RESEARCH UPDATES

Industry Projects

Under the leadership of our Deputy Director for Industry Prof. Chen Kan, RMI has continued to pave the way for collaboration on industry projects, which aim at advancing the industrial applications of new research in the field of risk management. In 2022, the projects team worked on publishing some research papers in relevant journals.

RMI Industry Projects’ team members, Prof. Chen Kan along with Tuoyuan Cheng, recently published a paper in the Journal of Finance and Date Science titled “Measuring Tail Risks”. Value-at-Risk (VaR) and Expected Shortfall (ES) are common high quantile-based risk measures adopted in financial regulations and risk management. In this paper, the authors propose a tail risk measure based on the most probable maximum size of risk events (MPMR) that can occur over a length of time. MPMR underscores the dependence of the tail risk on the risk management time frame. Unlike VaR and ES, MPMR does not require specifying a confidence level. They derive the risk measure analytically for several well-known distributions. In particular, for the case where the size of the risk event follows a power law or Pareto distribution, the paper shows that MPMR also scales with the number of observations n (or equivalently the length of the time interval) by a power law, MPMR(n) ∝ n^η, where η is the scaling exponent (SE). The scale invariance allows for reasonable estimations of long-term risks based on the extrapolation of more reliable estimations of short-term risks. The scaling relationship also gives rise to a robust and low-bias estimator of the tail index (TI) ξ of the size distribution, ξ = 1/η. In this paper, the authors demonstrate the use of this risk measure for describing the tail risks in financial markets as well as the risks associated with natural hazards (earthquakes, tsunamis, and excessive rainfall).

Prof. Chen Kan has another paper in the process of publishing called “The Scheweinler-Wigner Orthogonalization for Risk Model Construction” co-authored with Cheng Cao. In this paper, the authors investigate the Schweinler–Wigner/Löwdin (SW/L) orthogonalization scheme for risk model constructions. The SW/L scheme maximizes the overlaps between the original risk factors and the new orthogonalized (independent) risk factors. We test the robustness of the risk factor orthogonalization procedure on four risk models based on combinations of FarmerFrench 3 factors and various sets of industry factors in both the US and the Chinese markets. We show that the original risk factors and the corresponding new orthogonalized factors are highly correlated, and such high correlations are stable over a long period. This allows the orthogonalized factors to retain the economic intuition of original explicitly-defined risk factors, leading to a better and clearer risk attribution.

Conference, Seminars, and Other Events

Sixth PKU-NUS Annual International Conference on Quantitative Finance and Economics

RMI, Peking University’s (PKU) HSBC Business School and the Key Laboratory of Mathematical Economics and Quantitative Finance and NUS’s Centre for Quantitative Finance hosted the Sixth PKU-NUS Annual International Conference on Quantitative Finance and Economics virtually on 14 and 15 May 2022, given the travel restrictions and safety precautions in place considering Covid-19.

The conference featured a two-day scientific program, in the format of an academic conference. The invited keynote speakers were:

1. Qingmin Liu (Professor of Economics, Columbia University)
2. Xuezhong Tony He (Professor of Finance, Xi'an Jiaotong-Liverpool University)
3. Yacine Aït-Sahalia (Otto A. Hack 1903 Professor of Finance & Economics, Princeton University)

The call for papers attracted submissions from universities worldwide, including Yale University, Tsinghua University, Cambridge University and City University of Hong Kong as well as some from industry participants such as from Microsoft. This international conference aims to provide a platform for researchers and practitioners from academia and industry to enhance their quantitative finance techniques, explore the latest investment strategies and manage the fundamental regulatory changes in the financial sector.

This year’s conference organizing, and scientific committee consisted of program co-chairs, from NUS and PKU, including Prof Yang Jingping, A/P Li Chenxu, Prof. Gong Liutang and A/P Cheng Xue of PKU Beijing Campus, Prof. Chen Yi-Chun, Prof Sun Yeneng and Prof Dai Min of NUS, and Prof. Wang Pengfei, Prof. Chu Chia- Shang, Prof. Hai Wen, Prof. Thomas Sargent, A/P Shi Jiao and A/P Ren Ting of PKU’s HSBC Business School.