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Financial Engineering Workshop - Ana Ponikvar (UBS) and Dario Cziraky (Citi)
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Abstract:
Alternative reference rates (ARRs) such as the Secured Overnight Financing Rate (SOFR) and the Sterling Overnight Interbank Average (SONIA) do not satisfy some of the assumptions of standard short-rate diffusion models, which are suitable for modeling interest rate processes with constant volatility without jumps. If the overnight rate is characterised by stochastic volatility and jumps, some sort of compounding is done to arrive at the commonly used tenors (eg, one week to six months for most standard products). It is often argued that once the ARRs are compounded the resulting rate will become smoother with less pronounced jumps, and hence the currently implemented diffusion models might still be suitable after the model parameters are recalibrated to the newly constructed term rates, i.e., compounded overnight ARRs. We looked at the impact of compounding on zero-coupon bond prices by considering the short rate when it follows a Gaussian diffusion process or a stochastic volatility jump-diffusion process. We find that, despite highly volatile and jumpy behavior of the overnight ARRs, pricing with compounded rates from one week to one year using simple Gaussian short-rate models leads to negligible bias. However, it does increase slightly with the pricing tenor. This was found to be the case when we compounded Gaussian processes, but the results for stochastic volatility with jump processes were similar.
Bios:
Ana Ponikvar is a model developer in the counterparty exposure methodology team at UBS. She has 7 years of experience working in financial services for Deutsche Bank, Accenture and in a major insurance company. She has experience in exposure development and validation as well as market risk modelling. Ana holds a MSc in Financial Mathematics from Bayes Business School (formerly Cass) and MRes in Finance from Pompeu Fabra University.
Dario Cziraky is a senior quant in the enterprise risk analytics team at Citi. He has over 20 years of experience in the financial services industry having worked in the past for Barclays, UBS and PwC. His interests are in rates, pricing and portfolio loss modelling. Dario holds a PhD in Statistics from London School of Economics.
The Financial Engineering Workshop will take place online via Zoom.
To access the link to the online seminar, please register before 2pm on the day of the seminar otherwise you will not be given access.
Where
Online Event
Online Event