Chebyshev Methods for Ultra-efficient Risk Calculations

Spectral Decomposition Applications in Risk Management


Financial institutions now face the important challenge of having to do multiple portfolio revaluations for their risk computation. The list is almost endless: from XVAs to FRTB, stress testing programs, etc. These computations require from several hundred up to a few million revaluations. The cost of implementing these calculations via a “brute-force” full revaluation is enormous. There is now a strong demand in the industry for algorithmic solutions to the challenge.

In this paper, we show a solution based on Chebyshev interpolation techniques. It is based on the demonstrated fact that those interpolants show exponential convergence for the vast majority of pricing functions that an institution has. In this paper, we elaborate on the theory behind it and extend those techniques to any dimensionality. We then approach the problem from a practical standpoint, illustrating how it can be applied to many of the challenges the industry is currently facing. We show that the computational effort of many current risk calculations can be decreased orders of magnitude with the proposed techniques, without compromising accuracy.

Illustrative examples include XVAs and IMM on exotics, XVA sensitivities, Initial Margin Simulations, IMA-FRTB and AAD.

Download PDF