new game for financial market 金融市场新游戏 & new game field for risk management...

New Game for Financial Market金融市场新游戏

& New Game Field for Risk Management

风险管理新环境

Yimin Yang ( 杨一民 )Vice President & Sr. Manager

Risk Analytics

2

介绍 PNC It used to be a bank, but now ( 曾经叫做银行 ,但现在是… )

PNC Bank15th largestUS Bank

$70 Billion Asset

BlackRockOne of the best &fastest growing

Investment Company on Wall Street$300 Billion

Asset Under Mgnt

PFPCBrokerage

& Processing

Capital Market

Investment

……

PNC Financial Service Group(PNC 金融服务集团 )

3

介绍 Risk Analytics

Risk Analytics (Centralized Risk Mngt Team)

CRO

Capital Allocation资本配置

Reserve Adequacy准备金

Asset Mngt (ALCO)

资产管理

Portfolio Mngt组合管理

PNC Board董事会报告

more ……

PNCCommittees主要管理委

员会

CEO President CCOCFO

Decision-Making Support 决策分析辅助

Credit Risk$50 Billion

OperationalRisk

Basel II

MarketRisk

Investment

BusinessLines

Risk Management 风险管理

TradingAnalytics

4

Now, back to our topics

言归正传

5

两个热门话题Two Current Hot Topics

The Game( 新游戏 ) Credit Risk, more specifically ( 信用风险 )

Credit Derivatives ( 信用衍生品 )

The Game Field ( 新环境 ) New Regulatory Environment, more specifically ( 新监管要求 )

Basel II ( 巴塞尔协议 )

6

Credit Risk &Credit Derivatives

信用风险与信用衍生产品

7

What is Credit Derivative什么是信用衍生品

What is Credit Risk ( 什么是信用风险 ) The risk that a company is unable/unwilling to make

promised payment ( 不能按时支付 ) What are Credit Derivatives ( 什么是信用衍生品 ) Financial products that price & transfer credit risk ( 用于转移信用风险的金融产品 )

Credit Default Swap (CDS), Asset Swap Cash Flow Collateral Debt Obligation (CDO), Synthetic CDO Nth-to-default baskets, Single Tranche CDO, CDO Option Standardized Index Tranches, CDO Squared

8

Example: Credit Default Swap (CDS) 例一

Most of Credit Derivatives are CDS (70%) ( 市场主要产品 ) It is similar to buy/sell insurance for default( 类似破产保险 )

Protection Buyer买保方

Protection Seller卖保方

Underlying Asset(GE Bond, for example)

持有风险资产比如 GE债券

Regular % Fee 定期付费 (保险费 )

(Libor + Spread)

Payment IF the underlying asset

defaults当 GE发生破产时 ,付损失

费

9

Example: (Collateralized Debt Obligation( CDO) 例二

CDO is Today’s market favorite( 市场宠儿) A portfolio is tranched to absorb losses. Investors can invest in different tranches

Equity Tranche$10mm

Mazzanine$15mm

Senior Tranche$35mm

Super Senior$40mm

$100mm Asset(A portfolio of

Corp. bond,e.g.)1 亿风险资产

Return=0.5%

Return=1.5%

Return=3%

Return=7%

10

Example: CDX.HY例三

Popular Dow Jones CDX.HY (Dow Jones 推出的CDS指数之一) 100 liquid BB/B-rated CDS ENTITIES, equally weighted. (一百家高风险公司组成)

Reset every 6 months 5 year is the most common maturity Over 20 industries

Standardized 6 Loss Tranches (六个标准断) 0-3% Equity, 3%-7%, 7%-10%, 10%-15%, 15%-30%, 30%-100%

Investors buy & trade these tranches, just like buying stocks or any other financial products (象一般投资一样买卖) HY stands for High-Yield (there is also CDX.IG for Investment Grade with 125 names) (Dow Jones还有其他指数)

11

Example: CDX.HY例三

30% ( 三十个公司破产 )

15% ( 十五个公司破产 )

10% ( 十个公司破产 )7.0% ( 七个公司破产 )3.0% ( 三个公司破产 )0.0% ( 没有公司破产 )

