXiv · arXiv · 2026
In this paper, we develop a continuous-time model-free reinforcement learning algorithm to learn deterministic equilibrium policies in general time-inconsistent control problems. Utilizing the extended Hamilton-Jacobi-Bellman system, we recast the original time-inconsistent problem into an equivalent two-stage problem. In the first stage, for given auxiliary functions, we employ the deterministic policy gradient appr…
Xin Guo, Yijie Huang, Xiang Yu
arXiv · arXiv · 2015
An uncollateralized swap hedged back-to-back by a CCP swap is used to introduce FVA. The open IR01 of FVA, however, is a sure sign of risk not being fully hedged, a theoretical no-arbitrage pricing concern, and a bait to lure market risk capital, a practical business concern. By dynamically trading the CCP swap, with the liability-side counterparty provides counterparty exposure hedge and swap funding, we find that t…
Wujiang Lou
arXiv · arXiv · 2015
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged, resembles in economics an issued variable funding note, and should be priced at the market rate of the issuer's debt. For the purpose of determining the fair value, the party on the lia…
Wujiang Lou
arXiv · arXiv · 2014
In this paper, we analyze the diversity of term structure functions (e.g., yield curves, swap curves, credit curves) constructed in a process which complies with some admissible properties: arbitrage-freeness, ability to fit market quotes and a certain degree of smooth- ness. When present values of building instruments are expressed as linear combinations of some primary quantities such as zero-coupon bonds, discount…
Areski Cousin, Ibrahima Niang
arXiv · arXiv · 2013
We review the main changes in the interbank market after the financial crisis started in August 2007. In particular, we focus on the fixed income market and we analyse the most relevant empirical evidences regarding the divergence of the existing basis between interbank rates with different tenor, such as Libor and OIS. We also discuss a qualitative explanation of these effects based on the consideration of credit an…
Marco Bianchetti, Mattia Carlicchi
arXiv · arXiv · 2012
The main result of this paper is a collateralized counterparty valuation adjusted pricing equation, which allows to price a deal while taking into account credit and debit valuation adjustments (CVA, DVA) along with margining and funding costs, all in a consistent way. Funding risk breaks the bilateral nature of the valuation formula. We find that the equation has a recursive form, making the introduction of a purely…
Andrea Pallavicini, Daniele Perini, Damiano Brigo
arXiv · arXiv · 2011
We present a quantitative study of the markets and models evolution across the credit crunch crisis. In particular, we focus on the fixed income market and we analyze the most relevant empirical evidences regarding the divergences between Libor and OIS rates, the explosion of Basis Swaps spreads, and the diffusion of collateral agreements and CSA-discounting, in terms of credit and liquidity effects. We also review t…
Marco Bianchetti, Mattia Carlicchi
arXiv · arXiv · 2007
In this paper, we investigate the Merton portfolio management problem in the context of non-exponential discounting. This gives rise to time-inconsistency of the decision-maker. If the decision-maker at time t=0 can commit his/her successors, he/she can choose the policy that is optimal from his/her point of view, and constrain the others to abide by it, although they do not see it as optimal for them. If there is no…
Ivar Ekeland, Traian A. Pirvu