< Back to previous page

Project

Quantitative Risk Management under Scenario Constraints: Risk aggregation, Dependence, and Systemic risk (FWOODYS11)

This proposal focuses on decision making in risk management under scenario constraints (state-dependent constraints). It consists of three parts: First, we develop a methodology that allows us to assess dependence among market variables under specific market conditions (scenarios) in a forward‐looking way. Our approach overcomes the deficiencies of the implied correlation indices of the Chicago Board Options Exchange. In particular, our approach can detect tail correlations (correlations in a crisis scenario). In the second part, we discuss implications for assessing systemic risk. We propose to design a systemic risk indicator driven by changes in the dependence among financial institutions perceived from option prices written on the financial sector and individual banks. Such indicator is of potential interest to regulators who want to prevent future bailouts by taxpayers. We discuss recent changes in regulatory frameworks toward a regulation per scenario (e.g., capital being linked to the degree of market stress) and propose to investigate the impact on market equilibrium of regulation that is based on such state-dependent constraints. Finally, the third part is more closely related to insurance in that it examines the design of novel equity linked insurance products that respond to the fact that market values of guarantees are state-dependent and may help to achieve better risk management (and thus a more stable insurance sector).
Date:1 Oct 2016 →  30 Sep 2021
Keywords:Risk management
Disciplines:Business administration and accounting not elsewhere classified