Actuarial, Financial and Quantitative Risk Management

Actuarial, Financial and Quantitative Risk Management
Chair: Jose Garrido (Concordia University)
Organizer: Ruodo Wang (University of Waterloo)

ADAM METZLER, Wilfrid Laurier University
State Dependent Correlations in Linear Factor Models  [PDF]

For better or worse, linear factor models are used to model correlations in many risk management applications. Shortcomings of the basic linear model are well known, and several variants have been proposed to alleviate specific problems. Unfortunately very few allow for state-dependence in correlations, and (as we show) failure to include this feature can substantially underestimate a wide variety of risk measures. In this talk we present an empirically motivated model that allows for state-dependent correlations in linear factor models and contains both the simple mixture and so-called Random Factor Loading models as special cases. We derive a number of tractable asymptotic approximations and illustrate that state-dependence in correlations effectively precludes moderate default rates, exacerbating both good times and bad.

JIANDONG REN, Western University
Parameter Estimation of Discrete Multivariate Phase-Type Distributions  [PDF]

This paper considers parameter estimation of a class of discrete multivariate phase-type distributions (DMPH). Such discrete phase-type distributions are based on discrete Markov chains with marked transitions introduced by He and Neuts (1998) and are a generalization of the discrete univariate phase-type distributions. Properties of the DMPHs are presented. An EM algorithm is developed for estimating the parameters for DMPHs. A number of numerical examples are provided to address some interesting parameter selection issues and to show possible applications of DMPHs.

CHENGGUO WENG, University of Waterloo
Optimal Reinsurance Design  [PDF]

Reinsurance can be an effective risk management technique for an insurer. An appropriate use of reinsurance reduces the adverse risk exposure of an insurer and improves the overall viability of the underlying business. The use of reinsurance, on the other hand, incurs additional cost to the insurer in the form of reinsurance premium. This implies that an insurer is faced with a classical tradeoff between risk spreading and risk retaining. An optimal reinsurance design aims at striking a balance between these two conflicting objectives. In this talk, I will introduce some of my recent works on this topic.