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SOFR derivatives market remains illiquid and incomplete so it is not amenable to classical risk-neutral term structure models which are based on the assumption of perfect liquidity and completeness. This paper develops a statistical SOFR term structure model that is well-suited for risk management and derivatives pricing within the incomplete markets paradigm. The model incorporates relevant macroeconomic factors tha…
We develop a transparent and fully auditable LLM-based pipeline for macro-financial stress testing, combining structured prompting with optional retrieval of country fundamentals and news. The system generates machine-readable macroeconomic scenarios for the G7, which cover GDP growth, inflation, and policy rates, and are translated into portfolio losses through a factor-based mapping that enables Value-at-Risk and E…
This paper assesses the link between central bank's policy rate, inflation rate and output gap through Taylor rule equation in both United States and United Kingdom from 1990 to 2020. Also, it analyses the relationship between monetary policy and asset price volatility using an augmented Taylor rule. According to the literature, there has been a discussion about the utility of using asset prices to evaluate central b…
The financial industry has undergone a significant transition from the London Interbank Offered Rates (LIBORs) to Risk Free Rates (RFRs) such as, e.g., the Secured Overnight Financing Rate (SOFR) in the U.S. and the Cash Rate (AONIA) in Australia, as primary benchmark rates for borrowing costs. The paper examines the pricing and hedging method for financial products in a cross-currency framework with the special emph…
We develop a robust linear-quadratic mean-field control framework for systemic risk under model uncertainty, in which a central bank jointly optimizes interest rate policy and supervisory monitoring intensity against adversarial distortions. Our model features multiple policy instruments with interactive dynamics, implemented via a variance weight that depends on the policy rate, generating coupling effects absent in…
Transaction costs and regime shifts are major reasons why paper portfolios fail in live trading. We introduce FR-LUX (Friction-aware, Regime-conditioned Learning under eXecution costs), a reinforcement learning framework that learns after-cost trading policies and remains robust across volatility-liquidity regimes. FR-LUX integrates three ingredients: (i) a microstructure-consistent execution model combining proporti…
Overnight rates, such as the SOFR (Secured Overnight Financing Rate) in the US, are central to the current reform of interest rate benchmarks. A striking feature of overnight rates is the presence of jumps and spikes occurring at predetermined dates due to monetary policy interventions and liquidity constraints. This corresponds to stochastic discontinuities (i.e., discontinuities occurring at ex-ante known points in…
This paper proposes a reinforcement learning--based framework for cryptocurrency portfolio management using the Soft Actor--Critic (SAC) and Deep Deterministic Policy Gradient (DDPG) algorithms. Traditional portfolio optimization methods often struggle to adapt to the highly volatile and nonlinear dynamics of cryptocurrency markets. To address this, we design an agent that learns continuous trading actions directly f…
With the improvement of computer performance and the development of GPU-accelerated technology, trading with machine learning algorithms has attracted the attention of many researchers and practitioners. In this research, we propose a novel portfolio management strategy based on the framework of Deep Deterministic Policy Gradient, a policy-based reinforcement learning framework, and compare its performance to that of…
We coin the term *Protocols for Loanable Funds (PLFs)* to refer to protocols which establish distributed ledger-based markets for loanable funds. PLFs are emerging as one of the main applications within Decentralized Finance (DeFi), and use smart contract code to facilitate the intermediation of loanable funds. In doing so, these protocols allow agents to borrow and save programmatically. Within these protocols, inte…
Fixed income has received far less attention than equity portfolio optimisation since Markowitz' original work of 1952, partly as a result of the need to model rates and credit risk. We argue that the shape of the efficient frontier is mainly controlled by linear constraints, with the standard deviation relatively unimportant, and propose a two-factor model for its time evolution.
Explicitly taking into account the risk incurred when borrowing at a shorter tenor versus lending at a longer tenor ("roll-over risk"), we construct a stochastic model framework for the term structure of interest rates in which a frequency basis (i.e. a spread applied to one leg of a swap to exchange one floating interest rate for another of a different tenor in the same currency) arises endogenously. This rollover r…
Pricing extremely long-dated liabilities market consistently deals with the decline in liquidity of financial instruments on long maturities. The aim is to quantify the uncertainty of rates up to maturities of a century. We assume that the interest rates follow the affine mean-reverting Vasicek model. We model parameter uncertainty by Bayesian distributions over the parameters. The cross-sectional and time series par…
We give a detailed account of correlations between credit sector/quality and treasury curve factors, using the robust framework of the Barclays POINT Global Risk Model. Consistent with earlier studies, we find a strong negative correlation between sector spreads and rate shifts. However, we also observe that the correlations between spreads and Treasury twists reversed recently, which is likely attributable to the Fe…
Automated Market Makers based on concentrated liquidity, such as Uniswap v3, significantly improve capital efficiency but expose Liquidity Providers (LPs) to adverse selection costs, formalized as Loss-Versus-Rebalancing (LVR). While theoretical literature quantifies these costs, the interplay between realistic blockchain microstructure and endogenous pricing mechanisms remains under-explored. This paper develops a g…
In this paper, we consider a generic interest rate market in the presence of roll-over risk, which generates spreads in spot/forward term rates. We do not require classical absence of arbitrage and rely instead on a minimal market viability assumption, which enables us to work in the context of the benchmark approach. In a Markovian setting, we extend the control theoretic approach of Gombani & Runggaldier (2013) and…
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers the modeling of the liability liquidity risk (or funding liquidity), the second dimension is dedicated to the modeling of the asset liquidity risk (or market liquidity), whereas the third dimension considers the management of the asset-liability liquidi…
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly a…