1. QUANTITATIVE MODELLING OF OPERATIONAL RISK (Prof. Dr. Embrechts )
In this part of the course we give a critical assessment of the current Basel II framework for the Advanced Measurement Approach (AMA) to the quantitative modelling of operational risk.
In particular, various approaches used in industry will be discussed. Special emphasis will be given to the use of Extreme Value Theory, Copulas, g-and-h Distributions and Insurance Analytics. The stylised facts of operational risk data will be summarised, and the consequences for the several possible alternatives for the Loss Distribution Approach (LDA) will be given.
Besides a short introduction to relevant EVT and copula based techniques, there will be a discussion of heavy-tailed models, VaR and its alternatives, scaling, aggregation methodology and diversification effects.
2. CREDIT DERIVATIVES AND DYNAMIC CREDIT RISK MODELS (Prof. Dr. Frey)
In this part of the course we discuss recent developments in the rapidly growing market for credit derivatives. Special emphasis will be given to correlation products such as CDOs.
In order to set the stage we briefly introduce the most important products and discuss the pricing of a credit default swap (CDS) in reduced-form models. A detailed analysis of CDO pricing in the market-standard factor copula models (eg. the Gauss copula model) including issues such as the implied correlation skew, sensitivities and hedging or simulation techniques will be given.
The stream closes with a brief summary of alternative models which are currently being developed.
Reference: Our book (see the official webpage http://press.princeton.edu/titles/8056.html)