Each Tranche is traded at a different price ( 风险不同 ,定价不同 )

Equity Tranche (0%-3%) has the highest risk, therefore, highest return

Super Senior Tranche (30%-100%) offers the lowest return (spread)

12

Global Market( 全球市场 )

Estimated Global Credit Derivative Market(US$Billion)

0 180 350 586 893 13982191

3584

5088

6725

8363

10000

0

2000

4000

6000

8000

10000

12000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

13

Major Players( 主要运动队 )

Protection Buyers

51%

16%

16%

3%

7%6% 1%

Commercial Banks

Investment Banks

Hedge Funds

Corporates

Insurance

Mutual/Pension Funds

Other

Protection Sellers

38%

16%

15%

2%

20%

8% 1%

14

Key Drivers( 主要原因 )

Hedge Portfolio Risk( 风险抵消 ) Take Exposure in Credit Risk ( 投资信用风险 )

Enhance Profitability ( 增加回报 ) Improve Risk Management & Reduce

Regulatory Capital ( 风险与资本管理 ) Increase Asset & Liability Management

Capability ( 资产管理 ) Credit is now a TRADABLE asset ( 已成交易资产 )

15

Challenges To Financial Practitioners ( 主要的挑战 )

Understanding of Default Risk ( 深入了解违约风险 ) Default Probability Modeling( 违约率模型 ) Default Risk Pricing for various markets( 不同市场违约风险定价 )

Portfolio Management ( 组合管理 ) Correlation & Portfolio Loss Distribution( 相关性与损失分别 ) Risk Management & Capital Allocation( 风险管理与资本配置 ) Cross-Market Risk Hedging Techniques ( 跨越不同市场的风险分

化手段 )

16

Single name Default Modeling ( 单个公司违约率模型 )

Structural Model ( 结构性模型 ) Asset Value-Based Type: A firm will default if its asset value

falls below certain threshold CreditMetrics KMV

Reduced-Form Type Model ( 简化性模型 ) Intensity-based first-passage

Market Price (Risk Neutral Default Probability)-Based ( 市场价格性模型 )

CDS & Bond Spread

Statistical/Actuarial ( 统计性模型 ) Moody’s RiskCalc

17

Structural Model( 结构性模型 )

Asset Value-Based Model CreditMetrics

Asset follows a normal distribution with mean and standard deviation . Debt is assumed to be deterministic. The default probability is then

KMV Asset market value (not book value) follows a (lognormal) diffusion

process (Brownian process )

A A

A AD

AW

1 A A

A

DP

¥

AAAWA

Add dt

18


KMV This can be easily solved

To estimate the market value, one uses Merton’s view: Equity is a Call option on Asset with Debt as the strike

2

20

AA A A

T W T

AA DA e

2

0ln ( )1 2( )

D AAAA

A

T

TP

¥

E

EEEWE

Edd dt

19


KMV By Ito’s Lemma, we obtain

Another condition is added to solve the Call price (Equity)

KMV is very successful (it was sold to Moody’s last year for $220mm)

E

(i.e. and have the same random source)A EdW dW A E

E A AE E A

(=Market Price of Risk)A E

A E

r r

20

Reduced-Form Model( 简化性模型 )

First Passage Default Model: Default occurs when the Asset hits the Debt for the 1st time. That is, the default time and default probability

Intensity-based model: Conditional on any realization of the default intensity , the default process follows a Poisson arrival. If let be the information available up to time t, then

inf 0 : t tt A D

t

( ) Pr { } 1 ( )tetP t ob t E e

tg

1 ET

utud

P t T e 1t tg g

21

Reduced-Form Model( 简化性模型 )

Intensity-based model Mean reverting with jumps

Cox-Ingersoll-Ross Process (Affine process)

( )t t td k dt dJ

( )t t t td k dt dW ( ) ( ) ( ) 1 t

A t B tP t e ( )( ) ( )

1 tt T t T tP t T e

tg

22

Market Price Model( 市场价格性模型 )

Financial products such as Bond, CDS, Asset Swap, etc. contain substantial amount of information about (Risk Neutral) default probability of a company

