Capriotti, L;
Jiang, Y;
Macrina, A;
(2015)
Real-Time Risk Management: An AAD-PDE Approach.
International Journal of Financial Engineering
, 2
(4)
pp. 1550039-1550070.
10.1142/S2424786315500395.
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Abstract
We apply adjoint algorithmic differentiation (AAD) to the risk management of securities when their price dynamics are given by partial differential equations (PDE). We show how AAD can be applied to forward and backward PDEs in a straightforward manner. In the context of one-factor models for interest rates or default intensities, we show how price sensitivities are computed reliably and orders of magnitude faster than with a standard finite-difference approach. This significantly increased efficiency is obtained by combining (i) the adjoint forward PDE for calibrating model parameters, (ii) the adjoint backward PDE for derivatives pricing, and (iii) the implicit function theorem to avoid iterating the calibration procedure.
| Type: | Article |
|---|---|
| Title: | Real-Time Risk Management: An AAD-PDE Approach |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1142/S2424786315500395 |
| Publisher version: | http://doi.org/10.1142/S2424786315500395 |
| Language: | English |
| Additional information: | Electronic version of an article published as Capriotti, L; Jiang, Y; Macrina, A; (2015) Real-Time Risk Management: An AAD-PDE Approach. International Journal of Financial Engineering , 2 (4) pp. 1550039-1550070. 10.1142/S2424786315500395 © copyright World Scientific Publishing Company http://www.worldscientific.com/worldscinet/ijfe |
| Keywords: | Adjoint algorithmic differentiation, Option pricing by PDE, Model calibration, Parameter sensitivities, Risk management |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/1522613 |
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