Mathematical Foundations of Regression Methods for the approximation of the Forward Initial Margin

Lucia Cipolina Kun, Simone Caenazzo and Ksenia Ponomareva

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Abstract: Abundant literature has been published on approximation methods for the forward initial margin. The most popular ones being the family of regression methods. This paper describes the mathematical foundations on which these regression approximation methods lie. We introduce mathematical rigor to show that in essence, all the methods propose variations of approximations for the conditional expectation function, which is interpreted as an orthogonal projection on Hilbert spaces. We show that each method is simply choosing a different functional form to numerically estimate the conditional expectation. We cover in particular the most popular methods in the literature so far, Polynomial approximation, Kernel regressions and Neural Networks.

Date: 2020-02, Revised 2022-09
New Economics Papers: this item is included in nep-cmp and nep-rmg
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