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RMI Hosts a Research Symposium on Quantitative Risk Management
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On 16 January 2018, RMI hosted a one-day research symposium on quantitative risk management featuring three world-leading experts in the field, Prof. Halil Soner, Professor of Mathematics at ETH Zurich, Prof. Masaaki Kijima, Professor of Finance at Tokyo Metropolitan University, and Prof. Nizar Touzi, Professor of Applied Mathematics at École Polytechnique. The talk has attracted a total of 48 attendees from both industry and academia, for them to get updated about latest research results as well as engage in discussions on such topics. The Symposium was opened by a talk on “Hedging Leverage ETF” by Prof. Soner of Swiss Federal Institute of Technology in Zurich (ETH Zurich). He informed the audience that Leveraged Exchange Traded Fund (ETF) is a recent financial instrument rapidly gaining large market size. While these funds promise to provide a certain multiple of the daily return of the underlying ETF, the matching for this type of fund is done daily and is very different from matching in the long term. Due to this nature of the leveraged ETF, one needs to make large portfolio movements at the end of each day. Prof. Soner, who also holds a Senior Chair at the Swiss Finance Institute, pointed out that this proves costly due to transaction costs, front-running, and other reasons. He said that he and his fellow researchers also observed that despite the promise there is slight slippage in the return of the leveraged ETFs. Hence they proposed a model taking into account these frictions and provided hedging strategies which did not require large portfolio movements.
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After a short lunch break, Prof. Kijima, Professor of Finance at Graduate School of Social Sciences, Tokyo Metropolitan University (TMU), took the stage to talk about “Regulatory Policy to Mitigate Potential Risks Arising from Contingent Convertibles.” He began by giving a brief introduction of Contingent Convertible (CoCo) bond. He explained that a CoCo bond is an instrument that suffers a write-down or converts into equity when the issuing bank is in financial distress. In practice he further elaborated, a trigger event of CoCo takes place when the capital ratio of the bank falls to the pre-defined level or when the national authority declares a trigger at its discretion. Thus he told the audience that his study aims to model CoCos having such triggers and to find effective regulatory policies to handle them. A model for banks issuing CoCos is built within the framework of a structural-default approach, according to Prof. Kijima, who was a Professor of Financial Engineering at Kyoto University before joining TMU in 2006. The third and final talk of the symposium was by Prof. Touzi from École Polytechnique. His talk was titled, “Continuous Time Contract Theory and Applications.” Prof. Touzi explained that contract theory in economics focuses on social organization by optimizing the incentive of the interacting economic agents so as to account for moral hazard risk. Previously a Chair Professor at Imperial College London, he further stressed that this topic lies at the heart of many relevant real life problems, including insurance tarification, management delegation, regulation, and digital compensation/tarification policy. His talk has provided some recent results in stochastic control theory which allows to address a wide range of such problems.
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"It's very interesting and enlightening to see how the stochastic control thoery can be skillfully applied to either construct hedge strategies in financial markets or address the moral hazard risk in the contract design," commented Dr. Chen Yuanyuan, a research fellow at RMI. Aligned with RMI’s vision to advance research and deepen its footprint as a scientific research hub in financial risk management, it regularly hosts such events to offer both local and international research communities the latest happenings and provides a forum for exchange of ideas.
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