ORIE 5650

Quantitative Methods of Financial Risk Management

Course Description

Course information provided by the Courses of Study 2023-2024.

A historical perspective of market risk measurement including the Markowitz, CAPM and APT models and of insurance risk management, a description of the Value-at-Risk approach and an overview of VaR variants and extensions such as delta-VaR, CVaR and more generally distorsion risk measures, and a description of the qualitative approach of risk management by different companies. The course surveys methods for evaluating risk and consider multivariate methods for evaluating portfolios requiring copula tools which have become popular. Topics in credit risk: methods for determining default probabilities and company ratings based on financial ratios, and approaches to measuring credit risk which can be roughly divided into structural models and reduced-form models; first to default products and impact of correlation. Topics in insurance: pensions and life insurance, property and casualty insurance. Topics in finance: correlation of extremes, Herd index and systemic risk. Topics for environmental risks: flood risk, hurricane risk, weather derivatives and cat-bonds. Topics in energy: extremes and nuclear risk, energy supply issues, river network dam management. Regulations aspects (Basel II-III for banks and Solvency II for the insurance industry) and internal risk models for banks and insurance companies. Issues about concrete implementation of extreme value theory for regulation. Introduction to economic capital and economic capital allocation, and to competition issues in insurance and between old and new energies. Case studies and concrete examples of quantitative risk management issues and applications to financial, insurance, energy and environmental sectors. Participation of Chief Risk Officers of some companies to one or two sessions.

When Offered Spring.

Prerequisites/Corequisites Prerequisite: ORIE 3500.

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