Negative interest rates are becoming increasingly common around the globe, with the Euro Zone in particular experiencing firsthand the impact of negative rates for more than a year and a half, following the European Central Bank's lead in moving rates below zero. The Netherlands and Finland, as part of the Euro Zone, have experienced aggressive rate cuts by the ECB resulting in the yield curve in negative territory up to 7 years maturity—with the shortest maturities (below 2 years) becoming negative in excess of 45 basis points. In other Nordic countries, like Denmark and Sweden, we see negative interest rates up to 5 years maturity. In the meantime, Norway has low, but positive interest rates across the yield curve.
The growing presence of negative interest rates is remarkable—when just five years ago the concept of negative interest rates was so implausible that most derivative pricing models were designed to work exclusively with positive rates. This new negative rate environment brings forth two prominent resulting challenges – the quotation of option volatilities and volatility smile interpolation models, such as SABR.
In his “revolutionary” research, Dr. Alexander Antonov, SVP of Quantitative Research at Numerix, took on this challenge, proposing to go beyond the crude-fix practice of a shifted SABR, to devise a solution that no longer required recalibration each time rates became too negative. This Free Boundary SABR approach helped to earn him the honor of Risk Magazine's Quant of the Year 2016.
On Tuesday, June 7, 2016, Dr. Antonov gave a lecture delving into the issue of negative interest rates in light of the recent BOJ announcement, his Free Boundary SABR approach and how financial software must adjust for these new challenges.
Dr. Antonov addressed:
Alexandre Antonov, PhD, Senior Vice President of Quantitative Research, Numerix