Reality check for financial risk assessment tool concludes CWI-led project

One of the most promising tools for assessing financial risks proves to hold up after a thorough mathematical gauging. CWI researcher Ki Wai Chau developed a numerical analysis of complex algorithms that are developed to support financial risk management. His method provides a reality check for those algorithms, paving the way for future applications.

Publication date: 22-01-2020

One of the most promising tools for assessing financial risks proves to hold up after a thorough mathematical gauging. CWI researcher Ki Wai Chau developed a numerical analysis of complex algorithms that are developed to support financial risk management. His method provides a reality check for those algorithms, paving the way for future applications.

In the wake of the previous global financial crisis, financial industries are increasingly required to adopt advanced risk management strategies in their business. The risks that any financial business or institution is faced with, can be very diverse. Interest and exchange rates may fluctuate unexpectedly, operating results could suddenly drop, counterparties to transaction may go into default, and high-impact events such as Brexit can develop much quicker than expected. The challenge is to estimate the level of any risk, as well as the possible financial losses associated with it, and to hedge against possible high losses.

Risks assessment tools
This has led to a growing demand for advanced tools to assess risks. Certain numerical tools, called backward stochastic differential equations (BSDEs), are regarded as very promising methods. However, as promising as they are, putting these tools into industrial applications has proven to be very challenging, since they’re difficult to solve. CWI is at the forefront of developing solution methods for BSDEs, which should bring BSDEs closer to applications.

Solving BSDEs
At CWI's Scientific Computing group, PhD researcher Ki Wai Chau analysed various numerical methods that can be used to estimate the expectations that derive from financial risk calculations. Also, Chau developed a way to use these methods for solving BSDEs. This allowed him to conclude that BSDEs hold up in realistic scenarios.

Successful research project
Chau defended his PhD thesis at the Delft University of Technology, supervised by prof. Kees Oosterlee. His PhD is the final chapter of the European Industrial Doctorates project Wakeupcall. Led by Oosterlee, Wakeupcall’s main goal was to develop risk management models and mathematical techniques that allow for a robust and sustainable banking environment.

The Wakeupcall team achieved numerous scientific accomplishments and hosted several international events. All six students in the Wakeupcall team have now successfully continued their career at either financial institutions or in academia.

Follow-up
Following the success of the Wakeupcall project, Oosterlee and colleagues have launched a new EU project called ABC-EU-XVA. This project aims to to address significant challenges arising from mathematical modelling and numerical computation in risk management, focusing valuation adjustments of financial contracts.

Next to CWI, the project includes researchers from Université Libre de Bruxelles, the University of Bologna, the University of A Coruña, and the Delft University of Technology. The industrial partners include key international players, like Belfius Bank (BE), Unipol Gruppo Spa (IT), Abanca Corporación Bancaria (ES), Banco Santander (ES), EY (NL) and Rabobank (NL).