The most thoughtful and yet practical book ive seen on dealing with model risk. A practical guide for quants, traders and validators morini, massimo on. Modern interest rate modelling with collateral, funding and credit part 2 by massimo morini modern interest rate modelling with collateral, funding and credit part 2 presenter. Download models behaving badly ebook free in pdf and epub format. The proposed model captures legal and operational aspects of default in. Counterparty credit risk, collateral and funding by damiano.
A guide to the validation and risk management of quantitative models used for pricing and hedging. A guide to the validation and risk management of quantitative models used for pricing and hedging whereas the majority of quantitative finance books focus on mathematics and risk management books focus on regulatory aspects, this book addresses the elements missed by this. In spite of increased awareness of pricing model uncertainty, and its consequences. Understanding and managing model risk by massimo morini book resume. Massimo morini is head of interest rate and credit models and coordinator of model research at imi. Massimo morini a guide to the validation and risk management of quantitative models used for pricing and hedging whereas the majority of quantitative finance books focus on mathematics and risk. During the most recent operational risk erm audio conference, elizabeth mays, chief model risk officer at pnc, discussed the importance of model risk management in finance and provided important points of guidance that banks should consider as they develop and use models. Massimos main areas of interest are rates and credit modeling, risk management, and technologyenabled transformation of financial markets. Massimo is also professor of fixed income at bocconi university and. In this paper we develop structural first passage models at1p and sbtv with timevarying volatility and characterized by high tractability, moving from the original work of brigo and tarenghi 2004, 2005 and brigo and morini 2006. Second conference on the mathematics of credit risk, princeton may 2324, 2008 credit index options. Modelassume the risk neutral dynamics for the value of the. Massimo morini is head of interest rate and credit models and coordinator of model research at imi bank of intesa san paolo.
Head of credit models, banca imi precrisis interest rate market and models libor as a risk free rate. Model risk is a type of risk that occurs when a financial model used to measure a firms market risks or value transactions fails or performs inadequately. Modern interest rate modelling with collateral, funding. Managing derivatives on a distributed system requires a careful redesign of the derivatives business model. Damiano brigo massimo masetti credit models banca imi corso matteotti 6, 20121 milano, italy. Modern interest rates with collateral, funding and credit.
Log in to get better recommendations with a free account. Massimo morini has provided a comprehensive and practical book on model risk that well. Download for offline reading, highlight, bookmark or take notes while you read the essentials of risk management, second edition. Morini, massimo, one more model risk when using gaussian copula for risk management april 25, 2009. The federal reserve and the office of the comptroller of the currency occ define model. Something happens in the reality of the markets that reveals an element of unrealism of the model to be more relevant than previously. Eymen errais and massimo morini for comments and suggestions. Abstract standard techniques for incorporating liquidity costs into the fair value of derivatives produce counterintuitive results when credit risk of the coun. He has spent the last ten years inventing new models, implementing them, and helping practitioners in using them for buying, selling, and hedging derivatives. Rethinking margin period of risk by alexander sokol quants hub. In this article, we explore the evolution of model risk, including regulatory drivers and industry challenges. He writes understanding the robustness of models used for hedging and risk management purposes with respect to the assumption of perfectly liquid markets is therefore an important issue in the. Since the first edition of enterprise risk management.
Massimo morini is head of interest rate and credit models and coordinator of model research at banca imi of intesa san paolo. The behaviour of a smile model when applied to hedging should be consistent with market evidence that asset prices and market smiles move in the same direction. We show that the derivative price in presence of counterparty risk is just the default free. Here we point out an element of model risk that appears to be overlooked. The books content is focused on rigorous and advanced quantitative methods for the pricing and hedging of counterparty credit and funding risk.
A practical guide for quants, traders and validators, by massimo morini, examines the risks arising. Request pdf on jun 1, 2012, michael verhofen and others published massimo morini. Updated version to appear in mathematical finance arbitrage free pricing of credit index options. Understanding and managing model risk financial engineering. Modern interest rates with collateral, funding and credit risk by marco bianchetti and massimo morini frankfurt. With pricing cases for all asset classes, by damiano brigo, massimo morini, andrea palla. Frey 2000 presents a study of how market illiquidity is a source of model risk. Cryptocurrency technology could revolutionise derivatives valuation and collateralisation, say massimo morini and robert sams many traders would blame regulation or patchy collateralisation for the pricing addons that are making the swap market more complex. Sep 20, 2011 this has exposed him to the most practical side of model risk, and has led him to investigate model uncertainty, model robustness, and the management of the risk of model losses. The value approach model risk is the risk that the model is not a realistic or at least plausible description of the factors that affect the derivatives value by e. Foreign exchange option pricing a practitioners guide the wiley finance. A practical guide for quants, traders and validators by massimo morini 20111107 massimo morini on. Emanuel derman, professor at columbia university, former head of quantitative risk management at goldman sachs, and author models. And what about level 1 prices, are they really modelriskfree.
