Quantitative Finance and the Credit Crisis

Michael Dempster

This article from the European Research Consortium in Informatics and Mathematics (ERCIM) News (July 2009) defends the role of quantitative finance in the current credit crisis

Retire Comfortably?

Michael Dempster and Elena Medova

Pension systems are in crisis, but new products to support lifestyle advice over a lifetime are already available. This article from Financial World (2007) describes iALM, our state of the art Individual Asset Liability Management software, that can help with such advice

Individual Asset Liability Management

Elena Medova, James Murphy, Andrew Owen and Kasim Rehman

Individual financial planning is being revolutionized by the application of stochastic optimization techniques to personal wealth management. This article from the October 2008 edition of Quantitative Finance describes our cutting-edge personal financial planning tool, iALM. The paper describes the methodology of our approach and demonstrates the applicability of our tool to individual lifetime planning

Managing Guarantees

M.A. Dempster, M. Germano, E.A. Medova, M.I. Reitbergen, F. Sandrini and M. Scrowston

Changing attitudes towards risk have seen a growth in demand for guaranteed products, offering limited liability but access to potentially higher returns through exposure to risky assets. This article, from the Journal of Portfolio Management (Vol. 32.2, Winter 2006), analyzes the optimal strategic asset allocation for a closed-end guaranteed return fund over its lifetime using the techniques of dynamic stochastic optimization

Designing Minimum Guaranteed Return Funds

M.A. Dempster, M. Germano, E.A. Medova, M.I. Reitbergen, F. Sandrini and M. Scrowston

In recent years there has been a significant growth of investment products aimed at attracting investors who are worried about the downside potential of the financial markets. This paper from Quantitative Finance (Vol. 7.2, April 2007) introduces a dynamic stochastic optimization model for the design of such products

Empirical Copulas for CDO Tranche Pricing Using Relative Entropy

M.A. Dempster, E.A. Medova and S.W. Yang

In this paper published in the International Journal of Theoretical and Applied Finance in June 2007 we show how to construct a minimum entropy empirical copula for use in CDO tranche pricing that is as close as possible to the industry standard Gaussian copula whilst still ensuring a close fit to market tranche quotes. This approach performs noticeably better than the correlation approach in pricing non-standard tranches

Banking Capital and Operational Risks: Comparative Analysis of Regulatory Approaches for a Bank

E.A. Medova and P. Berg-Yuen

Capital allocation for operational risks in a major European bank is studied in this paper, which appeared in the Journal of Financial Transformation (Vol. 26) in July 2009. It is shown that implementing the Basel II proposal underestimates the risks, that the bank is actually allocating too much operational risk capital, but that using extreme value theory covers the risks without misallocating the Bank's capital

Risk Profiling Defined Benefit Pension Schemes

M.A. Dempster, M. Germano, E.A. Medova, J.K. Murphy, D. Ryan and F. Sandrini

Recent market turbulence, falling valuations of equity and property and lower long-term bond yields have again highlighted the problems of pension fund deficits. In this article, we present a new type of solution for defined benefit pension schemes. The approach we adopt uses Monte Carlo generation of asset returns, asset prices, and liabilities of a defined benefit pension scheme over a wide range of economic conditions. We employ dynamic stochastic optimization to determine the optimal asset allocation and employer contribution rates that will enable the scheme to achieve a desired funding ratio within a given time horizon while respecting the trustees' risk appetite.