Financial Engineering Workshop - Claudio Fontana (University of Padova and École Polytechnique, France)

Claudio Fontana is associate professor at the University of Padova (Italy) and scientific collaborator at École Polytechnique (France). He will be giving a seminar titled "Term structure modeling based on overnight rates" on Wednesday 15th March 2023 from 18:00 - 19:00.

Abstract
In the current reform of interest rate benchmarks, a central role is played by overnight nearly risk-free rates (RFRs), such as SOFR in the US. A key feature of RFRs is the presence of jumps and spikes at periodic time intervals as a result of regulatory and liquidity effects. This corresponds to expected jumps in the dynamics of RFRs. In a general HJM-type setup allowing for expected jump times, we characterize absence of arbitrage and relate term rates to solutions of a suitable BSDE. We develop a tractable specification driven by affine semimartingales, extending the classical short rate approach to the case of expected jumps. We show that a simple two-factor model allows to capture stylized facts of SOFR dynamics. In a Gaussian setting, we provide explicit valuation formulas for standard derivatives referencing RFRs. Finally, we study hedging in the sense of local risk-minimization in the presence of expected jump times. This is based on joint work with Z. Grbac and T. Schmidt.

Bio
Claudio Fontana is associate professor at the University of Padova (Italy) and scientific collaborator at École Polytechnique (France). He holds a PhD in Mathematics from the University of Padova. His research interests are in interest rate and credit risk modeling, arbitrage theory and the modeling of information. He was awarded the Bruno de Finetti prize by the Accademia Nazionale dei Lincei (Rome, 2008), the AMASES best paper award (2010), the Nicola Bruti Liberati fellowship (UTS Sydney, 2016) and the Europlace prize for the best paper in finance (Paris, 2017). His research has been supported by CNRS, the Europlace Institute of Finance and a Marie Curie fellowship. Together with E. Barucci, he is the author of the monograph "Financial Markets Theory: Equilibrium, Efficiency and Information" (Springer Finance, 2017).

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