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arXiv · 1311.0118

Regulatory-Compliant Derivatives Pricing is Not Risk-Neutral

Chris Kenyon·Andrew Green
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Abstract

Regulations impose idiosyncratic capital and funding costs for holding derivatives. Capital requirements are costly because derivatives desks are risky businesses; funding is costly in part because regulations increase the minimum funding tenor. Idiosyncratic costs mean no single measure makes derivatives martingales for all market participants. Hence Regulatory-compliant pricing is not risk-neutral. This has implications for exit prices and mark-to-market.

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Chris Kenyon, Andrew Green. 2014-08-12. Regulatory-Compliant Derivatives Pricing is Not Risk-Neutral. https://arxiv.org/abs/1311.0118

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