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Martino Grasselli

Publications and source records attributed to Martino Grasselli.

13 recordsLinked to original sources

Efficient simulation of a new class of Volterra-type SDEs

We propose a new theoretical framework that exploits convolution kernels to transform a Volterra-type path-dependent (non-Markovian) stochastic process into a standard (Markovian) diffusion process. The transformation is reversible. We discuss existence and path-wise regularity of solutions for our class of stochastic differential equations. In the fractional-kernel case, when $H\in(0,\frac12)$, where $H$ is the Hurst coefficient, we propose a numerical simulation scheme which exhibits a strong convergence rate of order $1/2$, improving upon the rate typically obtained by Euler schemes for stochastic Volterra equations with comparably rough trajectories. This improvement is made possible by the distinctive structure of the proposed class, characterized by a non-Markovian process whose coefficients are driven by an associated Markovian one.

q-fin.MF↗

Strong Solutions and Quantization-Based Numerical Schemes for a Class of Non-Markovian Volatility Models

We investigate a class of non-Markovian processes that hold particular relevance in the realm of mathematical finance. This family encompasses path-dependent volatility models, including those pioneered by [Platen and Rendek, 2018] and, more recently, by [Guyon and Lekeufack, 2023]. Our study unfolds in two principal phases. In the first phase, we introduce a functional quantization scheme based on an extended version of the Lamperti transformation that we propose to handle the presence of a memory term incorporated into the diffusion coefficient. In the second phase, we study the problem of existence and uniqueness of a strong solution for the SDEs related to the examples that motivate our study, in order to provide a theoretical basis to correctly apply the proposed numerical schemes.

q-fin.MF↗

Informative Risk Measures in the Banking Industry: A Proposal based on the Magnitude-Propensity Approach

Despite decades of research in risk management, most of the literature has focused on scalar risk measures (like e.g. Value-at-Risk and Expected Shortfall). While such scalar measures provide compact and tractable summaries, they provide a poor informative value as they miss the intrinsic multivariate nature of risk.To contribute to a paradigmatic enhancement, and building on recent theoretical work by Faugeras and Pagés (2024), we propose a novel multivariate representation of risk that better reflects the structure of potential portfolio losses, while maintaining desirable properties of interpretability and analytical coherence. The proposed framework extends the classical frequency-severity approach and provides a more comprehensive characterization of extreme events. Several empirical applications based on real-world data demonstrate the feasibility, robustness and practical relevance of the methodology, suggesting its potential for both regulatory and managerial applications.

q-fin.RM↗

Novel exact solutions for PDEs with mixed boundary conditions

We develop methods for the solution of inhomogeneous Robin type boundary value problems (BVPs) that arise for certain linear parabolic Partial Differential Equations (PDEs) on a half line, as well as a second order generalisation. We are able to obtain non-standard solutions to equations arising in a range of areas, including mathematical finance, stochastic analysis, hyperbolic geometry and mathematical physics. Our approach uses the odd and even Hilbert transforms. The solutions we obtain and the method itself seem to be new.

math.AP↗

Long vs Short Time Scales: the Rough Dilemma and Beyond

Using a large dataset on major FX rates, we test the robustness of the rough fractional volatility model over different time scales, by including smoothing and measurement errors into the analysis. Our findings lead to new stylized facts in the log-log plots of the second moments of realized variance increments against lag which exhibit some convexity in addition to the roughness and stationarity of the volatility. The very low perceived Hurst exponents at small scales is consistent with the rough framework, while the higher perceived Hurst exponents for larger scales leads to a nonlinear behavior of the log-log plot that has not been described by models introduced so far.

q-fin.ST↗

A general framework for a joint calibration of VIX and VXX options

We analyze the VIX futures market with a focus on the exchange-traded notes written on such contracts, in particular we investigate the VXX notes tracking the short-end part of the futures term structure. Inspired by recent developments in commodity smile modelling, we present a multi-factor stochastic-local volatility model that is able to jointly calibrate plain vanilla options both on VIX futures and VXX notes, thus going beyond the failure of purely stochastic or simply local volatility models. We discuss numerical results on real market data by highlighting the impact of model parameters on implied volatilities.

