Browsing by Author "McWalter, Tom"

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    Application of Adjoint Differentiation (AD) for Calculating Libor Market Model Sensitivities
    (2018) Morley, Niall; McWalter, Tom
    This dissertation explores a key challenge of the financial industry — the efficient computation of sensitivities of financial instruments. The adjoint approach to solving affine recursion problems (ARPs) is presented as a solution to this challenge. A Monte Carlo setting is adopted and it is illustrated how computational efficiency in sensitivity calculation may be significantly improved via the pathwise derivatives method through adapting an adjoint approach. This is achieved through the reversal of the order of differentiation in the pathwise derivatives algorithm in comparison to the standard, intuitive ‘forward’ approach. The Libor market model (LMM) framework is selected for examples to demonstrate these computational savings, with varying degrees of complexity of the LMM explored, from a one-factor model with constant volatility to a full factor model with time homogeneous volatilities.
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    Open Access
    Inflation modelling for long-term liability driven investments
    (2014) De Kock, Justin; Mollentz, Greg; McWalter, Tom
    A regime-switching model allows a process to switch randomly between different regimes which have different parameter estimates. This study investigates the use of a two regime-switching model for inflation in South Africa as a means of determining a hedging strategy for inflation linked liabilities of a financial institution. Each regime is modeled using an autoregressive process with different parameters and the change in regimes is governed by a two state Markov chain. Once the parameters have been estimated, the predictive validity of the regime-switching process as a model for inflation in South Africa is tested and a hedging strategy is outlined for a set of inflation linked cash flows. The hedging strategy is to invest in inflation linked bonds, the number of which is determined through the use of a Rand-per-point methodology that is applied to the inflation linked cash flows and inflation linked bonds. Over the period from January 2008 to June 2013 this hedging strategy was shown to be profitable.