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February 2010

The Bear's Lair: Indexed Credit Default Swaps and the Subprime Mortgage Crisis
November 2009

Last November, the Institute of Real Estate Studies and RMI were privileged to have Prof. Nancy Wallace from the Haas School of Business, University of California, Berkeley speak on her findings of the ABX.HE indices which are currently being used as the main benchmark for financial institutions when marking their subprime mortgage portfolios to market. The findings show that the indices were inconsistent with any reasonable assumption for mortgage default rates and that the ABX.HE price changes are only weakly correlated with observed changes in the credit performance of the underlying loans in the index. Prof. Wallace explained that these price changes are due to short-sale activities for publicly traded builders, commercial and investment banks and government sponsored enterprises. She then suggested that capital constraints, limiting the supply of ABS insurance, could be playing a similar role to that identified by Frost (2001) in the market for catastrophe insurance.

Financial Mathematics Program
November - December 2009

International researchers gathered for the Institute for Mathematical Sciences and RMI's two-month long joint workshop program back in November 2009. Topics covered included risk measures and robust optimization in finance, pricing and hedging of environmental and
energy-related financial derivatives and optimal stopping and singular stochastic control problems in finance. More than 100 participants attended the roundtable seminars, workshops and lectures conducted at the NUS Kent Ridge campus.

Revision of Markowitz Strategies
December 2009

Prof. Yan Jia-An from the Chinese Academy of Sciences in Beijing gave a talk at a seminar jointly held by RMI, Department of Statistics and Applied Probability and Department of Mathematics. He presented to the attendees that the VaR (Value-at-Risk) may not be the right measure in guiding investment practice. He also introduced certain stopping strategies where stock holdings are liquidated whenever the parameterized Markowitz strategies reach the present value of the mean target. The risk aspect of the revised Markowitz strategies are examined via expected discounted loss from the initial budget. A new portfolio selection model was suggested by him and his collaborator, Prof. Xunyu Zhou of University of Oxford.

RMI Credit Rating Initiative
January 2010

RMI launched a non-profit credit rating initiative in early 2009. Since then the Institute have made significant progress on it. More than 30 staff and interns are currently working on the various aspects of the project, encompassing data collection, data cleaning and validation, IT and market monitoring. The team obtained financial statement and market data for over 20,000 listed firms in 12 economies in the Asia-Pacific region. Within that data, over 1,600 defaulting or bankrupt firms are identified. This is the most extensive and comprehensive such database known for the region, available in a single convenient interface. The database is now ready for the modeling teams to begin their work on research and development of methodologies for credit rating. Two teams from within NUS have been selected. A/Prof. Anand Srinivasan (NUS Business School) was awarded one grant through RMI's annual call for grant proposals. Prof. Deng Yongheng (Institute of Real Estate Studies and NUS Business School) together with Dr Xudong An (College of Business Administration, San Diego State University) was awarded a grant through a special call for grants focused on credit rating methodologies. The first deadline for external grants saw a number of strong proposals. The final selections will be made shortly, and we look forward to welcoming the researchers to this project.

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