CD Laboratory for Portfolio Risk Management

Advanced financial mathematical tools for financial risk management are developed. The applicability of the methods to be developed is analysed on the real financial market.

The chosen combination of academic and methodological basic research with application-oriented solution approaches allows the development of new mathematical methods for risk management. These are based on a variety of mathematical fields, such as statistics, numerics, simulation, but also on dependency modelling, stochastic analysis, functional analysis and the theory of stochastic processes.

In detail, four particularly important areas of risk are analysed and corresponding tools developed: credit and counterparty risk, market risk, operational risk and risk-based valuation.

The credit risk arises from the danger that a loan will not be repaid. If loans are summarised in portfolios, this risk must be assessed differently than for individual cases. Interdependencies between borrowers affect the credit risk of the portfolio. The effects of cumulative extreme events on the credit risk are therefore analysed and simulated. In addition to so-called recursive methods, methods based on importance sampling are also developed.

Market risk refers to the effects of volatile financial market prices on the value of securities. The increasing complexity of the financial markets is making it ever more difficult to calculate this risk. New simulation models are being developed, existing standard procedures optimised and the accuracy and flexibility of current interest rate structure models improved.

Operational risk arises as a result of errors as part of an organisation's normal business activities (wrong decisions, technical errors, etc.). Among other things, the possible total loss of a financial institution as well as the inflation rate and losses from its misjudgement are modelled here.

In the area of risk-based valuation, a programme is being developed that enables the valuation of financial products with a focus on their cash flows.

Together, the scientific methods developed offer numerous opportunities to break new innovative ground in the risk assessment of portfolios.