Risk Live 2020: CompatibL’s Novel Machine Learning Approach to Market Generators

Nov 26, 2020

The Risk Live event on November 9–13 delivered key messages on the future of the industry, with talks by 52 expert speakers to over 800 registered attendees. The five-day conference covered climate risk and environmental, social, and corporate governance, next-generation credit risk modeling and AI, markets and the future of liquidity risk for the buyside, frontiers of electronic trading, and the future of quantitative finance.

CompatibL’s Head of Quant Research, Alexander Sokol, and Standard Chartered Bank’s Head of Data Analytics, Alexei Kondratyev, spoke jointly on market generators, giving the audience a glimpse into the future of quantitative finance.

The talk began with an overview of the conventional one-factor approach for long risk horizons (up to 30 years) calibrated to the historical data of 48 currencies. Alexander and Alexei then unveiled their new machine learning approach to market generators, which recognizes distinct curve dynamics for each currency even when calibrated to historical data across multiple currencies. Their innovative algorithm successfully adopts unsupervised learning techniques (originally developed for image recognition) to identify gaps in the currency space.

Alexander Sokol. Risk Live 2020

A well-known success of machine learning is the ability to distinguish two types of pets in unlabeled pixel-encoded images.

Alexander Sokol. Risk Live 2020

The algorithm does not know what types these are but is able to determine that there are two kinds.

This approach offers a more accurate calibration of interest rate and FX risk for long time horizons than the conventional one-factor approach, primarily owing to its precise modeling of the real-world drift for high interest rates. Despite calibration to the historical data for a large number of currencies, the unsupervised learning techniques in the new approach can recognize the differences in interest rate dynamics between currencies.

Alexander and Alexei concluded their presentation by showcasing how to build a market generator using unsupervised learning techniques.

CompatibL would like to thank the event committee for creating a valuable and thought-provoking event, and all the speakers at Risk Live for sharing their expertise!

About Risk Live

Risk Live is an annual event that brings the entire risk management ecosystem together in one place. It is a pioneering festival of ideas that shows what is changing in the industry, how companies are adapting, and how you and your business can get ahead and cope with radical changes in risk management and risk transfer markets

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