One-Day Workshop on Portfolio Risk Management
Vienna University of Technology
Lecture Hall: "FH HS 8 - Nöbauer Hörsaal" ("Freihaus", yellow area, 2nd floor)
Friday, October 1st, 2010, 9.00 - 19.00
Prof. Dr. Uwe Schmock
(FAM @ TU Wien)
||Prof. Dr. Anna Rita Bacinello
(University of Triest)
Variable Annuities: Risk Identification and Risk Assessment
Abstract: Life annuities and pension products usually involve a number of "guarantees", such as, e.g., minimum accumulation rates, minimum annual payments and minimum total payout. Packaging different types of guarantees is the feature of so-called variable annuities. Basically, these products are unit-linked investment policies providing deferred annuity benefits. The guarantees, commonly referred to as GMxBs (namely, Guaranteed Minimum Benefits of type "x"), include minimum benefits both in case of death and in case of survival. Following a risk management oriented approach, this talk first aims at singling out all sources of risk affecting variable annuities ("risk identification phase"). Critical aspects arise from the interaction between financial and demographic issues. In particular, the longevity risk may have a dramatic impact on the technical equilibrium within a portfolio. Then, we deal with risk quantification ("risk assessment phase"), mostly via stochastic simulation of financial and demographic scenarios. Our main contribution is to present an integrated approach to risks in variable annuity products, so providing a unifying and innovative point of view.
||Chairperson: Dr. Stefan Gerhold
Prof. Dr. Walter Farkas
(ETH Zürich, Universität Zürich)
On Modelling and Option Pricing using Lévy Copula Processes
Abstract: We discuss the valuation of derivative contracts on baskets of risky assets whose prices are Lévy-like Feller processes of tempered stable type. The dependence among the marginals’ jump structure is parametrized by a Lévy copula. We analyze the jump measure of the corresponding Lévy copula processes and discuss further analytical and numerical aspects and the efficient numerical solution of the parabolic Kolmogorov equation ut + Au=0 arising in valuation of derivative contracts.
Dr. Zorana Grbac
(Department of Mathematical Stochastics, University of Freiburg)
Conditional Markov Chains and Credit Risk in the Lévy Libor Model
Abstract: In this work we consider modeling of credit risk within the Libor market models. We extend the classical definition of the default-free forward Libor rate to defaultable bonds with credit ratings and develop the rating-based Libor market model. As driving processes for the dynamics of the default-free and pre-default term structure of interest rates a wide class of time-inhomogeneous Lévy processes is used. Credit migration is modeled by a conditional Markov process with finite state space consisting of possible credit ratings. This process is constructed in a canonical way by enlarging the reference filtration carrying the default-free information. We show that the conditional Markov property is preserved under all forward Libor measures. Moreover, we prove that this filtration enlargement satisfies the immersion property under all forward measures. This enables us to derive the conditions for absence of arbitrage in the model. Finally, the valuation formulae for some common credit derivatives in this setup are presented. In particular, we introduce defaultable forward measures to value certain types of defaultable contingent claims. This is joint work with E. Eberlein.
|| Lunch Break
||Chairperson: Dr. Friedrich Hubalek
Dr. Stefan Gerhold
(FAM @ TU Wien)
Refined Volatility Expansion in the Heston Model
Abstract: It is known that Heston's stochastic volatility model exhibits moment explosion, and that the critical moment can be obtained by solving (numerically) a simple equation. This yields a leading order expansion for the implied volatility at large strikes (Roger Lee's moment formula). Motivated by recent tail-wing refinements of this moment formula, we first derive a novel tail expansion for the Heston density, and then show the validity of a refined volatility expansion. Our results may prove useful for calibration of the Heston model to the volatility surface. This is joint work with P. Friz, A. Gulisashvili, and S. Sturm.
Dr. Robert Schöftner
Market and Credit Risk Aggregation: A Bottom-Up Approach
Abstract: The recent financial crisis has undoubtedly shown that the "thinking in
risk types", which is the current practice in the financial industry,
neglects essential interactions between risk drivers at product level.
In order to circumvent such unpleasant past events, we study market and
credit risk aggregation from a bottom-up perspective at product level.
In contrast to its counterpart, the top-down approach using the
statistical tools of copulas and introducing dependence at risk type
level, the bottom-up approach captures dependence at risk driver level.
