Compound Sampling Framework allows clients to effectively model Economic and Regulatory capital and properly price CVA
Algorithmics, the leading provider of risk solutions, today announced that it has been awarded a patent for the technology underlying its Compound Sampling Framework, which uses an innovative approach to modeling integrated market and credit risk. The patent has been awarded for the technology’s unique approach to modeling various correlated risks in a consistent, computationally efficient fashion. This patent recognizes Algorithmics’ investment in modeling integrated market and credit at a time when the integration of market and credit risk is receiving considerable industry and regulatory attention.
The patented technology underlies Algorithmics’ Algo Credit Economic Capital and Algo Credit Regulatory Capital products, and the Credit Valuation Adjustment (CVA) capability within Algorithmics’ Integrated Market & Credit Risk solution.
• In Algo Credit Economic Capital, the technology is used to estimate efficiently economic capital at various confidence intervals, consistently capturing the joint interactions between market and credit movements.
• In Algo Credit Regulatory Capital, the technology is used to derive the regulatory required Alpha measure for calculating capital in the trading book.
• For CVA, the patented technology is used to properly capture wrong-way risk in a bank’s CVA pricing.
The approach works both in single step and multi-step modes and can capture correlated market, migration, default and double-default risks using compute times that run orders of magnitude faster than traditional ‘brute-force’ simulation approaches. The technology utilizes a consistent, transparent, bottom-up approach to integrating these risks.
Ben De Prisco, senior vice president of Research and Financial Engineering, said: “This technology represents a significant advance in the area of integrated market and credit risk modeling. The last several years have provided irrefutable evidence as to the importance of capturing integrated market and credit movements both in terms of measuring capital requirements and in pricing. What we’ve seen, confirmed by some of the findings of the Basel Committee, is that traditional, simplistic top-down approaches for modeling these joint risks can lead to sizable biases in overall risk estimates. However, while transparent, bottom-up integration approaches have always been the preferred route, they do come with performance implications. This patented technology helps firms overcome these performance barriers, enabling full integration of market and credit risk in a timely fashion. With this technology, businesses can get the answers they need, when they need them.”
Michael Zerbs, president and coo, Algorithmics, added: “This latest patent is yet another example of our commitment to research and to solving some of the difficult issues the industry currently faces. We will continue to invest in cutting-edge research to ensure we provide risk solutions that help our clients create value.”
