Innovations in Quantitative Risk Management: TU München, by Kathrin Glau, Matthias Scherer, Rudi Zagst

By Kathrin Glau, Matthias Scherer, Rudi Zagst

Quantitative versions are omnipresent –but frequently controversially mentioned– in todays possibility administration perform. New laws, cutting edge financial items, and advances in valuation concepts supply a continuing flow of not easy difficulties for financial engineers and hazard managers alike. Designing a valid stochastic version calls for finding a cautious stability among parsimonious version assumptions, mathematical viability, and interpretability of the output. furthermore, facts specifications and the end-user education are to be regarded as well.

The KPMG heart of Excellence in threat administration convention hazard administration Reloaded and this court cases quantity give a contribution to bridging the distance among academia –providing methodological advances– and perform –having a firm knowing of the commercial stipulations during which a given version is used. mentioned fields of software diversity from asset administration, credits danger, and effort to threat administration concerns in coverage. Methodologically, dependence modeling, multiple-curve curiosity rate-models, and version danger are addressed. ultimately, regulatory advancements and attainable limits of mathematical modeling are discussed.

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Extra resources for Innovations in Quantitative Risk Management: TU München, September 2013

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This refers to risks such as migration and default risk, which were not covered by traditional market risk models before the crisis. 9 Regulatory Developments in Risk Management … 23 behave in the same way. 11 The supervisory treatment of such approaches is now much more restrictive. 6. The approximation of changes in the price of financial instruments cannot accommodate large price movements (delta-gamma approximations). Full revaluation of instruments is now standard practice. 7. No and/or flawed scaling to longer time horizons.

Against that, increasing the complexity of standardised approaches often improves comparability. See [5, 22] on the balancing debate. 33 30 U. Gaumert and M. Kemmer • Standardised models can pose a threat to financial stability because they encourage all banks to react in the same way (herd behaviour). Model diversity is a desirable phenomenon from a prudential point of view since it generates less procyclicality. • Standardised models would frequently be unsuitable for internal use at larger banks, which would consequently need to develop alternative models for internal risk management purposes.

Nevertheless, confidence in internal models needs to be significantly strengthened. 1 Overview The first, important step should be to standardise supervisory approval processes to eliminate this major source of variation. A single set of approval and review standards should be developed for application worldwide. A globally consistent procedure needs to be enforced for granting and withdrawing permission to use models. 33 A number of further proposals are also under discussion at present. Together, they have the potential to go a long way towards winning back trust: a.

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