q-fin.MF↗

A Fully Quantization-based Scheme for FBSDEs

We propose a quantization-based numerical scheme for a family of decoupled FBSDEs. We simplify the scheme for the control in Pagès and Sagna (2018) so that our approach is fully based on recursive marginal quantization and does not involve any Monte Carlo simulation for the computation of conditional expectations. We analyse in detail the numerical error of our scheme and we show through some examples the performance of the whole procedure, which proves to be very effective in view of financial applications.

math.NA↗

A Consistent Stochastic Model of the Term Structure of Interest Rates for Multiple Tenors

Explicitly taking into account the risk incurred when borrowing at a shorter tenor versus lending at a longer tenor ("roll-over risk"), we construct a stochastic model framework for the term structure of interest rates in which a frequency basis (i.e. a spread applied to one leg of a swap to exchange one floating interest rate for another of a different tenor in the same currency) arises endogenously. This rollover risk consists of two components, a credit risk component due to the possibility of being downgraded and thus facing a higher credit spread when attempting to roll over short-term borrowing, and a component reflecting the (systemic) possibility of being unable to roll over short-term borrowing at the reference rate (e.g., LIBOR) due to an absence of liquidity in the market. The modelling framework is of "reduced form" in the sense that (similar to the credit risk literature) the source of credit risk is not modelled (nor is the source of liquidity risk). However, the framework has more structure than the literature seeking to simply model a different term structure of interest rates for each tenor frequency, since relationships between rates for all tenor frequencies are established based on the modelled roll-over risk. We proceed to consider a specific case within this framework, where the dynamics of interest rate and roll-over risk are driven by a multifactor Cox/Ingersoll/Ross-type process, show how such model can be calibrated to market data, and used for relative pricing of interest rate derivatives, including bespoke tenor frequencies not liquidly traded in the market.

q-fin.PR↗

A Penny Saved is a Penny Earned: Less Expensive Zero Coupon Bonds

In this paper we show how to hedge a zero coupon bond with a smaller amount of initial capital than required by the classical risk neutral paradigm, whose (trivial) hedging strategy does not suggest to invest in the risky assets. Long dated zero coupon bonds we derive, invest first primarily in risky securities and when approaching more and more the maturity date they increase also more and more the fraction invested in fixed income. The conventional wisdom of financial planners suggesting investor to invest in risky securities when they are young and mostly in fixed income when they approach retirement, is here made rigorous. The paper provides a strong warning for life insurers, pension fund managers and long term investors to take the possibility of less expensive products seriously to avoid the adverse consequences of the low interest rate regimes that many developed economies face.

q-fin.PR↗

The explicit Laplace transform for the Wishart process

We derive the explicit formula for the joint Laplace transform of the Wishart process and its time integral which extends the original approach of Bru. We compare our methodology with the alternative results given by the variation of constants method, the linearization of the Matrix Riccati ODE's and the Runge-Kutta algorithm. The new formula turns out to be fast and accurate.

q-fin.PR↗

Smiles all around: FX joint calibration in a multi-Heston model

We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model preserves the natural inversion and triangulation symmetries of FX spot rates and its functional form, irrespective of choice of the risk-free currency. That is, all currencies are treated in the same way.

q-fin.PR↗

An analytic multi-currency model with stochastic volatility and stochastic interest rates

We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed effciently through the FFT methodology thanks to the affinity of the model Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fit simultaneously FX implied volatilities while being coherent with interest rate products.

q-fin.PR↗

A flexible matrix Libor model with smiles

We present a flexible approach for the valuation of interest rate derivatives based on Affine Processes. We extend the methodology proposed in Keller-Ressel et al. (2009) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then show that it is possible to price swaptions in a multifactor setting with a good degree of analytical tractability. This is done via the Edgeworth expansion approach developed in Collin-Dufresne and Goldstein (2002). A numerical exercise illustrates the flexibility of Wishart Libor model in describing the movements of the implied volatility surface.

q-fin.PR↗