20541 - ADVANCED QUANTITATIVE METHODS FOR ASSET PRICING AND STRUCTURING
Course taught in English
Go to class group/s: 31
Although these are not formal pre-requisites, a working knowledge of the key contents of the courses in Quantitative Finance and Derivatives I and of Financial Econometrics II are useful.
This course is designed to illustrate how multivariate techniques are applied to finance, with particular reference to the measurement and the pricing of multi-asset derivatives. Market crashes and the resulting contagion effects have emphasized the limitations of linear correlations in capturing the dependence structure among asset returns for the purposes of: (1) assessing the risk of a financial institution; (2) pricing derivatives whose value depends on the interaction in the performance of different underlying assets. Hence, it is essential to learn how to model dependence beyond the correlation structure implied by multivariate normal distributions. A number of practical applications to the pricing of equity/credit derivatives, and to issues of structuring of complex derivative securities are provided. A few sessions are devoted to the practical implementation of models in MatLab.
- The instability of correlations: multivariate GARCH and DCC Models and Markov Switching.
- The use of realized variance and covariance in risk management.
- Copulas in risk management.
- The econometrics of network connectedness and its applications to risk management.
- Review of stochastic calculus: from deterministic to stochastic differential equations (SDEs), Brownian motion, stochastic integrals, martingales, quadratic variation/covariation, Ito's formula, risk neutral valuation, change of measure.
- Single name credit derivatives.
- Reduced form intensity models.
- Structural models.
- CDS Bootstrapping.
- Multi name credit derivatives (CDOs).
- Counterparty Credit Risk.
- Introduction to structured financial instruments: equity protection structures; exotic options and barriers and their applications in structuring.
- Correlations and structured products: basket derivatives and certificates.
- An Introduction to simulations and Monte Carlo pricing.
- The role of structured products in dynamic asset management.
- Understand risk when correlations are unstable and there are network effects.
- Understand risk and price assets using realized variance and covariance estimates.
- Know the basic structure and economic nature of single name credit derivatives.
- Understand the structure of multiname credit derivatives (CDOs).
- Appreciate the nature and complexity of Counterparty Credit Risk.
- Know the structure and price features of structured financial instruments (equity protection structures, exotic options and barriers).
- Understand the role of structured products in dynamic asset management.
- Assess risk when correlations are unstable and there are network effects.
- Assess risk and price assets using realized variance and covariance estimates.
- Apply copulas in risk management.
- Price single name credit derivatives.
- Price CDS using reduced form intensity models.
- Price CDS using structural models.
- Price CDS using performing bootstrapping.
- Price Multi name credit derivatives (CDOs).
- Assess Counterparty Credit Risk.
- Price structured financial instruments (equity protection structures, exotic options and barriers).
- Face-to-face lectures
- Exercises (exercises, database, software etc.)
- Group assignments
Exercises are performed by illustrating MatLab script codes in a variety of applications. There is a take-home group assignment to be executed in Matlab on Pricing CDS and CDOs.
|Continuous assessment||Partial exams||General exam|
- 66.67%: 1 hour exam.
- 20%: take-home group project.
- 13.33%: Individual presentation/discussion of project and brief oral examination.
- 100%: 2 hour exam.
- D. BRIGO, F. MERCURIO, Interest Rate Models Theory and Practice, with Smile, Inflation and Credit, Springer Verlag, 2006.
- M. GUIDOLIN, M. PEDIO, Essentials of Time Series for Financial Applications, Academic Press, 2018, 1st edition.
- M. CAMELIA (ed), I certificati di investimento. Mercati, strutture finanziarie, strategie gestionali, Edizioni Il Sole 24 ORE, 2009.
- P. WILMOTT, Introduces Quantitative Finance, John Wiley & Sons, 2007.