Various Theoretical & Empirical models are trying to estimate Implied Default Probability by a market price (or vice versa)

CreditGrade, CreditEdge Spread = Risk Neutral Default Prob. + Liquidity(Size) Premium

= Function of Empirical & Market Price of Risk + Liquidity(Size) Premium

23

Statistical Model( 统计模型 )

Moody’s RiskCalc Based on Moody’s History A logistic model using 7-10 financial transformed ratios

Input Factor WeightNet Income/Assets 10%Net Income Growth 8%Interest Rate Coverage 8%Ret.Earnings/Assets 12%Liabilities/Assets 8%Cash/Assets 12%Quick Ratio 7%Assets 12%Sales Growth 12%Inventories/COGS 12%

Profitability

Capital Structure

Liquidity

24

Default Correlation Modeling ( 违约率相关度 )

Default Correlation Is Crucial To CDO

SeniorTranche

EquityTranche

Low Correlation

SeniorTranche

Loss Average

High Correlation

SeniorTranche

25


Correlation of default events of two firms is

Here and are default probabilities for the two firms Asset Value-Based Model: through asset correlation

To obtain asset correlation, it is very popular to use factor model

1 2

1 1 2 2

Joint default Probability

(1 ) (1 )

p p

p p p p

1p 2p

1 1 2 2Joint default Probability = Prob ,A D A D

26


Factor model example: ( and are standard normal dist).

The asset correlation = , the joint default prob

Intensity-Based Model: through correlation of intensities Intensity model example: the default times are given by

1 1 1 1 2 2 2 2 , A a A a 1, 2

1 2 a a

2

1 1 2 2 2

1 2

1

2

zD a z D a zdze

¥ ¥

=inf 0 : ( ) ( ) 0 1, 2i it N t N t i

i

27


Here is a Poisson Process with intensity The default correlation is then

Copula is becoming one of the most important methods for modeling correlation

What is a Copula? Suppose that and are marginal distributions for and . Let

be the joint distribution, then there is a function (copula) C such that

(t) iN i

1 2

1 2

2

( ) ( )

1

1 1

T T

T T

e e

e e

1 F 2 F1 X 2 X F

1 1 2 2 1 2 1 1 2 2Prob , ( , )= , ( ) X x X x F x x C F x F x

28


Using the copula for default time, the default correlation is

1 1 2 2 1 1 2 2

1 1 2 21 1 1 1 2 2 2 2

,( ), ( ) ( ) ( )

( )(1 ( )) ( )(1 ( ))

t tC p t p t p t p t

p t p t p t p t

29


In the pricing of CDX, correlation is the key The model is assumed to be homogenous, and the

correlation is assumed to be constant between all companies Market observed price for each tranche is inputted to the

model to solve an implied correlation. Depending on the way of estimating the accumulative losses for each tranche, one obtain

Implied Correlation: attempt to mimic the success of Implied Volatility for Option pricing

Base Correlation: is getting the market’s attention

30

The New Game Field

金融业面临一个新的环境

31

Major Reasons( 产生的主因 )

Significant Financial Losses & Failures ( 许多重大损失 )

Complex Financial Products, Operation & Organization ( 复杂的金融产品 ,运作与机构 )

Investors’ Concerns ( 投资者的顾虑 ) Regulatory Disciplines( 监管政策 )

32

Basel II( 巴塞尔协议 ) Bank for International Settlement is the Central Bank of

Central Banks( 国际清算银行是中央银行的中央银行 ) Its Basel Committee Sets Up a Framework/Standard for

Risk Capital Requirement for All Financial Institutions – BASEL II Accord ( 其 BASEL委员会为所有金融机构制定了资本适足率框架与标准 )

Many European Banks & Banks in Developed Countries have decided to Follow Advanced Approach ( 大多数发达国家银行将采用最高级标准 )

Major US Banks Will also Follow Advanced Approach( 美国的大型银行会采用最高级标准 )

Non Basel-compliant banks will be disadvantaged( 不遵守者处于不利地位 )

33

Key Requirements( 巴塞尔协议主旨 )

