TopQuants 2013 workshop spans broad range of topics – pricing models, risk management, and model risk

The successful TopQuants autumn workshop 2013 has taken place on the 7th of November, attracting over 130 quantitative professionals. The workshop was actually oversubscribed, with more than 40 interested people on the waiting list who could unfortunately not be admitted.

This was the second TopQuants workshop to be held at the ABN Amro Dialogues House in Amsterdam. The location supports well the by now established format of the TopQuants autumn workshops, consisting of two rounds of five parallel sessions each. The size of between 20 and 50 participants per session encourages questions from the audience and promotes open discussions, as several attendees positively remarked. The presentations covered a broad range of topics and were given by speakers from banks, pension funds, audit as well as the Dutch central bank and academia.

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Participants were welcomed by Tim Mexner and Tomas Nord (both ABN Amro) for TopQuants and Ebbe Negenman, Head of the ABN Amro Model Validation department, who sponsored the event together with the Dialogues House. Being a mathematician himself, Ebbe expressed his appreciation for the contributions made by quants in finance. Instead of a long speech, he gave the audience a little logical puzzle to solve.

The presentation by Artem Tsvetkov (ING) on Wrong-way risk in FX, cross-currency basis, and consistent multi-currency curve framework in the Dialogues House forum was attended by over 50 participants. Artem did not only explain how to consistently build a multi-currency multi-curve environment to reflect today’s market reality. He also suggested approaches towards explaining some of the striking features of the post-2008 markets by linking cross-currency basis spreads and counterparty defaults but also “defaults of currencies”.

Kees Oosterlee (CWI, TU Delft) introduced the workshop participants to recent research in this talk on The Stochastic Grid Bundling Method for Pricing and Hedging Financial Contracts. This approach allows the pricing of options with early exercise features and thus provides an alternative to Longstaff-Schwartz – so far the standard choice among industry practitioners.

Variable annuities are undoubtedly a focus of current quant interest and were the topic of even two presentations at this workshop. In his talk Variable Annuities – observations on valuation and risk management, David Schrager (ING) presented a model to efficiently deal with policyholder behaviour, in particular with early surrender. Perhaps not surprisingly, David emphasized the similarities with mortgage prepayment models. A different perspective on these products was provided by Roald Waaijer and Dimphy Hermans (Deloitte) in their presentation on Replication of a class of variable annuities for the purpose of economic capital calculations. The speakers’ focus was to replicate variable annuities using vanilla options or, more sophisticatedly, involving path-dependent options, with a view to using this replicating portfolio in an economic capital context in order to speed up calculations.

Over the past years, Dutch pension funds have not only made front-page news, but have arguably also triggered more interest among quants. In his presentation Monitoring market risk in a pension fund, Tony de Graaf (PGGM) provided an overview of a number of risk monitoring techniques currently applied at these institutions.

While credit and market risk models have been core fields for quant work for a long time, operational risk has attracted increasing quant interest only more recently. In his talk Lévy copulas – Basic ideas and a new estimation method, Joris van Velsen (ABN Amro) provided an introduction to their mathematical concepts and considered their application to operational risk modelling.

Big Data is another topic of growing popularity in the quant community. In his presentation On Big Data applications in financial services, Igor Stojković (ABN Amro) reviewed some general approaches in the field and considered applications to quant topics such as credit risk, market risk, and trading. Igor indicated that retail banks can use big data to gain a competitive edge. For those quants interested in the techniques used in the big data field, the speaker  recommended this book which can be downloaded free of charge.

Despite all the efforts spent on devising new and improving existing models, quants are also aware of the shortcomings and limitations of the models currently in use – although media coverage may sometimes suggest otherwise. To the professional in the field it does therefore not come as a surprise that model risk and model uncertainty were also prominently addressed during this TopQuants workshop. Paul de Beus (EY) considered model uncertainty in his talk entitled DVOC – Delta Value of Changes for assessing models and usage in analyses of change. Paul proposes to assess acceptable value ranges by looking at first order sensitivities to key model parameters.

Robert Daniels (Capstone Financial Industry) discussed how we interpret their outcome in Stress tests – a theoretical exercise or do they really work? He also provided a critical examination of the stress test framework of the European Banking Authority. In the context of stress tests, Robert stressed the importance of understanding which events trigger a crisis and of looking not only at their direct impact, but also at second and higher order effects.

The increased regulatory attention on the financial sector since the recent crisis is an undisputable fact. It is therefore particularly interesting to quantitative finance professionals working in the industry how their regulators think about model risk. Frans de Weert (DNB) provides his opinion on this during his presentation on The importance of different perspectives and implicit assumptions in models. Frans considered the interplay of model uncertainty, capital management, and decision making.

The two rounds of parallel sessions were followed by an informal networking part, with complimentary drinks and a dinner buffet.

TopQuants acknowledge the generous support for this workshop received from ABN Amro. We also thank all speakers for the contributions.

Participants will receive an electronic questionnaire. Their feedback will be taken into account in the organization of future TopQuants events. Watch the TopQuants webpage for more information about our activities in 2014!