Monday, May 31, 2010


As I predicted, with so much going on, I'm falling seriously behind with my blogging duties. But I have good excuses. After a gorgeous weekend dedicated to serious gardening and landscaping, I went to the Perimeter Institute today to serve as an external examiner for their PSI program (yes, the acronym makes up the Greek letter generally used to represent a wave function in quantum mechanics... they are clever that way). As I mentioned here, the Institute hosted a very successful workshop on the foundations of economics last year, and I'm always glad to see them involved in financial math, which was the subject of the essay I examined today, so thanks to John Berlinski for the invitation and for the ride to Waterloo.

I'll be back to Fields dedicated blogging tomorrow though.

Wednesday, May 26, 2010

Derivatives workshop: opening remarks

It is hard to believe, but we have arrived at the last workshop in our thematic program. I used my opening remarks on Monday to reminisce about the formation of the scientific committee for the workshop. Back in 2008 we already had Peter Carr, Darrell Duffie and Roger Lee as confirmed members (Rama Cont joined the group later that year), but still lacked a chair for the committee. I realized at the time that the broad scope for the workshop would make it a Bachelier Congress in miniature and decided to invite Lane Hughston, who together with Mark Davis was in the midst of organizing the 2008 congress in London, to take the role of chair of the scientific committee. I now joke that the expensive dinner (at Indigo on One Aldwych) that I used as a pretext to pose the invitation to him provided the best return on capital of my life, resulting in the spectacular array of speakers and participants that we have here this week.

I'll be using my commuting time in the train to review the talks day-by-day in the next few blog posts, but I apologize in advance if I fall a bit behind with the blogging, since there are just too many interesting interactions to be had this week.

Saturday, May 22, 2010

It's all about networking

The Workshop on Financial Networks and Risk Assessment took place at Fields this week as part of the Mitacs International Focus Period on Advances in Network Analysis and its Applications, following the Industrial-Academic Forum on Systemic Stability and Liquidity at the beginning of the week.
Back in 2009, when the cool thing was to hold summits, Mitacs organized a very stimulating event on systemic risk. It was at that point that Michael Lynch and I had the idea of organizing a joint event for both the upcoming Mitacs Focus period and Fields thematic program.

Our idea was to mimic the format for the summit itself, with concentrated research talks by academics and practitioners sparking off the discussion during the first two days in the Forum, followed by a more relaxed set of mini-courses, lectures and problem solving sessions during the three days workshop. I think we managed to convey the idea to the organizing committees of the two activities, who in turn did a great job in producing the end result we saw this week. Talk about the power of networking !

Wednesday, May 19, 2010

Systemic risk forum

We held the long awaited Forum on Systemic Stability and Liquidity this week at Fields. This was one of the activities that I was looking forward to the most in the thematic program, not only because it relates directly to the financial crises, but because it brought to Fields a diverse group of speakers, including some renowned economists, who are hard to find in typical mathematics conference.

Wei Xiong opened the proceedings with a talk incorporating financing choices and diverse beliefs into asset pricing and associated booms and crashes. This naturally delighted me because of my recent obsession with finding mathematical formulations for the Minsky story about asset bubbles and fragility of financial systems.

Jennifer Huang followed with a simple model explaining market failures in liquidity provision which allowed her to analyze the effects of several different policy interventions, most of them used in the aftermath of the crisis of 2008.

Rama Cont concluded the morning with his network model for banking systems and the corresponding measures for the default impact of any single bank and the associated systemic risk that it poses on the network. I was particularly interested in this talk, since one of my PhD students, Omneia Ismail, is currently working on an agent-based extension of this model.

Hao Zhou, the first of three speakers from the Fed, presented an intriguing way of measuring systemic risk by constructing a hypothetical insurance contract covering the losses of the entire banking sector. Although such contract would never be sold by any individual insurance company (for obvious reasons), the marginal contribution of each bank to the hypothetical premium is an indication of the risk it poses to the system.

In a different direction, Kay Giesecke proposed to link systemic risk directly with the probability of default of a large fraction of the financial sector and suggested a clever two-step maximum likelihood method to estimate this probability from default events occurring in the entire economy.

The first day ended with a panel discussion featuring Aaron Brown, Michael Gordy, Joseph Langsam and David Rowe and provided unique insights on key factors leading up to the crisis and a lively discussion on policy, legislation and general banking practices.

Frank Milne started the second day with a tour de force on roughly sixty years of attempts to introduce illiquidity into traditional economic models (read general equilibrium a la Arrow-Debreu). He knows all the tricks in this trade, and anyone working in this area should bounce their ideas off him to make sure that they are neither reinventing the wheel or moving towards a dead end. What got him really excited towards the end of his talk was the idea of financial war games, which sits squarely within the agent-based models for financial systems that Omneia and I are working on.

Viral Acharya proposed yet any way to measure systemic risk based on the degree of under-capitalization of a financial institute. This leads to the concept of Marginal Expected Shortfall, which I still think should have the words "systemic" in it, just so that they can properly call it a MESS (this was my piece of advice to Robert Engle when I heard him talk about it in the econometrics workshop last month

Itay Goldstein presented a game-theoretical model for credit freezes, where the lending actions of banks reinforce the probability of successful outcomes for the loans of other banks. He showed how this can lead to different equilibria: efficient no-lending (when the economic outlook is sufficiently bad that no bank would recover their loans, efficient lending (when the economic outlook is so good that all loans are fully recovered no matter what) and an interesting regime where both lending and no-lending are possible equilibria, and credit can freeze due to lack of coordination between banks. He then analyze the effect of different policy interventions according to this model.

The last two talks of the forum were dedicated to the concept of risk appetite. Jon Danielsson provided the theoretical background by explaining that risk appetite is the result of risk preferences and beliefs under constraints, and therefore can very wildly in the market as constraints move from non-biding to biding and back again. Erkko Etula provided empirical evidence for exactly this type of phenomenon using constraints in the funding liquidity for US financial intermediaries. The associated changes in the corresponding risk appetite can then be used to forecast changes in exchange rate between the US dollars and most major currencies.

Monday, May 10, 2010

Back in town

I was in Paris last week, hence the lack of posting in this blog. Here is what I missed:

- a talk by Eddie Ng in the visitors seminar series 

- the second week of lectures in Nizar Touzi's graduate course

- the crash of 2:40 in the NYSE. Ok, this didn't really have anything to do with our thematic program, or did it ? See what I wrote about algorithmic trading here and make up your own mind.

Saturday, May 1, 2010

How I became a quant

Don't worry, I didn't really become a quant - I'm still a poor math professor. But this was the title of a panel we had at Fields this Friday, organized jointly by the IAFE and our thematic program.

The panel was preceded by a Program Directors luncheon bringing together for the first time representatives from the local financial math programs and the major Canadian banks to discuss topics of common interest, such as curriculum, scope, duration and format of the different programs.

After the panel we held a Recruiters Reception, where students could network with potential employers in quantitative finance.

An altogether successful and productive day, not to mention that I got to share a ride to the airport with two of the panelists, Raphael Douady and Marco Avellaneda, who are among the most interesting people in this business.