Internal-rate-of-return (IRR) settled swaptions are the main interest rate volatility instruments in the European interest rate markets. Industry practice is to use an approximation formula to price IRR swaptions based on Black model, which is not arbitrage-free. We formulate a unified market...

In this paper we present a framework for backtesting all currently popular risk measurement methods (including value-at-risk and expected shortfall) using the functional delta method. Estimation risk can be taken explicitly into account. Based on a simulation study we provide evidence that tests...

In this paper we propose a general framework for quantification of model risk. This framework allows us to allocate regulatory capital to positions in a given market depending on the extent to which this market can be reliably modeled. Our approach is based on computing worst-case risk measures...

In this paper I introduce a novel way of visualizing historical asset returns. I show that using the R(ecent)F(irst)-graph it is typically easier to answer the more relevant financial return questions than using standard pricing graphs. I illustrate this by visualizing several well-known...

In this paper we show that contrary to the claim made in Longstaff, Santa-Clara, and Schwartz (2000a) and Longstaff, Santa-Clara, and Schwartz (2000b) discrete string models are not more parsimonious than market models. In fact, they are found to be observationally equivalent. We derived that...