Risk optimisation: the noise is the signal
Burnett, O’Callaghan and Hulme introduce a new method for optimising accuracy and risk's computing speed for an XVA trading book
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The make-up of bank trading books can be highly variable. At one end of the spectrum are flow books, consisting of a fairly homogeneous set of quick-to-value trades. At the other end, we have valuation adjustment books, referencing a heterogeneous set of counterparties, each with different underlying trade populations. These trades, and hence the XVAs for different counterparties, will vary enormously both in the time needed for calculation and the magnitude of the
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