Sample Research
These are examples of some of the research reports available to Barrie & Hibbert clients.
Best-Estimate Equity Calibration: Distributional Targets
This note provides an update to our best-estimate volatility and correlation assumption for global equity markets at end-December 2007.
The Difference Between Foreign Deflators and the Foreign Cash Roll Up: Implications for Risk-Neutral Valuation
When running a multi-currency risk-neutral valuation, care must be taken to ensure that cash flows in different currencies are discounted correctly. As explained in Technical Note 2004/04, Currency Model Specification, “foreign” cash flows, i.e. those expressed in a currency other than the “base currency”, should be discounted by their local “foreign deflator”. This is defined as the base-currency cash rollup, modified by some currency translation. However, in certain circumstances it can be shown that this is equivalent to simply discounting at the foreign currency cash rollup. In summary, provided the exchange rate is independent of the foreign cash flow, it is valid to use the foreign cash rollup rather than the foreign deflator. Indeed using the foreign deflator simply introduces additional noise, i.e. sampling error, into the valuation.
Credit Calibration - The Effect of Model Time-Step - February 2008
The Barrie & Hibbert credit model incorporates correlation between credit migrations (and defaults) on different issuers via a single factor ‘Gaussian Copula’ based model. In this model, probabilities of migration and default – as defined by an inputtransition matrix - are mapped onto the corresponding percentiles of a standard Gaussian distribution. Credit transitions on different issuers are then generated by sampling ‘credit shocks’ from a multivariate Gaussian distribution.
Global Equity Markets - January 2008
The Global Equity Market Monitor contains two pages of analysis for the four major equity markets; UK, US, EU and Japan. It also includes a one page
summary sheet for both the Asian and Emerging equity markets.
Yield Curve Extrapolation - December 2007
Risk-free yield curves are the basic building blocks for the valuation of future financial claims and long-term risk management work. In well-developed fixed income markets we may be able to observe instruments with maturities of up to 50 years. In less developed markets liquid bond quotations may be more limited or simply not exist. In this discussion paper we look at how to extrapolate beyond traded maturities to create ‘pseudo’-prices for long-term bonds for the purposes of valuation and risk management.
Currency hedging within the iESG - December 2007
The Barrie & Hibbert iESG enables users to model asset returns from several different asset classes, across a number of different economies, within the same simulation model. Asset returns denominated in a foreign currency can be transformed into any other currency via the simulated exchange rate process.
A simple way for iESG users to do this, without requiring any post-processing on simulation output, is by setting up a Composite Portfolio. This functionality allows users to output returns on a portfolio of the assets modelled within their simulation. Out of all currencies modelled, the user can choose the currency in which the returns of the portfolio are denominated. In addition, the user can specify whether the FX risk has been hedged, or is left unhedged.
Swaption Implied Volatility Extrapolation - December 2007
Barrie & Hibbert calibrate interest rate models to swaption implied volatilities quoted by investment banks and by market data providers (eg, Bloomberg). The swaption volatility matrices provided are often incomplete in that no quotations are provided for certain instruments within the matrix.
In some markets the coverage available may vary from one valuation date to the next, or from one provider to the next. These inconsistencies give rise to the possibility of spurious changes to the calibration - due not to market movements, but rather to differences in data availability. In order to avoid this possibility, we wish to develop approaches to the extrapolation and interpolation of swaption implied volatility. This note introduces the issues faced and discusses the issues in extrapolating data, raises some key discussion point and makes suggestions as to a candidate approaches.