From March 17th-19th, the Department of Economics conducted the Fifth Spring School in Risk Management, Finance, and Insurance.
“It’s all that the young can do for the old, to shock them and keep them up to date.” With this quotation from George Bernard Shaw, special guest Hannes Chopra—the General Director of Sberbank Insurance Company LLC—opened the 5th Spring School in Risk Management, Insurance, and Finance. Mr. Chopra described the general problems facing the Russian insurance market and spoke to participants about how insurance and other services might look in the future. “Mass-personalization,” the “share-economy,” and “digitalization” will soon transform the markets that practically every business has dealings with. Mr. Chopra calls these changes “dramatic.”
Dominique Beckers, a professor at the Katholieke Universiteit Leuven in Belgium, preferred to call the changes “remarkable.” In the first half of his basic course professor Beckers familiarized the audience with methods for stress-testing the pension system, spoke about quantitative risk assessments of capital, and the methodologies for obtaining such assessments for pension funds as conducted by the EIOPA (European Insurance and Occupational Pension Authority).
Thanks to these lectures, participants came to better understand the practical side of risk assessment—the process by which economists attempt to answer various questions concerning the future: What will happen in different market scenarios? How will pension funds respond to increases in life expectancy? How do they assess the risks inherent to this or any scenario?
The second half of the day was devoted to a reckoning of legal rights and information disclosure in communications between pension funds and the entities participating in pension schemes (investors). Like the earlier session, this part of the talk was replete with examples from EIOPA practices. In his conclusion, professor Beckers stressed the need for the presence of a reasonable “pension strategy for the future,” as well as the important role of scholars studying pension systems.
Within the framework of the lecture “Risk Measurement: Principles and Recent Developments,” Roger Laeven described the main principles of risk assessment theory. In addition to discussing theoretical foundations, Laeven gave clear examples from the field of insurance. The professor’s speech was presented as a bridge between the applied and theoretical parts of the science, which made his report extremely interesting for those whose work is somehow related to risk assessment.
At the core of the presentation was the question of the insufficient application of existing theoretical knowledge in the field or risk assessment. During his report, Laeven showed how important such knowledge can be when it comes to practice. Having begun with the famous St. Petersburg paradox, Laeven spoke about the law of large numbers and its roles in risk theory.
In terms of task optimization, Laeven described how the distribution of risk between economic agents could reduce the probability of the onset of adverse events. Special attention was paid to the attitude of agents toward risk in cases when it comes to risk transfer. Part of the presentation was devoted to uncertainty regarding risks caused by the inability to accurately determine the probability distribution function.
Professor Laeven also spoke about approaches to measuring risk, having defined function classes that could be used toward this end. In supporting theoretical conceptions with economic interpretations, Laeven elaborated on the challenge of choosing an optimal portfolio under conditions of uncertainty, as well as the problem of solving this task within the framework of advanced speculation.
The School concluded with a presentation by Oleg Rusakov, a professor at St. Petersburg State University. The lecture was devoted to finance, and specifically to “temporal dependence in financial models.” He placed “philosophical” questions of terminology at the forefront. He discussed the concepts of risk measurement, probability, stochastic independence, and noise—a difficult concept for mathematicians. In this regard Rusakov recalled how in his youth he met with the academician Kolmogorov, and how he viewed the concept of probability. Based on quotes alternating between William Feller and the works of Anatoly Skorokhod, Rusakov convinced the audience that it is ultimately possible to define the essence of basic concepts.
Professor Rusakov presented an extensive classification system of random processes that includes 21 items. In the building of financial models, the Wiener process, the Orstein-Uhlenbeck process, the Lévy process, random walk, the Poisson process, and various modifications of these processes all play important roles.
The Poisson distribution is frequently encountered in practice. One famous historical use of the distribution is the example of an annual estimate of the number of Prussian cavalry soldiers accidentally killed by horses’ hooves.
When creating a financial model, we are faced with the concept of model risk. This type of risk is generated by three main components: a problem in the data, assessment, or use of models. The last part of the presentation dealt with higher-level concepts, such as functional limit theory, random projections, the case of inhomogeneity, and gamma-distributed random intensity. In the closing arguments, several examples of actual analysis of financial markets were given.
Authors: Peter Promegger, Maxime Kochemasov, Dmitry Orlov