Quantitative Financial Risk Management - Henry Stewart Talks

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III: Market Risk Estimating Risk Models Professor Kevin Dowd, Centre for Risk and Insurance Studies Nottingham University Business School Defining a risk model – Assembling data – Non-parametric estimation methods – Parametric estimation methods – Monte Carlo simulation methods Measures of Financial Risk Professor Kevin Dowd, Centre for Risk and Insurance Studies Nottingham University Business School Nature of financial risk – Representing financial risk using a density function – VaR as a risk measure – Expected shortfall – Coherent risk measures – Worst-case scenario analyses Nonlinear VaR Models Dr Simon Hubbert, School of Economics, Mathematics and Statistics, Birkbeck, University of London When faced with estimating the value at risk for a non-linear portfolio a practitioner will often resort to simulation methods. For large portfolios the computational time required for this can be enormous. This presentation provides a selfcontained introduction and overview of analytical techniques which can be used to provide Value at Risk estimates for such portfolios. Accurate closed form estimates are appealing as they circumvent the computational demands. IV: Applications to Credit Risk and Market Risk Structural and Reduced Form Models Dr Theo Darsinos – Fixed Income Research, Deutsche Bank AG Structural Models – The Merton Approach – Bond pricing, Stock pricing, Default probability, Credit spreads, Bond volatility – Parameter estimation – Limitations – Extending Merton: The creditgrades model Reduced Form Models – Default intensity – Examples: Constant, Deterministic and Stochastic intensities – Linking reduced and structural models – Recovery rates Modelling Business Dependencies for Credit Portfolios Dr Markus A. Leippold, the Swiss Banking Institute, University of Zürich Portfolio credit risk – Integrating macrostructural and microstructural interdependencies – Gaussian copula – Credit portfolio as a graph – Impact of business dependencies on correlation – Feedback effects – Marginal risk contribution Extreme Value Theory Professor Paul Embrechts, Professor of Mathematics and Dr Johanna Neslehova, Postdoctoral Research Fellow, Risk Management Research Centre RiskLab, ETH Zürich at the ETHZ (Swiss Federal Institute of Technology, Zürich) Extremes in quantitative risk management – Limiting behaviour of sums and maxima – Fisher/Tippett theorem – Extreme value distributions and domains of attraction – Block maxima method – Threshold exceedances – Pickands/Balkema/de Haan theorem – Threshold selection – Quantile estimation – Point process approach – Banking and insurance regulation – Critical appraisal Copulas Professor Paul Embrechts, Professor of Mathematics and Dr Johanna Neslehova, Postdoctoral Research Fellow, Risk Management Research Centre RiskLab, ETH Zürich at the ETHZ (Swiss Federal Institute of Technology, Zürich) Impact of extremes and dependence in finance and insurance – Correlation issues – Copulas and Sklar’s theorem – Copula generation – Fréchet-Hoeffding bounds – Limitations of correlation – Rank correlation measures – An application to credit risk – Tail dependence – Bounds on risk measures – Critical appraisal V: Risk Model Validation Validation Techniques I: Regulatory and Statistical Background Dr Dirk Tasche, Banking and Financial Supervision Department, Deutsche Bundesbank Historical background – New capital standards (Basel II) – Requirements on quantitative validation – The binary classification model for rating systems – Bayes’ formula – Modelling cyclical effects – Conditional probabilities of default (PD) Validation Techniques II: Discriminatory Power and Calibration Dr Dirk Tasche, Banking and Financial Supervision Department, Deutsche Bundesbank Validation principles – Predictive ability, discriminatory power, and PD calibration – Cumulative accuracy profile (CAP) – Accuracy ratio (AR) – Receiver operating characteristic – Kolmogorov-Smirnov statistic – Conditional and unconditional tests – Binomial test – Hosmer-Lemeshow test – Spiegelhalter test – Normal test VI: Economic Capital Leading Bank Credit Portfolio Strategies Mr Brian Dvorak, Moody’s KMV Credit Strategies Group • Leading banks manage their credit portfolios actively • Active credit portfolio management objectives and principles • Active credit portfolio management trends and success stories • Leading bank economic capital management strategies • Uses of required economic capital at leading banks • Leading bank credit portfolio management organisational models • Leading bank credit portfolio management strategies • Adopting leading bank strategies
