AQFC2015

Seminar: Arbitrage-Free Pricing of XVA

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                Department of Systems Engineering and Engineering Management
                             The Chinese University of Hong Kong

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Date: Wednesday, 4:30pm - 5:30pm, February 4, 2015

Title: Arbitrage-Free Pricing of XVA

Speaker: Stephan Sturm, Assistant Professor in Mathematical Sciences at Worcester Polytechnic Institute (WPI) in Worcester, Mass.

Abstract:
We introduce a framework for computing the total valuation adjustment (XVA) of an European claim accounting for funding costs, counterparty risk, and collateral mitigation. Based on no-arbitrage arguments, we derive the nonlinear backward stochastic differential equations (BSDEs) associated with the replicating portfolios of long and short positions in the claim. This leads to defining buyer and seller’s XVAs which in turn identify a no-arbitrage band. When borrowing and lending rates coincide we provide a fully explicit expression for the uniquely determined price of XVA. When they differ, we derive the semi-linear partial differential equations (PDEs) associated with the non-linear BSDEs. We use them to conduct a numerical analysis showing high sensitivity of the no-arbitrage band and replicating strategies to funding spreads and collateral levels. This is joint work with Maxim Bichuch (WPI) and Agostino Capponi (Columbia).

Biography:
After undergraduate education at the University of Vienna (Austria), Stephan Sturm received his PhD in Mathematics from TU Berlin (Germany). After a Postdoc at the Department of Operations Research and Financial Engineering (ORFE) at Princeton University he became Assistant Professor in Mathematical Sciences at Worcester Polytechnic Institute (WPI) in Worcester, Mass. His research interest lie in the field of financial mathematics, concentrating on topics highlighted by the recent financial crisis: Counterparty credit risk and funding spreads, incentive schemes and delegated portfolio management, risk assessment for entire markets and systemic risk. The underlying mathematical methods he uses come mainly from stochastic analysis: Backward stochastic differential equations, Malliavin calculus, convex duality for semimartingales.

 

Everyone is welcome to attend the talk!

Venue: Room 513,
      William M.W. Mong Engineering Building (ERB),
      (Engineering Building Complex Phase 2)
      The Chinese University of Hong Kong.

The talk will be hosted by:
Prof. Chen Nan,
Department of Systems Engineering and Engineering Management,
The Chinese University of Hong Kong,
E-mail: nchen@se.cuhk.edu.hk
Homepage: http://www.se.cuhk.edu.hk/nchen/

SEEM-5202 Website: http://seminar.se.cuhk.edu.hk
Email: seem5202@se.cuhk.edu.hk

Date: 
Wednesday, February 4, 2015 - 08:30 to 09:30