Alessandro Calvia, Marzia De Donno, Chiara Guardasoni, Simona Sanfelici “Short-rate models with stochastic discontinuities: A PDE approach”

Articolo

Mag 21 2026
Alessandro Calvia, Marzia De Donno, Chiara Guardasoni, Simona Sanfelici “Short-rate models with stochastic discontinuities: A PDE approach”

Abstract: With the reform of interest rate benchmarks, interbank offered rates (IBORs) like LIBOR have been replaced by risk-free rates (RFRs), such as the Secured Overnight Financing Rate (SOFR) in the U.S. and the Euro Short-Term Rate (€STR) in Europe. These rates exhibit characteristics like jumps and spikes which correspond to specific market events, driven by regulatory and liquidity constraints. To capture these characteristics, this paper considers a general short-rate model that incorporates discontinuities at fixed times with random sizes. Within this framework, we introduce a PDE-based approach for pricing interest rate derivatives and establish, under suitable assumptions, a Feynman-Kač representation for the solution. For affine models, we derive (quasi) closed-form solutions, while for the general case, we develop numerical methods to solve the resulting PDEs.

https://doi.org/10.1016/j.matcom.2026.04.034

Roberto Baviera and Michele Domenico Massaria, “The additive Bachelier model with an application to the oil option market in the Covid period”

Articolo

Apr 30 2026

Abstract: In April 2020, the Chicago Mercantile Exchange temporarily switched the pricing formula for West Texas Intermediate oil market options from the Black model to the Bachelier model. In this context, we introduce an additive Bachelier model that provides a simple closed-form solution and a good description of the implied volatility surface. This new additive model exhibits several notable mathematical and financial properties. It ensures the no-arbitrage condition, a critical requirement in highly volatile markets, while also enabling a parsimonious synthesis of the volatility surface. The model features only three parameters, each with a clear financial interpretation: the volatility term structure, the vol-of-vol, and a parameter for modelling skew. Model calibration can follow a cascade procedure: first, it accurately replicates the term structures of forwards and At-The-Money volatilities observed in the market; second, it fits the smile of the volatility surface. The proposed model also supports efficient pricing of path-dependent exotic options via Monte Carlo simulation, using a straightforward and computationally efficient approach. Overall, this model provides a robust and parsimonious description of the oil option market during the exceptionally volatile first period of the Covid-19 pandemic.

https://doi.org/10.1016/j.cam.2026.117741

Federico D’Amario, Sebastian De-Ramon and William B. Francis “The economic effects of changes to bank capital regulation: evidence from the United Kingdom”
Bank of England, Working Paper n°1,172

Articolo

Apr 29 2026
Federico D’Amario, Sebastian De-Ramon and William B. Francis “The economic effects of changes to bank capital regulation: evidence from the United Kingdom” Bank of England, Working Paper n°1,172

Abstract: Strong bank capitalisation provides long‑run financial‑stability benefits. However, transitioning to higher capital levels may involve short‑run costs. We analyse the effects of prudential capital changes on lending behaviour, macroeconomic outcomes, and banking competition using UK data within a structural VAR framework with sign and narrative restrictions. Narrative constraints draw on the UK regulator’s 2014–15 stress tests and the 2016 annual cyclical scenario. Impulse responses indicate that banks primarily adjust by reducing risk‑weighted assets rather than raising new equity. Higher capital requirements entail negligible long-run costs, with modest short-run macroeconomic effects consistent with other VAR studies on bank capital. These impacts are driven by a contraction in lending and increase in spreads across sectors. We find that effects of altering prudential capital requirements are state dependent. Altering during recessions, as compared with expansions, amplifies short-run contractions, but these are more short-lived, with output recovering more quickly. Indicators of market power (Boone, HHI, Lerner) suggest that tighter capital requirements temporarily reduce banking competition.

https://www.bankofengland.co.uk/working-paper/2026/the-economic-effects-of-changes-to-bank-capital-regulation-evidence-from-the-uk

Romain Baeriswyl, Kene Boun My and Camille Cornand “Central Bank Digital Currency and Gresham’s law: An experimental analysis”
Swiss National Bank, Working Paper n° 3/2026

Articolo

Apr 29 2026
Romain Baeriswyl, Kene Boun My and Camille Cornand “Central Bank Digital Currency and Gresham’s law: An experimental analysis”Swiss National Bank, Working Paper n° 3/2026

Abstract: In a monetary system in which risk-free and risky money coexist, Gresham’s law predicts that people will hoard risk-free money as a store of value and spend risky money as a medium of exchange. Establishing a payment system on the basis of risk-free money, such as a retail CBDC, while maintaining the fractional reserve banking system in place poses numerous challenges. In a laboratory experiment, we demonstrate that when the holding of risk-free money is unrestricted, people hold and pay with it extensively. However, when the ability to hold risk-free money is limited by a ceiling or an unattractive interest rate, people tend to hoard risk-free money and use risky money for payments.

