ResearchTalks Vol. 3 - Risk modelling: Is finance compatible with mathematic…

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ResearchTalks Vol. 3 - Risk modelling: Is finance compatible with mathematic…

  1. 1. Institut de Statistique, Biostatistique et Sciences Actuarielles RISK MODELLING: Is Finance compatible with Mathematics ? Prof. Pierre DEVOLDER UCL
  2. 2. Evolution of Interest rates (UK) 2
  3. 3. STORY OF A BELGIAN STOCK … 3
  4. 4. « Prediction is very difficult, especiallyabout the future. … » Niels BOHR ( 1885- 1962) 4
  5. 5. Everything started with games …. 5
  6. 6. Blaise PASCAL Pierre de FERMAT 6
  7. 7. A GOOD EXERCISE FOR TONIGHT….You throw 2 dices and you add the valuesobtainedWhat is the most likely result ? 7
  8. 8. Insurance has been the next step 8
  9. 9. GAMES INSURANCE LAW OF LARGE NUMBERS PROBABILITY THEORY 9
  10. 10. Risk .. Or … uncertainty ???To preserve the distinction betweenmeasurable uncertainty and anunmeasurable one we may use the term“risk” for the former and the term“uncertainty” for the latter. ( Knight, 1921 ) 10
  11. 11. Risk and financeDoes financial risk really exist ?? 11
  12. 12. RATING AGENCY After 1 year After 6 years AAA 0% 0,34% AA+ 0,01% 0,49% AA 0,03% 0,66% A 0,07% 1,06% BBB+ 0,12% 1,74% BBB- 0,42% 4,94% BB+ 0,75% 10,65%junk B- 11,69% 35,58% 12
  13. 13. Risk ManagementBASEL 2 / SOLVENCY 2 :Probability of ruin less than 0.5% … ??? … 200 years of consistent experience ??? 13
  14. 14. The Gaussian LegendThe normal distribution .. is not a religion … 14
  15. 15. The danger of correlation 15
  16. 16. Finance and Neural Networks 16
  17. 17. Finance and Quantum Mechanics 17
  18. 18. You have to take risks. We will only understand the miracle of life fully when we allow the unexpected to happen. Paulo COELHO 18

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