A Henry Stewart Talks’ Series in Finance Speaker Biographies Dr George A. Christodoulakis George A. Christodoulakis is Assistant Professor of Finance at Manchester Business School, University of Manchester and Advisor at the Bank of Greece. He holds a PhD and MSc in Finance from the University of London as well as an MSc and BSc in Economics and Econometrics from the AUEB in Athens. His expertise concerns the area of credit and market risk theory and applications, approached from both a mathematical finance and a financial econometrics perspective. George is a regular contributor to international refereed research journals and a frequent speaker in specialist conferences. Dr Theo Darsinos Theo Darsinos is Vice President in the Global Markets, Fixed Income Research division of Deutsche Bank, London. He is responsible for quantitative, relative value and volatility strategies in Europe. Theo received his PhD in Financial Econometrics from the University of Cambridge, and a BSc in Mathematics from the University of London. Prior to joining Deutsche Bank in 2003, he was a Research Fellow in the Department of Applied Economics, University of Cambridge. Professor Kevin Dowd Kevin Dowd is Professor of Financial Risk Management at Nottingham University Business School, where he works with the Centre for Risk and Insurance Studies. His research interests cover macro, monetary and financial economics, financial risk management, insurance, pensions and political economy. His latest book, “Measuring Market Risk” (2nd edition) was published by John Wiley in 2005. Mr Brian Dvorak As Managing Director of Moody’s KMV’s Credit Strategies Group, Brian Dvorak supports clients globally in creating value from their investment in the products and services of Moody’s KMV, the world’s leading provider of quantitative credit risk analysis tools to lenders, investors, and corporations. Before joining KMV in 1998, Mr Dvorak was Vice President of Product Marketing and Technical Support at CATS Software Inc. Previously, he was Executive Vice President and Chief Operating Officer of LOR/Geske Bock Associates, Inc. and LORGB Investment Advisors, Inc. Mr Dvorak received both his A.B. in Economics with Highest Honors and his MBA in Finance from the University of California, Berkeley. Professor Paul Embrechts Paul Embrechts is Professor of Mathematics at the ETH Zürich specialising in Actuarial Mathematics and Quantitative Risk Management. Previous academic positions include the Universities of Leuven, Limburg and London (Imperial College). Dr Embrechts has held visiting appointments at the University of Strasbourg, ESSEC Paris, the Scuola Normale in Pisa and the London School of Economics (Centennial Professor of Finance). He is an Elected Fellow of the Institute of Mathematical Statistics, Honorary Fellow of the Institute of Actuaries, Corresponding Member of the Italian Institute of Actuaries and Associate Editor of numerous scientific journals. His areas of specialisation include insurance risk theory, quantitative risk management, the interplay between insurance and finance, and the modelling of rare events. He coauthored the influential books “Modelling of Extremal Events for Insurance and Finance”, Springer, 1997 and “Quantitative Risk Management: Concepts, Techniques and Tools”, Princeton University Press, 2005. Dr Simon Hubbert Simon Hubbert is a lecturer in mathematics and mathematical finance at Birkbeck College London. Before joining Birkbeck he worked for the Debt Management Office, a branch of HM Treasury in London, as a risk analyst. He has also engaged in consultation work with IBM-global service on a range of projects covering risk management and pricing. His main research interests are in approximation theory, computational finance and risk management Professor John Knight John Knight received his PhD from the University of New South Wales, Sydney, Australia in 1980. He has held teaching and research positions in the USA, Australia, UK and Canada and has been in his current position since 1987. His extensive list of research publications are in theoretical econometrics and more recently in financial econometrics. In 2002 he was awarded a Plura Scripsit Award by the journal, Econometric Theory. He has also won awards for his teaching and PhD supervision. Current research interests include stochastic volatility modelling and estimation of continuous time processes in finance. Dr Markus Leippold Markus Leippold is Assistant Professor of Finance at the Swiss Banking Institute of the University of Zürich. Prior to this, he worked for Sungard, Trading and Risk Management Systems, and the Zürich Cantonal Bank. Markus’ main research interests are term structure modelling, asset pricing, and risk management. He was a research fellow at the Stern School of