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Interview with Dr Damiano Brigo, Head of Credit Models at Banca IMI in Milan and co-author of the best-seller « Interest-Rate Models: Theory and Practice ».
You have been working for Banca IMI since 1998 as the Head of Credit Models. Can you give more details on your role on daily basis ?
In fact I was previously responsible for interest rate models. Then I
moved to credit about 2002. My responsibilities consist in exploring
known and original modeling solutions, both for products that are
traded in the market and for potential products that might become
important in the future.
How do you interract with the traders, is it a constructive talk?
This part of the job is very important. Initially there is a language
barrier for people coming from purely scientific disciplines. In the
first year I had problems in grasping the ideas behind traders’
comments, mostly because of the jargon and a different attitude at
problems. In time however, one learns to understand quickly what the
traders mean and require. In some cases coming up with a quick
approximated solution is better than waiting for a more rigorous but
slow approach; in other cases approximations can be dangerous and it
is better to slow down. Experience teaches one how to handle such
situations and compromise.
You co-authored a book which is a reference in finance « Interest-Rate Models: Theory and Practice, 2001 ». When are you planning to release a new edition and can we get some insights on new features?
The book should be out right now. The 2nd edition is almost double
sized with respect to the first one and has several new features.
The calibration discussion of the LIBOR market model has been enriched considerably. A discussion of historical estimation of the
instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation
technique has been introduced.
The old parts devoted to the smile issue have been enlarged into a new part. New chapters on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the uncertain-volatility approach. Examples of calibrations to real market data are now considered.
The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives. The three final new chapters are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives — mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS – are discussed. Counterparty risk in interest rate payoff valuation is also considered
Any views on the future of finance ?
I think that the increasing sophistication and interest for products
across traditional asset classes calls for strategies to model
different asset classes jointly. Hybrid products and models will then
become paramount in the immediate future. This has already started
actually. Also, portfolio optimization is growing more and more
technical as one includes structured products in portfolios. Further,
optimization of risk measures across portfolios is a challenging task
I believe the role of quantitative research in the financial industry
will remain fundamental and possibly increase in importance in the
future.
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