Re: [Quantlib-users] seasonality for inflation termstructures

by Bianchetti Marco-3 :: Rate this Message:

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Quotes allows optimal sensitivity calculation, and sensitivity to inflation seasonality factors - even if they are not properly quoted market data - is of great interest if you manage an inflation derivative book, especially when:

you update your factors;
you occasionally observe the quotation of a seasonal factor through CPI Futures or - better - a calendar spread (a swap with two inflation-linked legs based on different months)

and you want to know the impact on your book.

Quotes are already used in QL for "not properly quoted market data" as SABR parameters.

Following this line of reasoning, any model parameter in general could be thought as "metamarket data" and described in QL as a quote, such that changing the market data at the beginning of the notification chain would allow for proper - and efficient- recalculation of the NPV of the derivative through recalibration of the model in the middle (4 people interested in this topic a good reference can be "Model Calibration, Risk Measurement, and the Hedging of Derivatives", by Anlong Li", http://papers.ssrn.com/sol3/papers.cfm?abstract_id=899081, unpublished - if anyone has some other reference please let me know).

ciao

-----Original Message-----
From: quantlib-users-bounces@... [mailto:quantlib-users-bounces@...] On Behalf Of Chris Kenyon
Sent: venerdì 2 maggio 2008 09.58
To: Ferdinando Ametrano
Cc: quantlib-dev@...; luigi.ballabio@...; quantlib-users@...
Subject: Re: [Quantlib-users] [Quantlib-dev] seasonality for inflation termstructures

Hi Nando,

that makes sense. This also makes setSeasonality methods safer because if you are using Quotes it is a signal that you may be changing all sorts of other things. OK lets go that way because:
1) helps avoids unexpected side effects (i.e. given the QuantLib setup you know that if you change a quote, or if you have to make new ones, then you are doing something drastic);
2) permits sensitivity analysis (which is also what get/set are about).
This implies:
1) Instead of vector<Real> we use a vector<Handle<Quote> > for seasonality factors.

Have I understood what you meant?
Any objections anyone?

Regards,
Chris

----- Original Message ----
From: Ferdinando Ametrano <nando@...>
To: Chris Kenyon <chris.kenyon@...>
Cc: luigi.ballabio@...; quantlib-dev@...; quantlib-users@...
Sent: Thursday, May 1, 2008 6:19:32 PM
Subject: Re: [Quantlib-dev] seasonality for inflation term structures

Hi Chris

On Thu, May 1, 2008 at 10:01 AM, Chris Kenyon <chris.kenyon@...> wrote:
> I don't favor using Quotes for seasonality data since seasonality
> should not be changing on short timescales (there are no market
> quotes - this is exactly why this feature was invented).
> Comments anyone?

I understand your reasons but I am in favor of Quotes, especially
since they would be the main hook for sensitivity analysis, i.e. in
order to calculate sensitivity with finite differences you just tweak
the Quote value, recalculate the NPV of your portfolio, then restore
the original value.

The observability combined with the lazyness ensure optimal
performances and general easiness for this approach, which is probably
one of best features of the QuantLib design.

ciao -- Nando

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