Business in New York and obtained his PhD from the University of St Gallen, Switzerland, in 1999. He has published in several journals and, in 2004, the research paper he co-authored on credit contagion won the STOXX Gold Award at the annual conference of the European Financial Management Association. During 2005, he was a visiting researcher at the Federal Reserve Bank in New York. Mr Jason MacQueen Jason MacQueen founded QUANTEC in 1980, which was the first firm to develop risk models for equity markets outside the USA. In 1984 QUANTEC launched the first global asset allocation model, which was enhanced in 1985 by the addition of currency hedging overlays and in 1986 by reverse optimisation for efficient portfolio rebalancing. Jason also pioneered the development and use of multi-factor stock selection models in both the USA and Japan, and the investment track record of his long-term collaborators is exceptional. In the late 1990s he helped to develop the first truly global risk model, and a global stock selection model, both incorporating global common factors. He is currently working with R-Squared to develop Customised Hybrid Risk Models for institutional investors, and with Apollo Advisors, which uses a proprietary risk overlay system to manage a fund of funds and optimise the portfolio risk-return trade-off. Mr David Martin David Martin is Senior Vice President and Chief Risk Officer of AllianceBernstein LP Mr Martin joined the firm in December 2001 and is responsible for the risk management function. Mr Martin began his career at Price Waterhouse & Co in 1972 in the audit and consulting practices. In 1979 he joined Citibank and held numerous positions during his 20-year tenure. Mr Martin was a senior risk officer responsible for the global windows on risk processes that was used to proactively manage the entire risk profile of Citigroup. From 1999-2001, Mr Martin was an active Director of DFD Select Group, a manager and distributor of funds of hedge funds. Dr Johanna Neslehova Johanna Neslehova is currently a postdoctoral research fellow at the risk management research centre RiskLab, ETH Zürich. She completed her PhD on Dependence of Non-continuous Random Variables with Professor Dietmar Pfeifer at the University of Oldenburg in 2004. Her research interests include stochastic methods for quantitative risk management in finance, dependence modelling, discrete copulas, point processes, extreme value theory and operational risk. She has spoken at various conferences on Risk Management. She is involved in the German e-learning project E-Stat and wrote a book on elementary mathematics with Erhard Cramer published by Springer in 2004. Dr Norvald Instefjord Norvald Instefjord is a Reader in Finance and an Associate Director of Finance Studies at the Department of Accounting, Finance and Management at the University of Essex. He received a PhD in finance from the London Business School in 1995, and was a lecturer in finance at Birkbeck College, University of London, from 1994-2004. Norvald’s primary research interests are corporate finance; banking (including risk management and issues linked to fraud and operational risk); and security and market design. He has also extensive teaching experience in general and corporate finance, mathematical and theoretical finance, and market microstructure. Mr Daryl Roxburgh Daryl Roxburgh is Head of BITA Risk Solutions the London and New York based portfolio construction and risk solutions provider. Daryl is a graduate of the City University (now John Cass) Business School and his career commenced as a private client fund manager with Buckmaster & Moore. He progressed to a senior management role in 1987 and was subsequently appointed Director of IT in 1994 for Credit Suisse Asset Management. Following two years at M&G, he was recruited by Prudential Portfolio Managers as Global Head of IT in 1998. He now specialises in portfolio construction and risk analysis solutions for the quantitative, institutional, and private banking markets. Dr Dirk Tasche Dirk Tasche received a PhD in mathematics from the Berlin University of Technology. After two years in the credit risk management division of a major German bank, he held post-doctoral research positions at statistics and finance institutes in Munich and Zürich before he joined the Deutsche Bundesbank in 2002. Dr Tasche’s current main area of work is the national implementation of the Basel II Capital Accord. He has published a number of papers on measurement and management of financial risks in the banking industry, with focus on capital allocation and statistical aspects of validation. To view extracts from the Series please go to www.hstalks.com/risk/
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