Andrei Lyashenko, a 1983 graduate of the NSU Mechanics and Mathematics Department, and co-author Fabio Mercurio received the international 鈥楺uant of the Year鈥� award for their publication in 鈥淩isk Magazine鈥�, the most influential magazine in the global financial industry. The ceremony takes place in London and the award is given to the authors of the best technical article published in 鈥淩isk鈥�. This is the most prestigious award in the "quant" (quantitative analyst) field, where primarily graduates from mathematics and physics departments work developing mathematical models that can be applied in risk assessment and calculating financial cost instruments.
This year鈥檚 winning article by Lyashenko and Mercurio, 鈥淟ibor Replacement: A modeling framework for in-arrears rates鈥�, was published in the July issue of the magazine. It is devoted to modeling a new type of bank discount rate that could replace LIBOR (London Interbank Offer Rate), the rate currently used in financial contracts valued at a total of approximately $ 400 trillion.
Lyashenko, currently Head of the Market Risk Assessment and Modeling Department at Quantitative Risk Management (QRM) in Chicago, talked about their work,
After the 2007-2009 financial crisis, numerous cases of manipulation of this key banking rate were discovered in the USA and England. After attempts to reform the rate were not successful, it was decided to replace it with a new type of bank rate. This new bank rate, calculated using a very simple formula known to everyone, will be protected from possible manipulation. The new rate called 鈥渂ackward-looking鈥� only becomes known at the end of the period it refers to. The LIBOR rate (鈥渇orward-looking鈥�) is known at the beginning of the period. The modern analytical theory used to model the bank rate (interest rate modeling framework) is based on forward-looking rates, therefore it was not clear if it would work with back-looking rates.
In their work, Lyashenko and Mercurio demonstrated how this theory can be expanded to simulate both types of bank rates. In particular, they showed how the very popular Libor Market Model (LMM), widely used in the financial industry for pricing derivatives and options, can be expanded for use with back-looking bets. This extension of the analytical theory of modeling bank rates is more complete and internally harmonious.
