Journal Articles

Permanent URI for this collection

https://open.uct.ac.za/handle/11427/29124

Browse

Browsing Journal Articles by Department "African Inst. of Fin. Markets and Risk Mngnt"

Now showing 1 - 3 of 3
  • Thumbnail Image
    Item
    Open Access
    How deep is your model? Network topology selection from a model validation perspective
    (2022-01-03) Nowaczyk, Nikolai; Kienitz, Jörg; Acar, Sarp K; Liang, Qian
    Deep learning is a powerful tool, which is becoming increasingly popular in financial modeling. However, model validation requirements such as SR 11-7 pose a significant obstacle to the deployment of neural networks in a bank’s production system. Their typically high number of (hyper-)parameters poses a particular challenge to model selection, benchmarking and documentation. We present a simple grid based method together with an open source implementation and show how this pragmatically satisfies model validation requirements. We illustrate the method by learning the option pricing formula in the Black–Scholes and the Heston model.
  • Thumbnail Image
    Item
    Open Access
    Quantifying the Model Risk Inherent in the Calibration and Recalibration of Option Pricing Models
    (2021-01-04) Feng, Yu; Rudd, Ralph; Baker, Christopher; Mashalaba, Qaphela; Mavuso, Melusi; Schlögl, Erik
    We focus on two particular aspects of model risk: the inability of a chosen model to fit observed market prices at a given point in time (calibration error) and the model risk due to the recalibration of model parameters (in contradiction to the model assumptions). In this context, we use relative entropy as a pre-metric in order to quantify these two sources of model risk in a common framework, and consider the trade-offs between them when choosing a model and the frequency with which to recalibrate to the market. We illustrate this approach by applying it to the seminal Black/Scholes model and its extension to stochastic volatility, while using option data for Apple (AAPL) and Google (GOOG). We find that recalibrating a model more frequently simply shifts model risk from one type to another, without any substantial reduction of aggregate model risk. Furthermore, moving to a more complicated stochastic model is seen to be counterproductive if one requires a high degree of robustness, for example, as quantified by a 99% quantile of aggregate model risk.
  • Thumbnail Image
    Item
    Open Access
    Wealth Inequality in South Africa—The Role of Government Policy
    (2022-05-30) Fortuin, Marlin Jason; Grebe, Gerhard Philip Maree; Makoni, Patricia Lindelwa
    In South Africa, high levels of wealth inequality have persisted since 1994, to the extent that 1% of the population owns 50% of the wealth. This study examines how macroeconomic policies influenced wealth inequality in South Africa over the period 2010 to 2019 using a behavioural life-cycle model. Despite a decrease in wealth inequality over this period, the extent of this decrease is almost negligible. Results show government’s current policy model to redirect wealth from a very small tax base that is under increasing financial strain is unable to meet wealth redistributive targets. The South African government should change the wealth redistribution policy from redistribution through predominantly lump sums to creating an environment in which private enterprises are able to absorb the labour capital that South Africa possesses. An open labour market would support private and foreign direct investment into the economy, thereby strengthening economic growth and upliftment through increased income and the consequent ability to accumulate wealth.