For this purpose we calibrate a scenario generator, which consists of
several dependent submodules that are based on both market risk and
credit risk related components such as interest rates, foreign exchange
rates, equity prices, as well as default intensities. Due to the
significant importance to be able to value any kind of financial
products at long time horizons in credit risk, we also focus on the
modeling of credit exposures using a least squares Monte Carlo
algorithm. Finally, formal definitions of (joint) market and credit risk
profits and losses from a bottom-up perspective are provided.
Dipl.-Math. Benedikt Blum
(FAM @ TU Wien)
Superreplication and No-Arbitrage in Multiasset Models with
Abstract: Apart from being an economic reality in financial markets, transaction
costs (TC) give us the opportunity to render price processes with
interesting modeling properties arbitrage-free, that would have
allowed for arbitrage without TC. On the other hand, well-known
results from classical financial mathematics more often than not get
distorted as soon as TC are introduced to the underlying model. The
so-called face-lifting theorem, which deals with super-replication
prices in multiasset models with TC, is an especially drastic example.
The second important result developed by the PRisMa-Lab's work on TC models
is a multiasset version of the famous fundamental theorem of asset
pricing, which gives necessary and sufficient conditions for the
absence of arbitrage in models with asymptotically small TC. In both
cases, the focus lies on the question whether "big" market agents can
neglect the presence of TC, i.e. if their situation converges to the
frictionless case as TC tend to zero.
|| Coffee Break
||Presentations of Prize Winning Theses
Chairperson: Dir.i.R. Helmut Holzer (Vice President of the Actuarial Association of Austria)
Dr. Richard Warnung
Improved Recursions for Risk Aggregation
(Raiffeisen Capital Management)
(2nd Prize 2008 of the Actuarial Association of Austria)
Abstract: In this talk we analyze the collective risk model which originally comes from insurance mathematics (non-life insurance). Despite its long history this model has very up-to-date applications in quantitative risk management in banks and other financial institutions (credit and operational risk). In 1981 the classical Panjer recursion was first published as an algorithm to calculate the loss distribution in the collective risk model. With the aim to guarantee the numerical stability of this recursion we first present an improved Panjer recursion and apply it to compound Poisson mixture models which allow for a flexible description of the claim number distribution. A second approach tries to find short and quick recursions. This aim is achieved by considering a special class of claim size distributions. (Joint work with Uwe Schmock and Stefan Gerhold)
Dipl.-Ing. Annemarie Mayer
Bondoptionen im Risikomanagement der Generali Versicherung AG
(Generali Holding Vienna AG)
(2nd Prize 2009 of the Actuarial Association of Austria)
Abstract: Risiken sind ein Merkmal jeder unternehmerischen Tätigkeit, im Risikomanagement erfolgt die systematische Erfassung und Bewertung von Risiken. Auf erkannte Risiken kann reagiert werden, und mit geeigneten Maßnahmen können diese gesteuert werden. Mittels Zinsstukturmodelle werden Bondoptionen und vor allem Bermuda Optionen bewertet. Mit Hilfe der Term Structure Equation wird das Vasicekmodell eingeführt, das ein Vorläufer des genauer beschriebenen Hull-White-Zinsstrukturmodells ist. Es werden sowohl Formeln für die Bewertung von Bonds als auch von den dazu gehandelten Optionen hergeleitet und die Modellierung eines künstlichen Short-Rate-Prozesses mittels Konstruktion eines Trinominalbaumes vorgenommen.
Christoph Brodowicz, MSc.
Pricing Synthetic Collateralized Debt Obligations using Normal Approximation
(3rd Prize 2009 of the Actuarial Association of Austria)
Abstract: Throughout this talk we describe a numerical approach to compute CDO tranche prices. Actually we apply the normal approximation of the binomial distribution within the conditional independent framework to obtain the cumulative loss distribution of the CDOs underlying portfolio, which is the essential part to value a CDO tranche. Since the size of the portfolio is fixed for a standard synthetic CDO tranche, the use of correction terms for the approximations is inevitable. To achieve adequate corrections, we combine Stein's method and the zero-bias transformation.
|| Bread and Wine
Participation is free, and there is no official registration - nevertheless for administrative reasons we would be happy if you write a short email to our secretary (see below) with your name and university or company.
Everyone is welcome, practitioners are especially encouraged to attend.
For actuaries, this workshop counts up to five points for their continuing professional development. For a corresponding certificate, please register in advance for the morning and/or afternoon part of the workshop by sending an email with your name and postal address to the workshop secretary (see below) and sign up when you actually attend the workshop.
We have not made any special arrangements for lunch since there are
sufficient possibilities nearby ([PDF/135kb]).
For hotel accommodation, please check the Wien Tourism home page or a list of hotels near TU Wien.
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