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August 2010

FEATURE
RMI hosts 4th Annual Risk Management Conference

The NUS Risk Management Institute (RMI) hosted its Fourth Annual Risk Management Conference from 15 - 17 July 2010 at the Shangri-La Hotel, Singapore. The topical theme of the conference was 'The Risk Management Paradigm in the Post-Crisis Era.' The event featured a one day policy forum, followed by a one and a half day scientific program which drew over 350 delegates from the financial sector, central banks, regulatory agencies, academia and think tanks.

In the inaugural session chaired by RMI Director Prof. Jin-Chuan Duan, NUS President Prof. Tan Chorh Chuan gave the opening remarks and welcomed the delegates. He pointed out RMI's rapid growth in four focus areas of education, training, research and industrial outreach. He stated that while its flagship Master of Financial Engineering Program remained popular, of particular significance was a major credit rating initiative that covered 12 major economies in the Asia Pacific region.

Implications for investment and risk management

The Guest of Honor, Mr. Ong Chong Tee, Deputy Managing Director at the Monetary Authority of Singapore (MAS) spoke of the implications of the post-crisis period for investors and financial regulators. He highlighted the challenges for investment and risk management from an investor's perspective. The fact that the risk-return trade-off has become more acute in a post-crisis world created three challenges for risk management. Firstly, the fundamental tenets on which much of risk management tools and methodologies were built have been severely challenged by the recent crisis. High asset correlations had undermined the benefits of portfolio diversification. The assumption of rational markets was also being questioned. The liquidity crunch resulted in a massive sell off in high risk weighted assets.



Risk Management: Lessons from the Crisis 

By Myron S Scholes, Nobel Laureate, Frank E. Buck Professor of Finance, Emeritus, Stanford University

In the aftermath of the 2008 financial crisis, regulators of the financial system are reemphasizing risk management to minimize risk and prevent future crises. However, risk management is not about risk minimization but rather optimization of risk and returns. Since making returns for risk are two sides of the same coin, financial institutions cannot achieve returns without taking risks. Hence, the level of risks to take is a business decision. There are seven components to risk management; the first four components 1) capital allocation models, 2) considerations for capital structure, 3) optimization tools, and 4) stress testing are a system of what financial institutions necessarily must do to optimize risk, while the last three, 5) feedback systems, 6) reporting systems and 7) firm reporting structure and compensation policies are feedback systems to monitor how well firm managers are doing it.

The capital allocation model determines how much capital to allocate to a division or strategy. Only after capital is assigned to provide certain services can financial institutions know if they have made sufficient returns on their capital to continue with the allocation. In the past, financial institutions used to assign capital based on asset category, e.g. unrated paper, bonds and equities, and their net present value. This method satisfies investment needs but describes only the best case scenario as such models generally ignore uncertainty and risk over future cash flows and capital needs. With the advent of portfolio theory, capital began to be allocated with respect to risk using value-at-risk (VaR) models. While the models are dynamic, being under constant evolution from Bank of International Settlement (BIS), it assumes capital sharing through low correlations, which is inappropriate during shocks when capital is scarce as correlations among business entities approach one.


 

Multiperiod Corporate Default Prediction - A Forward Intensity Approach

A working paper by Prof. Jin-Chuan Duan, (Risk Management Institute and Department of Finance, National University of Singapore), Jie Sun (Risk Management Institute, National University of Singapore) and Tao Wang (Department of Finance, National University of Singapore)

Prof. Jin-Chuan Duan together with his co-authors, Sun and Wang, recently finished their working paper titled "Multiperiod Corporate Default Prediction - A Forward Intensity Approach". In this paper, they proposed a forward intensity approach for the prediction of corporate defaults over different future periods. The model is also amenable to aggregation, which allows analysts to assess default behavior at the portfolio and/or economy level.

Understanding the term structures of default probabilities is critical to credit risk management, macro policy making and financial regulation. Firms may have totally different short-term and long-term credit risk profiles due to their debt structures, liquidity positions and other attributes. For example, firm A can present a smaller credit risk vis-á-vis firm B in next three months due to its healthy cash position, but at the same time be a bigger credit risk over next two years simply because of its dismal profit prospect.





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MFE Alumni Networking Event

May 2010
On 4 May, RMI and its Masters of Financial Engineering (MFE) Alumni Committee put together a networking session for its alumni at the al fresco restaurant Oosh. The event served as a platform for the different alumni batches to get to know each other. MFE program's current students were also invited to attend the event. In total, almost 30 people attended the event held at Dempsey Hill.



Customized Training Program for KUBS

June 2010
In June 2010, RMI conducted a customized program for the Korea University Business School (KUBS) for the third time. A team of 20 Samsung employees participated in the two and a half day program in RMI.



Symposium for Computational Finance

June 2010

On 28-29 June, RMI held the Symposium for Computational Finance, which saw interest from over 90 financial professionals and academics.

The Symposium, a platform for researchers to share their researches and recent findings in the field of computational finance, also enabled the participants to understand the recent developments in the theory and application of mathematical finance.




NUS-Waterloo Certification Workshops in Financial Risk Management
20 - 28 September 2010

Berkeley-NUS Certificate in
Financial Engineeringbr /> 08 - 12 & 22 - 26 November 2010

more




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