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Quantitative Finance & Risk Analytics Workshop
|8:00 - 8:40 a.m.||Pickup Registration Material and Breakfast|
|8:40 - 9:00 a.m.||Welcome by Lally Dean Tom Begley and Chair's Introduction|
|9:00 - 10:15 a.m.||
Plenary Speaker: Professor Stavros A. Zenios, Professor of Finance and Management Science, University of Cyprus, Business Economics and Public Policy Department, Wharton School of Business (USA) and Norwegian School of Economics
Topic: Financial Innovation for Sovereign Debt Management in Crisis Countries
Abstract: An old idea was revived at the G20 leaders meeting in Chengdu, China, in July 2016: issuing contingent debt for sovereigns. The International Monetary Fund was asked to analyze the ``technicalities, opportunities, and challenges of state contingent debt instruments" and report back within a year. We use portfolio optimization theory to do two things. First, price two types of contingent contracts, namely GDP-linked bonds and sovereign contingent convertible bonds (S-COCO) with an automatic standstill. Second, to show how a sovereign’s debt risk profile can improve when financed using contingent debt. We use the developed pricing and risk optimization models to compare the two types of instruments in order to understand which one may be preferable and under what conditions. The G20 emphasized GDP-linked bonds in its mandate to IMF, but S-COCO deserve some serious discussion too. Another innovation of the risk optimization model is that it allows us to jointly optimize debt stock and gross financing decisions for a sovereign, and identify the hot spots of unsustainable debt in crisis countries. We illustrate with publicly available data for Greece as a case study.
|10:15 - 10:30 a.m.||Coffee Break|
|10:30 - 11:45 a.m.||
Plenary Speaker: Professor Andreea C. Minca, Andrew Schultz '36 Ph.D. '41, Sesquicentennial Fellow, Operations Research and Information Engineering, Cornell University, Ithaca, N.Y.
Topic: Systemic Risk and Central Clearing Counterparty Design
Abstract: I will examine the effects on a financial network of multilateral clearing via a central clearing counterparty (CCP) from an ex ante and ex post perspective. The CCP is capitalized with equity and a guarantee fund and it can charge a volume-based fee. We propose a CCP design which improves aggregate surplus, and reduces banks' liquidation and shortfall losses. We characterize the CCP's equity, fee, and guarantee fund policies that reduce systemic risk and are incentive compatible for banks. A simulation study based on aggregate market data shows that central counterparty clearing can reduce systemic risk and improve banks' utility.
|11:45 a.m. - 1:00 p.m.||Lunch|
|1:00 - 2:15 p.m.||
Plenary Speaker: Professor Anna Chernobai, Associate Professor Finance, Martin J. Whitman School of Management, Syracuse University, Syracuse, N.Y.
Topic: Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies
Abstract: Recent regulatory proposals tie the systemic importance of a ﬁnancial institution to its complexity. However, we know little about how complexity aﬀects a bank’s behavior, including its risk management. Using the gradual deregulation of banks’ nonbank activities during 1996–1999 as a natural experiment, we show that the frequency and magnitude of operational risk events in U.S. bank holding companies have increased signiﬁcantly with their business complexity. This trend is particularly strong for banks that were bound by regulations beforehand, especially for those with an existing Section 20 subsidiary, and weaker for the other banks that were not bound and for nonbank ﬁnancial institutions that were not subject to the same regulations to begin with. These results reveal the darker side of post-deregulation diversiﬁcation, which in earlier studies has been shown to lead to improved earnings performance. We use operational risk events as a risk management measure because (i) the timing of the origin of each event is well identiﬁed, whereas actual balance sheet losses can take years to materialize, and (ii) the risk events can serve as a direct measure of materialized failures in risk management without being inﬂuenced by the confounding factors that drive asset prices, such as implicit government guarantees. Our ﬁndings have important implications for the regulation of ﬁnancial institutions deemed systemically important, a designation tied closely to their complexity by the Bank for International Settlements and the Federal Reserve.
|2:15 - 2:30 p.m.||Coffee Break|
|2:30 - 3:45 p.m.||
Plenary Speaker: Professor Nikunj Kapadia, Professor Finance, Isenberg School of Management, University of Massachusetts, Amherst, Mass.
Topic: Indexing Market Risk Using Option Prices
Abstract: The growth and popularity of the CBOE’s VIX index suggests that option prices are uniquely suited to generate measures of market risk. In this talk, I show how to construct volatility and tail index from option prices. Both indexes are model-free, and can be constructed using portfolios of options. The volatility index improves upon the VIX as it is unbiased in the presence of jump risk or discontinuities. The jump index can be used to distinguish between upside and downside risk. Both indexes are useful in predicting one-year ahead returns in the aftermath of the financial crisis. Finally, I consider why option markets are successful in aggregating risk, and how to construct an early warning system using anomalies in the option market.
|3:45 - 5:00 p.m.||
Industry Panel Discussion: Challenges in Investments, Fixed-Income Markets, and Regulation
Moderated by: Professor Brian Clark, Lally School of Management, RPI
|5:00 - 5:15 p.m.||Closing Remarks: Financial Analytics at Lally|
|5:15 - 6:00 p.m.||Networking and Student Interactions - open session|
|6:30 - 9:30 p.m.||Dinner at Pat's Barn, Rensselaer Tech Park - Bus leaves at 6 p.m.|
- Professor Anna Chernobai, Associate Professor Finance, Martin J. Whitman School of Management, Syracuse University, Syracuse, N.Y.
- Professor Nikunj Kapadia, Professor Finance, Isenberg School of Management, University of Massachusetts, Amherst, Mass.
- Professor Andreea C. Minca, Andrew Schultz '36 Ph.D. '41, Sesquicentennial Fellow, Operations Research and Information Engineering, Cornell University, Ithaca, N.Y.
- Professor Stavros A. Zenios, Professor of Finance and Management Science, University of Cyprus, Business Economics and Public Policy Department, Wharton School of Business (USA) and Norwegian School of Economics
- Mr. Leon H. Tatevossian, Math in Finance Program, NYU-Courant Institute; former Director, RBC Capital Markets, LLC
- Mr. Charles Brown, Hugh Johnson Advisors, LLC, Albany, N.Y.
- Dr. Steven Zhu, Quantitative Finance Manager, Bank of America, N.Y.
- Dr. Kosrow Dehnad, Adjunct Professor, Columbia University; former Head of Analytics and Quantitative Trading at Samba Financial Group, and Managing Director, Citigroup
Venue and Directions
Center for Biotechnology and Interdisciplinary Studies, Howard Isermann ’42 Auditorium
Rensselaer Polytechnic Institute, Troy Campus
1623 15th St, Troy, N.Y. 12180