In the risk-neutral world, all investments grow, on average, at the risk-free rate. In reality, risky positions earn a premium depending on their sensitivities to market factors. For instance, a call on an equity index is seen to earn a premium while a put is seen to pay a premium.

Thus, while risk-neutral dynamics are ideal for producing valuations and hedge ratios, risk must be assessed with reference to real-world dynamics which incorporate such risk premia, and this has immediate consequences for the generation of economic scenarios by insurance companies.

On April 2, 2014, featured speaker Dr. Andrew McClelland, Financial Engineer at Numerix, discussed practical issues in real-world economic scenario generation. Dr. McClelland examined the implications of incorporating risk premia for equity scenarios, discussed estimation issues associated with identification of risk premia parameters, and showed how the American Monte Carlo approach can be used to generate real-world risk profiles.

Dr. McClelland’s presentation covered:

  • Real-world vs. risk-neutral comparison
  • Pricing and risk examples using real-world and risk-neutral assumptions
  • Primer on stochastic volatility
    • Heston vs. Black Scholes
  • How to recover/estimate risk premia and how it differs from calibration
  • Time series analysis to estimate risk premia
  • Simulating real-world dynamics
  • Using American Monte Carlo to produce real-world risk profiles
    • Similarities to Monte Carlo VaR and Counterparty Credit Risk computations
Attendance is complimentary, Registration is required.

Featured Numerix Speakers:

Andrew McClelland, PhD, Financial Engineering, Numerix
Andrew McClelland’s work at Numerix focuses on counterparty credit risk issues including valuation adjustments and counterparty exposure production for structured products, and numerical methods for efficient production of risk profiles under the real-world measure. Dr. McClelland earned his PhD in finance at the Queensland University of Technology for a thesis on financial econometrics. He considered markets exhibiting crash feedback, option pricing for such markets, and parameter estimation for such markets using particle filtering methods. His work has been published in the Journal of Banking and Finance and the Journal of Econometrics.

Moderator: Jim Jockle, Chief Marketing Officer
Mr. Jockle leads the company's global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.

Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody's Investors Service.

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