Real-time risk management: An AAD-PDE approach

Luca Capriotti, Yupeng Jiang and Andrea Macrina
Additional contact information
Luca Capriotti: Quantitative Strategies, Investment Banking Division, Credit Suisse Group, One Cabot Square, London E14 4QJ, UK†Department of Mathematics, University College London, London WC1E 6BT, UK
Yupeng Jiang: #x2020;Department of Mathematics, University College London, London WC1E 6BT, UK
Andrea Macrina: #x2020;Department of Mathematics, University College London, London WC1E 6BT, UK‡Department of Actuarial Science, University of Cape Town, Rondebosch 7701, South Africa

International Journal of Financial Engineering (IJFE), 2015, vol. 02, issue 04, 1-31

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 (FD) 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.

Keywords: Adjoint algorithmic differentiation; option pricing by PDE; model calibration; parameter sensitivities; risk management (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786315500395
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:02:y:2015:i:04:n:s2424786315500395

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786315500395

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().