FE Practitioners Seminar: Damiano Brigo

November 29, 2017 | 6:00pm - 7:30pm

FE Practitioners Seminar: Damiano Brigo

Schapiro CEPSR, 530 W. 120 St., New York, NY 10027 Davis Auditorium
Title: The science and art of nonlinear valuation: from risk neutral to indifference XVAs
 
Abstract: We consider a consistent framework for valuation under counterparty credit risk, initial and variation margins, and funding costs. This is based on stretching risk neutral valuation to its limits. We explain nonlinear effects due to replacement closeout at default and possibly asymmetric borrowing and lending rates in the margin interest and in the funding strategy for the replication of the relevant portfolio. Nonlinearity manifests itself in the valuation equations taking the form of semi-linear PDEs or Backward SDEs. We briefly hint at existence and uniqueness of solutions for these equations. We also present a high level discussion of the consequences of nonlinearities, both from the point of view of methodology and from an operational angle, including the role of banks treasuries. In the second part of this work we add trading costs associated with capital requirements. We argue that the capital valuation adjustment has a rather different nature and we move away from a replication or risk neutral approach and we adopt an indifference valuation framework in a simple one-period model. Joint work with Marco Francischello, Andrea Pallavicini and Daniele Perini.
 
Bios: 
Damiano Brigo is head of group and chair in Mathematical Finance and Stochastic Analysis at Imperial College, London, and serves in the advisory boards of Credit Benchmark and IHS-Markit. Damiano's previous roles include Gilbart Professor and Head of Group at King's College London, Managing Director and Quantitative Innovation Global Head in Fitch Ratings, Head of Credit Models in Banca IMI, Director of the Capco Institute and Fixed Income Professor at Bocconi University. Damiano published more than 100 works in Mathematical Finance, Systems Theory, Probability and Statistics, and books for Springer and Wiley that became field references in stochastic interest rate and credit modelling. Damiano has been the most cited author in Risk Magazine in 2006, 2010, 2012, with more than 100 citations in 1988-2016. Damiano is in the Editorial board of a number of scientific journals in mathematical finance, probability and systems theory. Damiano's interests include valuation, risk measurement, credit risk, funding costs, optimal execution, stochastic analysis, dependence modelling, stochastic differential geometry and nonlinear filtering. Damiano holds a PhD in stochastic filtering with differential geometry.
 
 
 
 


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