Rethinking Valuation and Pricing Models

1st Edition

Lessons Learned from the Crisis and Future Challenges

Editors: Carsten Wehn Christian Hoppe Greg Gregoriou
Hardcover ISBN: 9780124158757
eBook ISBN: 9780124158887
Imprint: Academic Press
Published Date: 8th November 2012
Page Count: 652
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It is widely acknowledged that many financial modelling techniques failed during the financial crisis, and in our post-crisis environment many techniques are being reconsidered.  This single volume provides a guide to lessons learned for practitioners and a reference for academics.  Including reviews of traditional approaches, real examples, and case studies, contributors consider portfolio theory; methods for valuing equities and equity derivatives, interest rate derivatives, and hybrid products; and techniques for calculating risks and implementing investment strategies.  Describing new approaches without losing sight of their classical antecedents, this collection of original articles presents a timely perspective on our post-crisis paradigm.

Key Features

  • Highlights pre-crisis best classical practices, identifies post-crisis key issues, and examines emerging approaches to solving those issues
  • Singles out key factors one must consider when valuing or calculating risks in the post-crisis environment
  • Presents material in a homogenous, practical, clear, and not overly technical manner


Addresses issues relevant for upper-division undergraduates, graduate students, and professionals worldwide working in asset management / trading / risk control of banks and insurance companies / consultancy firms  / auditing / regulation / applied mathematics and finance

Table of Contents

Editor’s Disclaimers




1. The Effectiveness of Option Pricing Models During Financial Crises

1.1 Introduction

1.2 Methodology

1.3 Data

1.4 Results

1.5 Concluding Remarks


2. Taking Collateral into Account

2.1 Introduction

2.2 Notations and Problem

2.3 Black–Scholes Partial Differential Equation in the Presence of Collateral

2.4 Collateral Discount Curve Bootstrapping

2.5 Pricing and Bootstrapping of the IR Vanilla Swap Term Structure

2.6 European Swaption Pricing Framework

2.7 Collateral Effect and Term-Structure Models

2.8 Conclusion


3. Scenario Analysis in Charge of Model Selection

3.1 Introduction to Model Risk

3.2 Classical Calibration Procedure

3.3 Processes, Dynamics and Model Definition

3.4 Importance of Risk Premia

3.5 Equity Volatility Modeling

3.6 Foreign Exchange Volatility Modeling

3.7 Conclusions



4. An “Economical” Pricing Model for Hybrid Products

4.1 Introduction

4.2 Pricing Convertible Bonds

4.3 Two-Factor Numerical Procedure

4.4 Default Risk

4.5 Pricing Convertible Bonds Subject to Interest Rate Risk and Default Risk

4.6 Conclusion



5. Credit Valuation Adjustments– Mathematical Foundations, Practical Implementation and Wrong Way Risks

5.1 Introduction

5.2 Mathematical Foundations of CVA

5.3 Practical Implementation: Issues and (Wrong Way) Risks

5.4 Model Risks in CVA Calculation

5.5 Summary and Prospects



6. Counterparty Credit Risk and Credit Valuation Adjustments (CVAs) for Interest Rate Derivatives–Current Challenges for CVA Desks



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Academic Press
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About the Editor

Carsten Wehn

Head of the risk modelling team at DekaBank, Frankfurt, Germany. He is responsible for development and validation of internal portfolio models for measuring and managing credit risk.

Affiliations and Expertise

DeKaBank, Frankfurt, Germany

Christian Hoppe

Christian Hoppe is the Head of Credit Solutions at Commerzbank, Frankfurt, Germany, and the founder of Anleihen Finder GmbH.

Affiliations and Expertise

Commerzbank, Frankfurt, Germany

Greg Gregoriou

A native of Montreal, Professor Greg N. Gregoriou obtained his joint Ph.D. in finance at the University of Quebec at Montreal which merges the resources of Montreal's four major universities McGill, Concordia, UQAM and HEC. Professor Gregoriou is Professor of Finance at State University of New York (Plattsburgh) and has taught a variety of finance courses such as Alternative Investments, International Finance, Money and Capital Markets, Portfolio Management, and Corporate Finance. He has also lectured at the University of Vermont, Universidad de Navarra and at the University of Quebec at Montreal. Professor Gregoriou has published 50 books, 65 refereed publications in peer-reviewed journals and 24 book chapters since his arrival at SUNY Plattsburgh in August 2003. Professor Gregoriou's books have been published by McGraw-Hill, John Wiley & Sons, Elsevier-Butterworth/Heinemann, Taylor and Francis/CRC Press, Palgrave-MacMillan and Risk Books. Four of his books have been translated into Chinese and Russian. His academic articles have appeared in well-known peer-reviewed journals such as the Review of Asset Pricing Studies, Journal of Portfolio Management, Journal of Futures Markets, European Journal of Operational Research, Annals of Operations Research, Computers and Operations Research, etc. Professor Gregoriou is the derivatives editor and editorial board member for the Journal of Asset Management as well as editorial board member for the Journal of Wealth Management, the Journal of Risk Management in Financial Institutions, Market Integrity, IEB International Journal of Finance, and the Brazilian Business Review. Professor Gregoriou's interests focus on hedge funds, funds of funds, commodity trading advisors, managed futures, venture capital and private equity. He has also been quoted several times in the New York Times, Barron's, the Financial Times of London, Le Temps (Geneva), Les Echos (Paris) and L'Observateur de Monaco. He has done consulting wo

Affiliations and Expertise

School of Business and Economics, State University of New York, Plattsburgh, NY, USA


"This reference is for financial professionals and advanced students and scholars working in asset management trading and risk control of banks and insurance companies. It looks at tensions revealed by the financial crisis between classical, well-established models and emerging issues in valuation models, derivatives pricing, risk calculation, and managing portfolios."--Reference & Research Book News, December 2013
"This book shows in a comprehensive way the influences and impacts of past crises. After guiding the reader through several investment styles and asset classes, the editors can present a deep comparison of governmental regulation on the one side and markets' tendencies toward self-regulation on the other. Their analytics identify leading indicators of future crises. A must-read for every financial market participant."--Christoph D. Kauter, Trigon Equity Partners
"In both our personal and professional lives, crises stimulate serious soul searching. The Global Financial Crisis was bound to have this effect on financial risk management. Rethinking Valuation and Pricing Models: Lessons Learned from the Crisis represents a major contribution to the collective soul searching currently under way in the world of quantitative finance. Particular attention is paid to the need for improved treatment of "higher order risks" such as basis risk, counterparty default risk, the instability of implied correlations and the shifting credit quality inherent in many interest rate indices. Also addressed is the realization that some risks are different in kind from those reflected in daily fluctuations of prices and rates (essentially the difference between risk and uncertainty in the Frank Knight sense). While not a volume for the quantitatively faint of heart, this book represents a significant contribution to the continuing reassessment of what we know about risk and how to quantify it."--David M. Rowe