https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_03

Giovanni Covi, Maren Froemel, Dennis Reinhardt and Nora Wegner “Climate policy and banks’ portfolio allocation”
Bank of England, Working Paper n° 1,149

Articolo

Apr 29 2026
Giovanni Covi, Maren Froemel, Dennis Reinhardt and Nora Wegner “Climate policy and banks’ portfolio allocation” Bank of England, Working Paper n° 1,149

Abstract: How do banks respond to transition risk and which mechanisms drive this response? We shed new light on this question using data on granular international large exposures of UK banks. Climate policy is the main source of transition risk we use. We find that an increase in climate policy stringency on average leads to a decline in the share of lending that is exposed to transition risk. However, this finding is not uniform across banks: banks with a lower initial exposure to transition risk decrease their transition-risk exposure by more and increase their transition-aligned exposure, while banks with a high initial exposure to transition risk further increase their exposure to those sectors. We also find evidence supportive of outward international spillovers through banks’ cross-border lending portfolios: banks increase transition risk-exposed lending to a given country if climate regulation gets tighter in other countries banks have such exposures to.

https://www.bankofengland.co.uk/working-paper/2025/climate-policy-and-banks-portfolio-allocation

Iñaki Aldasoro, Paula Beltrán and Federico Grinberg “Stablecoin flows and spillovers to FX markets”
Bank for International Settlements, BIS Working Papers n° 1340

Articolo

Apr 29 2026
Iñaki Aldasoro, Paula Beltrán and Federico Grinberg “Stablecoin flows and spillovers to FX markets” Bank for International Settlements, BIS Working Papers n° 1340

Abstract: Using data on four USD-pegged stablecoins and 27 fiat currencies, this paper documents spillovers from stablecoin-based foreign exchange (FX) to traditional FX markets. We document a gap between the cost of acquiring dollars via stablecoins and via the spot FX market (parity deviations). To establish a causal link between stablecoin flows and FX markets, we use a granular instrumental variable that exploits idiosyncratic shocks to stablecoin net inflows in other currencies. Our estimates indicate that a 1% exogenous increase in net stablecoin inflows raises parity deviations by 40 basis points, depreciates the local currency, and widens the dollar premium in synthetic funding markets (covered interest parity (CIP) deviations). A model of constrained arbitrage rationalizes these findings and provides structural foundations for the identification strategy. Counterfactual simulations show that halving cross-market frictions would attenuate CIP spillovers by roughly one-half and cut exchange rate effects by nearly one-third. A dynamic extension that closely matches the empirical impulse responses shows that spillovers grow disproportionately when intermediaries suffer losses, as depleted capital reduces their capacity to absorb further shocks. Our results establish stablecoins as an emerging segment of global currency markets with direct implications for financial stability.

https://www.bis.org/publ/work1340.htm

Bo Li, Tommaso Mancini-Griffoli, Marcello Miccoli, Brandon Joel Tan and Longmei Zhang “Making Stablecoins Stable”
International Monetary Fund, Working paper n° 26/74

Articolo

Apr 29 2026
Bo Li, Tommaso Mancini-Griffoli, Marcello Miccoli, Brandon Joel Tan and Longmei Zhang “Making Stablecoins Stable”International Monetary Fund, Working paper n° 26/74

Abstract: Payment stablecoins are privately issued digital money with the potential to enhance payment efficiency, foster innovation, and improve financial inclusion. At the same time, they are vulnerable to runs and associated welfare losses. One way to lower run risk is to require stablecoin issuers to hold safe assets. But doing so may lower issuers’ profitability and thus their incentive to provide stablecoins, hampering payment innovation and product variety. This paper offers a theoretical framework to navigate the tradeoff between maintaining stability and incentivizing issuance. Based on the Diamond and Dybvig (1983) model of bank runs, the paper shows that an unregulated private equilibrium is suboptimal. Stablecoin issuers hold risky assets to maximize profits, increasing run risk. A social planner can improve the equilibrium by requiring the backing of stablecoins with a safe asset (such as central bank reserves in a narrow bank setting), and creating conditions for other sources of revenue for issuers (such as central bank reserves remuneration or policies for payment data utilization). The model offers a baseline for the ongoing policy discussion while identifying considerations for further study.

https://www.imf.org/en/publications/wp/issues/2026/04/10/making-stablecoins-stable-575348

Paul Konietschke, Julian Metzler and Aurea Ponte Marques “A quantile probability model for sectoral corporate defaults in Europe”
European Central Bank, Working Paper Series n° 3207