The new general theory that is required for this methodology is developed from scratch, leading to a c. Pricing interest rate products in the classic risk free. A fully revised second edition focused on the best practices of enterprise risk management. Gaussian copula as a model for default correlation has been recently criticized for a number of fallacies in its application to pricing and risk management of f. Nov 03, 2008 the behaviour of a smile model when applied to hedging should be consistent with market evidence that asset prices and market smiles move in the same direction hagan et al. Derman you may have not taken into account all the factors that affect valuation. Pricing interest rate products in the classic risk free model no default and liquidity costs. Credit default swap calibration and counterparty risk valuation with a scenario based first passage model by damiano brigo of banca imi, and marco tarenghi of banca imi 226k pdf. Cryptocurrency technology could revolutionise derivatives valuation and collateralisation, say massimo morini and robert sams many traders would blame regulation or patchy collateralisation for the. A practical guide for quants, traders and validators the. Attendees will be equipped with a thorough understanding of model risk now and into a 01 jun 2020 02 jun 2020 singapore, singapore. Pdf download counterparty credit risk, collateral and funding. The noarmageddon pricing measure and the role of correlation after the subprime crisis massimo morini.
In finance, model risk is the risk of loss resulting from using insufficiently accurate models to make decisions, originally and frequently in the context of valuing financial securities. Massimo morini born 1967 in genoa, italy is an italian singer, musician, conductor and composer, leader of the comedy rock band buio pesto. Download foreign exchange option pricing a practitioners guide the wiley finance series ebook for free in pdf and epub format. Local volatility models are criticized because not consistent with this desired behaviour, and this has been an important driver towards the use of stochastic. Badly massimo morini has provided a comprehensive and practical book on model risk that well covers the practitioners needs in these postcreditcrisis times. Opening of academic year 20192020 and bocconis urban campus.
And what about level 1 prices, are they really modelrisk free. Massimo morini is head of credit models and coordinator of model research at imi bank of intesa san paolo. Gaussian copula as a model for default correlation has been recently criticized for a number of fallacies in its application to pricing and risk management of financial liabilities. Model risk, 2018 a practitioners point of view people. A note on hedging with local and stochastic volatility. Understanding and managing model risk wiley online books. Massimo morini born 1967 in genoa, italy is an italian singer, musician, conductor and composer, leader of the comedy rock band buio pesto italiano. Gaussian copula as a model for default correlation has been recently. Collateral margining in arbitragefree counterparty valuation. Massimo morini milan, italy is head of interest rate and credit models and coordinator of model research at imi bank of intesa san. The proposed model captures legal and operational aspects of default in considerably greater detail than models currently used by most practitioners, while remaining fully tractable and computationally feasible. Dec 08, 2009 gaussian copula as a model for default correlation has been recently criticized for a number of fallacies in its application to pricing and risk management of financial liabilities.
Blog 6 key considerations for model risk management rma. Massimo morini at universita commerciale luigi bocconi. Apr 10, 2019 model risk is a type of risk that occurs when a financial model used to measure a firms market risks or value transactions fails or performs inadequately. This has exposed him to the most practical side of model risk, and has led him to investigate model uncertainty, model robustness, and the management of the risk of model losses. During the most recent operational riskerm audio conference, elizabeth mays, chief model risk officer at pnc, discussed. Counterparty credit risk, collateral and funding by. A practical guide for quants, traders and validators. This twoday workshop has been designed to delve into best practice approaches to building a model risk framework. Rethinking margin period of risk by alexander sokol.
A guide to the validation and risk management of qua. He has spent the last ten years inventing new models, implementing them, and helping practitioners in using them for buying, selling, and he. Dec 06, 20 the essentials of risk management, second edition. Massimo morini has provided a comprehensive and practical book on model risk that. Scenaroi s were usuay lll mi tied to observed events, and there was ltitle motivation for more. Massimo morini, understanding and managing model risk.
Damiano brigo and massimo morini introduce firstpassage models with timevarying volatility and random default barriers, while illustrating their tractability, exact calibration and economic. The most thoughtful and yet practical book ive seen. Counterparty credit risk, collateral and funding wiley. A guide to the validation and risk management of quantitative models used. Edition 2 ebook written by michel crouhy, dan galai, robert mark. The federal reserve and the office of the comptroller of the currency occ define model risk as the occurrence of fundamental errors in model outputs and the incorrect use of models. Understanding and managing model risk and millions of other books are available for amazon kindle. A note on hedging with local and stochastic volatility models. Model risk does not only exist for complex financial contracts.
In this paper we develop structural first passage models at1p and sbtv with timevarying volatility and characterized by high tractability, moving from the original work of brigo and tarenghi. We describe a new framework for collateralized exposure modelling under an isda master agreement with a credit support annex. As a result, model risk is increasingly on every risk managers radar. One more model risk when using gaussian copula for risk. Massimo is also professor of fixed income at bocconi university and was a research fellow at cass business school, city university london.
Massimo morini is head of credit models and coordinator of model. One more model risk when using gaussian copula for risk management. Understanding and managing model risk by massimo morini. The implementation presented here provides many of the features financial professionals are used to, notably a management of.
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