|Title||Risk Management Systems|
The students will gain an understanding of how institutional financial risks can be quantified and managed using information technology. This course discusses issues in aggregating and rationalizing real-time data from multiple trading sources in designing and implementing firmwide risk systems. The course discusses the business and IT issues, regulatory requirements, and techniques to measure and report risk across a major financial organization and examines several cases of major risk failures. It further addresses market, credit, operational, model, and liquidity risks and the Basel II recommendations regarding risk management in financial institutions. As a part of the course, the students will experience vendor systems and risk applications at the Subotnick Financial Services Center. Students will learn to compute Value at Risk (VaR), perform a Monte Carlo simulation using spreadsheet software, and have an understanding of best practices as well as the underlying assumptions and limitations of widely used models in risk management practice.
Soc Gen Trader loses billions due to a “rogue trader”. Citibank, ML, UBS, lose billions in CDO’s, Bear Stearns “saved” by JP Morgan Chase, AIG saved by the US government to avoid a global crisis in credit derivatives, Amaranth hedge fund losses $7B in one week and Lehman Brothers goes bankrupt. These are not new stories but recurring crises going back many years. How did so many smart people lose so much money??? This course will explain what happened, examine a number of notorious cases, review what regulators are doing about it, (the now famous Basel II and III Accord), calculate Value at Risk and what you need to know to read and understand risk management reports, or architect and build or buy a risk management system.
In today’s world of rapid information flows, rising volatility, regulatory concerns and oversight, prudent management increasingly requires understanding and measuring risk. Merged or individual banks, securities dealers, insurance companies and industrial firms with significant financing operations, all require enterprise-wide risk management that may span many operations across currencies and locations in real time. Risk management establishes standards for aggregating disparate information, gathering market data, calculating risk measures and creating timely reporting tools for management market, credit, and operational risks. This course is directed toward students interested in understanding how large-scale complex risk can be quantified, needs to be managed and architected. We identify the business and technical issues, regulatory requirements and techniques to measure and report risk across a major organization.
|Prerequisites||Prerequisite: STA 9708; FIN 9770 or CIS 9555; or permission of the instructor|
|Textbooks and other material||
Other Reading Material & Cases will be supplied in class:
|Topics||Introduction to the course
The course – syllabus, grading, readings, etc.
Review of Modern Portfolio Theory, (EMH) and Behavioral finance
Review of probability and statistics (if needed)
Intro to risk management
Types of risk – market, credit, liquidity, operational, etc.
Examples of financial disasters
Review and discuss Barings case
Value at Risk –VaR
Risk measures for various asset classes
VaR Tools – Marginal, Component VaR, etc.
Calculating VaR of single equity using Excel and publicly available data
Homework #1 on calculating single instrument VAR and HW #2 on 2 asset VaR
Monte Carlo Simulation
Choice of Quantitative Measures
GARCH Volatility Models
Extreme Value Theory (EVT and CVaR)
Review and discuss Orange County case
Liquidity Risk and Leverage
Hedge Fund Risk Measures
First Exam Part I
First Exam Part II
When Genius Failed – LTCM case
25 years of risk related regulations
BIS, Basel and Dodd Frank
Discussion of multifactor analysis and Barra software
Barra system test cases
Systems addressing Credit Risk
Empirical, Accounting and Financial
Altman Z Score, Merton Model and Jarrow Models
Credit Metrics, etc. Credit Rating Systems
Credit Default Swaps (CDS)
CDO’s, CMO’s and other structured finance
Tranching of Sub-prime CDOs
What happened to AIG?
SIVs and off balance sheet financing and lessons on credit risk management
Operational Risk and its Basel II requirements
Defining and organizing operational risk
Measuring Op Risk for VaR
Six Sigma and Balanced Scorecards for process improvement