Articolo

Apr 29 2026
Paul Konietschke, Julian Metzler and Aurea Ponte Marques “A quantile probability model for sectoral corporate defaults in Europe”European Central Bank, Working Paper Series n° 3207

Abstract: Conventional credit risk models understate tail risk by centering on mean default probabilities and neglecting distributional and sectoral heterogeneity. We propose a Quantile Probability of Default (QPD) framework based on unconditional quantile regressions estimated on flow default rates from five million non-financial firms across nine countries, conditioned on macro- and sectoral scenario covariates standard in stress testing. The tail exhibits three- to five-fold stronger sensitivity than at the median, revealing non-linearities and asymmetric sectoral propagation of credit risk. We validate the performance of our model across crisis periods and benchmark models to confirm the framework’s robustness and prudential efficiency. Under the European Central Banks’s 2025 increasing geopolitical and trade tensions scenario, the QPD identifies higher tail vulnerabilities in construction, trade, hospitality, and real estate. The framework embeds distributional estimation into stress testing, advancing scenario-based assessment of sectoral credit risk for policy and prudential applications.

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp3207~4ec5f4abf6.en.pdf

Andrés Azqueta-Gavaldón, Marina Diakonova, Corinna Ghirelli and Javier J. Pérez “Diverging signals from economic uncertainty measures: Uncovering coherence through news narratives”
BANCO DE ESPAÑA, Working paper n° 2641

Articolo

Apr 29 2026
Andrés Azqueta-Gavaldón, Marina Diakonova, Corinna Ghirelli and Javier J. Pérez “Diverging signals from economic uncertainty measures: Uncovering coherence through news narratives” BANCO DE ESPAÑA, Working paper n° 2641

Abstract: The proliferation of economic uncertainty indicators —ranging from text-based indices like the Economic Policy Uncertainty (EPU) index to market-based measures such as the VIX and the ECB’s Country-Level Index of Financial Stress (CLIFS)— has enriched the analytical toolkit of economists and policymakers. Yet these indicators often diverge, sending conflicting signals about the state of uncertainty in the economy. This paper argues that such divergence is not a flaw but a feature: each indicator captures a distinct dimension of uncertainty. Using topic modeling techniques applied to national news corpora, we construct a taxonomy of uncertainty narratives across five European countries and classify episodes of divergence between the EPU and CLIFS indicators. Our findings reveal systematic patterns: EPU peaks are predominantly driven by political and institutional developments, CLIFS peaks by financial market stress and joint peaks by systemic crises. These results underscore the multidimensional nature of uncertainty and highlight the need for structured interpretative frameworks. By linking narrative content to indicator behavior, our approach offers a novel lens for understanding uncertainty dynamics and provides practical tools for researchers and policymakers navigating an increasingly complex informational environment.

https://www.bde.es/wbe/en/publicaciones/analisis-economico-investigacion/documentos-trabajo/diverging-signals-from-economic-uncertainty-measures-uncovering-coherence-through-news-narratives.html

Fabien Gonguet, Xuehui Han, Choonsung Lim, To-Nhu Dao and Saraf Nawar “Climate Finance and Adaptation Needs In Pacific Island Countries”
International Monetary Fund, Working paper n° 26/83

Articolo

Apr 29 2026
Fabien Gonguet, Xuehui Han, Choonsung Lim, To-Nhu Dao and Saraf Nawar “Climate Finance and Adaptation Needs In Pacific Island Countries”International Monetary Fund, Working paper n° 26/83

Abstract: Pacific Island Countries (PICs) face acute and rising climate adaptation needs due to high exposure to sea‑level rise, natural disasters, and structural vulnerabilities associated with small size and geographic remoteness. This paper develops a unified framework to produce the first region‑wide, internally consistent estimates of climate adaptation financing needs for PICs. A metadata analysis harmonizes country‑level assessments into comparable annual measures, while a complementary machine‑learning approach generates synthetic estimates for data‑deficient countries using economic, geographic, and climate‑vulnerability indicators, subject to differences in sectoral definitions and coverage embedded in the underlying source studies. The results show that adaptation needs are large, highly uneven across countries, and exceptionally high relative to GDP, particularly for atoll nations where physical risks dominate. The paper also examines climate adaptation finance flows to PICs over the past decade, distinguishing between commitments and estimated disbursements, and finds that current financing levels fall well short of projected needs. Disbursement ratios vary substantially across financing channels, reflecting differences in institutional capacity and project implementation. Taken together, the findings highlight substantial adaptation financing gaps in PICs and underscore the importance of strengthening institutional capacity and improving the effectiveness and accessibility of climate finance mechanisms.

https://www.imf.org/-/media/files/publications/wp/2026/english/wpiea2026083-source-pdf.pdf