RiskLab and Center of Competence Finance in Zürich

invite you to attend the

Risk Day 2010

Mini-Conference on Risk Management in Finance and Insurance

Time: Friday, September 17, 2010,09.00-18.00

Location:ETH Zürich, Main Building, Room HG G-5,
Rämistrasse 101, 8092 Zürich.

Organizer: Prof. Dr. Walter Farkas

Registration: The Risk Day 2010 is free of charge but due to administrative reasons you are kindly requested to register electronically following the

registration link.

Program:

09.30–10.00 Welcome Coffee
10.00–10.45 Prof. Dr. Jean-Charles Rochet
(Department of Banking and Finance, University of Zürich and Toulouse School of Economics):

Title: Shareholder Risk Measures
Abstract: I propose a new family of risk measures, defined as the loss in shareholder value associated with the acceptance of a new risk for an insurance company. This risk measure depends on the portfolio of risks already held by the company and on its current financial situation: it is indexed by the current level of reserves. This family of risk measures is more adapted to risk management decisions of corporation than the axiomatic approaches, which define abstract risk measures that are independent of the context. The properties of shareholder risk measures are intriguing:
  • they only satisfy the diversification principle for small risks, not for large ones.
  • they only satisfy the translation invariance axiom for small translations, not large ones;
  • they do not satisfy the homogeneity axiom.
10.45–11.30 Prof. Dr. Freddy Delbaen
(Department of Mathematics, ETH Zürich):

Title: Risk Measures: Mathematics and Regulators
Abstract: I will discuss on why we need risk measures and whether the existing procedures are sufficient to prevent a new crisis.
11.30–12.00 Dr. Johannes Muhle - Karbe
(Faculty of Mathematics, University of Vienna):

Title: Asymptotics and Exact Pricing of Options on Variance
Abstract:We consider the pricing of derivatives written on the discrete realized variance of an underlying security. In the literature, the realized variance is usually approximated by its continuous-time limit, the quadratic variation of the underlying log-price. Here, we characterize the short-time limits of call option on both objects. We find that the difference strongly depends on whether or not the stock price process has jumps. To study the exact valuation of options on the discrete variance itself, we then propose a novel randomization approach that allows to apply Fourier-Laplace techniques to price European-style options efficiently in exponential LÚvy models. To illustrate our results, we also present some numerical examples. This is joint work with Martin Keller-Ressel.
12.00–14.00 Lunch Break
14.00–14.30 Prof. Dr. Karl-Theodor Eisele and Prof. Dr. Philippe Artzner
(Institut de Recherche Mathematique Avancee, University of Strasbourg):

Title: Time-Consistent Supervisory Accounting
Abstract: Supervisory acceptability of an insurance business plan is given via an assessment of the risk bearing capital. This assessment leads naturally to a definition of supervisory provision as the minimal acceptable amount of asset value for given obligations. A recursive calculation of supervisory provision is possible by the time consistency. The condition of market prudence of the assessment provides the existence of an optimal replicating portfolio often used for defining supervisory risk margin.
14.30–15.00 Philipp Arbenz
(Department of Mathematics, ETH Zürich and Scor Reinsurance):

Title: Estimating Copulas from Scarce Observations, Expert Opinions and Regulator Guidelines: A Bayesian Approach
Abstract: A prudent assessment of dependence is crucial in many stochastic models in finance and insurance. Copula models allow to comprehensively represent dependence between random variables, for instance by incorporating tail dependence. Using only scarce observations for copula estimation leads to a large parameter uncertainty of the copula model. We propose a Bayesian method which combines different sources of information in order to estimate copula parameters, namely observations, expert opinions and regulator guidelines. This combination can significantly reduce the parameter uncertainty compared to the use of only one source. We also describe psychological effects when eliciting expert opinions.
15.00–15.30 Coffee Break
15.30–16.00 Prof. Dr. Thorsten Hens
(Department of Banking and Finance, University of Zürich):

Title: Three Solutions to the Pricing Kernel Puzzle
Abstract: The pricing kernel puzzle is the observation that the pricing kernel might be increasing in some range of the market returns. This paper analyzes the pricing kernel in a financial market equilibrium. If markets are complete and investors are risk-averse and have common and true beliefs, the pricing kernel is a decreasing function of aggregate resources. If at least one of these assumptions is violated, the pricing kernel is not necessarily decreasing. Thus, incomplete markets, risk-seeking behaviour and incorrect beliefs can induce increasing parts in the pricing kernel and can be seen as potential solutions for the pricing kernel puzzle. We construct examples to illustrate the three explanations. We verify the robustness of the explanations under aggregation and compare the phenomena with the findings in the empirical literature. The results are used to reveal strengths and weaknesses of the three solutions. Risk-seeking behaviour is a fragile explanation that can only work in a model with atomic state space. Biased beliefs are robust under aggregation and consistent with the empirical findings. In incomplete markets, it is easy to find a pricing kernel with increasing parts. In order to get situations where all pricing kernels have increasing parts, we need extreme assumptions on the wealth distribution.
15.30–16.00 Prof. Dr. Damir Filipovic
(Swiss Finance Institute, EPF Lausanne):

Title: Quadratic Variance Swap Models: Theory and Evidence
Abstract: We introduce a quadratic term structure model for the variance swap rates. The latent multivariate state variable is shown to follow a quadratic process characterized by linear drift and quadratic diffusion and jump compensator functions. The univariate case turns out to be a parsimonious and flexible class of models. We provide a complete classification and canonical representation, and discuss model identification. We fit the model to the cross section of variance swap rates and returns of the S&P 500 Index, and perform a specification analysis. This is joint work with Elise Gourier and Loriano Mancini.
16.30–17.00 Dr. Ioannis Akkizidis
(Senior Financial Risks Analyst, FRS Global, Switzerland):

Title: Systemic Risk under Stress Financial Risk Conditions
Abstract: In the present financial crisis financial institution but also the entire market has been facing the risk of collapsing due to their interdependencies with individual counterparties including financial entities and countries. This "systemic risk" can be caused by actual or expected financial instabilities or losses that are initiated by idiosyncratic events or conditions linked to specific counterparties. However, the downstream effect of losses in the entire market can reach a significant degree. Although that diversification effect is unable to minimize losses of such type of risk, financial institutions should be able to first identify and measure their exposure to systemic risk but more importantly to be capable of dealing with it. In this presentation the Systemic Risk is approached. The role of financial analysis elements in identifying and managing Systemic Risk under Stress Financial Risk Conditions will be explained, linked to actual business cases.
17.00–17.15
17.15–18.00 Cocktail

Conference Secretary:

Ms. Galit Shoham, HG G21.3 (IFOR), Phone 044/632 40 16, E-mail: sekretariat@ifor.math.ethz.ch

Previous Risk Days:

2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998.

Please send comments and suggestions to Walter Farkas.
Last update:  June 29, 2010