Risk-Based Capital for Financial Risks( 风险为依据的资本要求 ) Credit Risk (1988 Accord) ( 信用风险 ) Market Risk (1996 Amendment) ( 市场风险 ) Operational Risk (New Basel Accord) ( 运营风险 )

Three Pillars( 三大支柱 ) Minimum Capital Requirement ( 最低资本要求 ) Supervisory Review Process ( 监管与审阅程序 ) Market Disciplines & Risk Disclosures ( 市场纪律与风险

公开 )

34

Key Requirements( 巴塞尔协议主旨 )

Capital Ratio( 资本比率 )

Type of Capital( 三类资本 ) Tier 1 Core( 核心资本 ) Tier 2 Supplementary( 次级资本 ) Tier 3 For market risk only( 只对部分市场风险可用 )

On-Balance Sheet & Off-Balance Sheet Risk Charges( 表内及表外业务风险折算 )

Total CapitalCapital Ratio 8%

Credit Risk + Market Risk + Operational Risk

35

Basel Approaches( 巴塞尔协议方法 )

Goal( 目的 ) To quantify all risks using appropriate models, with recognition of risk

diversification & mitigation techniques ( 用模型来量化一切风险 ,同时接纳风险分散及转移技术 )

Credit Risk(信用风险 ) Standardized Approach( 标准方法 )

Standard Risk Weight External Rating Based

Foundation Internal Rating Based Approach ( 基本内部评级方法 ) Internal Rating System Use of Probability of Default (PD)

Advanced Internal Rating Based Approach ( 高级内部评级方法 ) Internal Rating System Use of PD, Loss Given Default (LGD) and Exposure At Default (EAD)

36


Market Risk( 市场风险 ) Standardized Approach ( 标准方法 )

Market Charges (Risk Weights) for Interest Rate Risk Maturity Zones Netting within bands

Market Charges for Equity Risk Net Position

Market Charges for Currency Risk Use of maximum of total long or short positions

Market Charges for Commodity Netting but not complete offset

Market Charges for Option Simplified Approach Intermediate Approach Internal models Approach

37


Market Risk( 市场风险 ) Internal Models Approach ( 内部模型高级方法 )

Relies on Internal Risk Management System Qualitative Requirements

Independent Risk Control Unit Back-testing Senior Management Involvement Integration of risk models with day-to-day management Use of Limits Stress Testing Compliance

38


Operational Risk( 运营风险 ) Basic Indicator Approach ( 基本指标方法 )

A single indicator as a proxy for firm’s exposure to operational risk o Gross Income

Standardized Approach ( 标准方法 ) Distinguishes between business lines and business volume Standardized loss factors (beta) for business lines

Internal Measurement Approach ( 内部度量高级方法 ) Bottom-Up Approach Key Issue: Internal Loss Data Requirement (5 Year of History)

o Probability of Loss Evento Loss Severityo Exposure Indicator

39

Basel Implementation( 巴塞尔协议落实 )

Deadline( 截止日 ) Jan. 1, 2007 (2007 年一月一日 )

Or a later date ( 或许更晚 )

Cost(费用 ) $100mm for each large US Bank ( 平均一亿美元 ) Human Resources ( 人力资源 )

Risk Managers & Internal Controls Risk Research & Analytics

Information Systems ( 信息系统 ) Data Support Hardware & Software

40

Math Tools For Op. Risk( 运营风险的数学方法 )

A Significant Challenge(巨大的挑战 ) In Particular when less/no data available

Methods Considered(试用中的方法 ) Frequency Models

Poisson,Binomial, Negative Binomial,Geometric, Hypergeometric, etc. Correlation is a problem?

Severity Models Heavy tail distributions

Lognormal,Pareto, Weibull, etc

Extreme Value Theory GEV Distribution

41

Math Tools For Op. Risk( 运营风险的数学方法 )

Value-at-Risk (VaR) Tail distribution Expected Shortfall

Stochastic Process Markov Process,Renewal Process,etc.

Bayesian Techniques Linear Causal Models

Regression Models Factor Models Discriminant Analysis

Risk Scores

Non-linear Models Neural Networks/Bayesian Networks Fuzzy Logic

new game for financial market 金融市场新游戏 & new game field for risk management...

Documents