In this research paper, Andrew McClelland PhD and Financial Engineering specialist at Numerix, examines the differences between risk-neutral dynamics and real-world dynamics, and the important role of risk premia. The paper explores why real-world dynamics are necessary for risk analysis and scenario generation, and also discusses the roles of the equity premium and volatility premium in stochastic volatility models of equity markets.

Highlights include:

  • Real-world Dynamics vs. Risk-neutral Dynamics
  • Defining Risk-neutral Dynamics
  • Defining Real-world Dynamics
  • Implications for Risk Profiles and Scenarios
  • Impact on Variable Annuities & Structured Derivatives
  • Stochastic Volatility and The Volatility Premium
  • Best Practices for Process Re-engineering and Implementation
  • Best Practices for Visualizing EVA
  • Why Real-world Profiles Can Deviate from Risk-neutral Profiles

Complete the form to download this complimentary whitepaper, “Real-World Equity & Volatility Behavior: Implications for Economic Scenario Generation.”

DOWNLOAD THIS COMPLIMENTARY WHITE PAPER

About the Author:

Andrew McClelland, PhD, Financial Engineering, Numerix Andrew McClelland, PhD, Financial Engineering, Numerix

Andrew McClelland’s work at Numerix focuses on counterparty credit risk issues including valuation adjustments and counterparty exposure production for structured products, and numerical methods for efficient production of risk profiles under the real-world measure.

Dr. McClelland earned his PhD in finance at the Queensland University of Technology for a thesis on financial econometrics. He considered markets exhibiting crash feedback, option pricing for such markets, and parameter estimation for such markets using particle filtering methods. His work has been published in the Journal of Banking and Finance and the Journal of Econometrics.

Download White Paper

Complete the form below to download this complimentary white paper.

Select Form: 

Form #5: Research

Keep me informed of future research from Numerix:

Sign me up to receive "Thinking Derivatively" monthly newsletter by Numerix:

* Required fields
news - article pdf - Aug 20, 2019

Americas Derivatives Awards 2019 | Data and Analytics Vendor of the Year

newsletter issue - Aug 12, 2019

Thinking Derivatively - August 2019 Issue

conference

Sibos 2019

video blog

Accelerate Your LIBOR Transition

on-demand webinar

Curve Construction Beyond LIBOR

newsletter issue - Jun 17, 2019

Thinking Derivatively - July 2019 Issue

numerix conference

Join us for NEXT 2019 - the Numerix User Conference

press release - Jun 21, 2019

New Book “Modern SABR Analytics” Authored by Numerix Focuses on How to Enhance the SABR Model for...

on-demand webinar

On-Demand Resource | Dawn of Alternative Reference Rates: Curve Construction Fundamentals

white paper

White paper | LIBOR Will Not Transition Quietly: What You Need to Know Now

newsletter issue - Jun 10, 2019

Thinking Derivatively - June 2019 Issue

numerix roadshow

Life After LIBOR: What’s Next for Pricing and Curve Construction?