Financial Optimization for Risk Management

Short course for Bank of Thailand, Dec. 2015 ProfessorStavrosA.ZENIOSUniversityofCyprusandtheWhartonFinancialInstitutionsCenter

INTRODUCTIONThisshortcoursewillfamiliarizestudentswithstate-of-the-artoptimizationmodelsastheyapply to financial risk management. Special focus will be placed on planning underuncertaintyusingscenariooptimizationandmulti-periodstochasticprogrammingmodels.Wewillalsodiscussapplicationstocreditriskportfoliomanagementandinternationalassetallocation,andtheintegrationofhedgingdecisionsintheoptimalassetallocation.

• CourseReadingMaterial:S.A.Zenios,PracticalFinancialOptimization:Decisionmakingforfinancialengineers,BlackwellPublishing,Cambridge,2007.

A.Consiglio,S.NielsenandS.A.Zenios,PracticalFinancialOptimization:AlibraryofGAMSmodels,WileyFinance,2009.(Softwareon-linehttp://www.gams.de/finlib/libhtml/)

• AdditionalRecommendedbooksandpapers:

Zenios,S.A.andW.T.Ziemba(editors),HandbookofAssetandLiabilityManagement,Vol.1(Theory)andVol.2(Casestudies).HandbooksinFinance,ElsevierScience,2006,2007.Mulvey, J.M. and S.A. Zenios, Capturing the correlations of fixed income securities,ManagementScience,Vol.40,No.10(Oct.,1994),pp.1329-1342

Consiglio, A. and S.A. Zenios, ``Risk Management Optimization for Sovereign DebtRestructuring",TheWhartonSchoolFinancialInstitutionsCentreWorkingPaperNo.14-10,August2014.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2478380Consiglio, A. and S.A. Zenios, Greek debt sustainability: the devil is in the tails, Vox.euCEPR Policy Poartal, August 2015. http://www.voxeu.org/article/greek-debt-sustainability-devil-tails

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LECTURE SCHEDULE

Day 1 0. Introductiontoriskmanagement

- Enterprise-wideriskmanagement- Riskmeasuresforfixedincome,equitiesandcoherentriskmeasures- Convergenceofriskmeasuresforfixedincomeandequities:capturingcorrelations- Scenariosandholdingperiodreturns- Courseoverview

1. Mean-varianceoptimization

- Canonicalformulationsandextensions- Incorporatingliabilities- FactorModelsofReturn

2. FactorImmunizationforCorporateBonds 3. Scenariooptimization

- Mean-absolutedeviation- Trackingmodels- Regretmodels- Expectedutilityoptimization

2nd Day

4. Optimizationofcoherentriskmeasures:CVaR5. Multi-periodportfoliooptimization

- Scenariotrees- Stochasticdedication- Stochasticprogramming- Stochasticprogrammingforportfoliooptimization

6. Indexfunds

- Strategicassetallocation- Tacticalassetallocation- Integratedindexationmodels

7. FinancialProductsNovelties(omitted)

- CallableBonds- MBS- Contingentdebt

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3rd Day

8. ScenarioGeneration

- FrameworkandMethodologies- ConstructingEventTrees

9. Internationalassetallocation

- Indexationmodels- Hedgingstrategies- Scenariogeneration

10. CorporateBondPortfolios

- CreditRiskSecurities- IntegratingCreditandMarketRisk- OptimizingtherightRiskmetric- IndexFundsforCorporateBondPortfolio- TrackingCorporateBondIndex

11. OverviewofFINLIB.Alibraryoffinancialoptimizationmodels