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Pricing Partners, announced today a successful extension of its inflation module with the release of the inflation market model referred to as the “BBK” model. Based on the quantitative work largely publicized by various publications co-written by N. Belgrade, E. Benhamou and E. Koehler, this extension is fully integrated within the Price-it library. This model endows the inflation module with numerous unmatched business advantages since it enables to calibrate very accurately on market instruments.
The name “BBK” abbreviates from the three authors’ names “Belgrade-Benhamou-Koehler” who have co-written a paper entitled “ A market model for inflation” deriving from a common discovery of the market that real interest rates were useless for inflation modelling as one could not calibrate on these. This work comes from an active and fruitful collaboration with Mr Nabyl Belgrade now Quantitative Analyst at Dexia/professor at University Panthéon Sorbonne Paris I, Etienne Koehler now Head of model validation at Commerzbank/professor at University Panthéon Sorbonne Paris I and Eric Benhamou, CEO of Pricing Partners.
Applying the same strategy as the one for a market model on interest rates, the BBK model provides the no-arbitrage relationship between zero coupon and year on year swaps. Closed forms for convexity adjustment exist and enable fast calibration of the model parameters. Last but not least, calibration against inflation volatility both on year on year and zero coupon cap and floor provides a way to price inflation derivatives consistently.
Nabyl Belgrade, Quantitative Analyst at Dexia, comments: “I am very proud that Pricing Partners integrates our common work. It is a very powerful model and should strengthen significantly the Pricing Partners library. I have worked many years with Eric and Etienne and we have achieved a noteworthy improvement of the previously existing inflation models. Having such a model in the Pricing Partners library gives it a remarkable edge against any other commercial pricing library”
Eric Benhamou, CEO of Pricing Partners adds: “As one of the co-author of the BBK model, it made sense for us to have the seminal BBK model integrated in our pricing library. Inflation is becoming a key topic and we aim at providing our clients the most accurate pricing library.”
Pierre Gauthier, financial engineer concludes “Together with Price-it innovative generic product description, BBK model allows fast and consistent pricing of a wide range of inflation-linked derivatives.”