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May 2010

Decomposing the Credit Risk of a Portfolio into the Individual Assets
March 2010

On March 22, RMI hosted Prof. Yukio Muromachi from the Tokyo Metropolitan University to speak as part of the RMI's Credit Rating Initiative Special Seminar Series.

Prof. Muromachi, whose interests lie in pricing model of the credit risk and evaluation model of a portfolio risk, spoke on the topic of "Decomposing the Credit Risk of a Portfolio into the Individual Assets".

He felt that analyzing the concentration risk in the portfolio is an important issue for risk management of financial institutions. In his talk, Prof. Muromachi reviewed the risk contributions and the hybrid method for the credit risk of a portfolio. Using the construct, risk contribution (RC) of asset j, defined by RCj ≡ aj ∂Rp/∂aj, where aj is the holding amount of asset and Rp is the total risk of the portfolio. RCj can satisfy the additivity; that is, he demonstrated that the sum of RCs of all assets is equal to the total risk of the portfolio Rp. This can lead to the definition of RCs for standard deviation, Value at Risk (VaR) and Expected Shortfall (ES). He also showed the audience that this method provides much more reliable estimates of VaR and RCs for VaR than ordinary Monte Carlo simulation.

Risk Sharing, Costly Participation, and Intermediation
April 2010

The first talk during April's RMI Research Workshop was given by Prof. Mark S. Seasholes from Hong Kong University of Science and Technology. He spoke on "Risk Sharing, Costly Participation, and Intermediation".

Prof. Seasholes presented his study on two groups of traders previously shown to provide immediacy on the New York Stock Exchange. He found that market makers' inventories (and individuals' net trades) are negatively correlated with past/current returns and positively correlated with future returns, which is consistent with being compensated for providing liquidity. 

The Impact of Liquidity on Option Prices
April 2010

Prof. Chung San-Lin of the National Taiwan University gave a talk on "The Impact of Liquidity on Option Prices" as part of RMI Research Workshop Series.

He pointed out that even after controlling for the systematic risk of Duan and Wei (2009), a clear link remained between option prices and liquidity; with a reduction (increase) in spot (option) liquidity, there was a corresponding increase in the level of the implied volatility curve.

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Published quarterly by Risk Management Institute, NUS
Editor: Ivy Wang (rmiwy@nus.edu.sg)