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Regulatory-Compliant Derivatives Pricing is Not Risk-Neutral

Chris Kenyon and Andrew Green

Papers from arXiv.org

Abstract: Regulations impose idiosyncratic capital and funding costs for holding derivatives. Capital requirements are costly because derivatives desks are risky businesses; funding is costly in part because regulations increase the minimum funding tenor. Idiosyncratic costs mean no single measure makes derivatives martingales for all market participants. Hence Regulatory-compliant pricing is not risk-neutral. This has implications for exit prices and mark-to-market.

New Economics Papers: this item is included in nep-ban, nep-fmk and nep-rmg
Date: 2013-11, Revised 2014-08
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