IEF 217a: Computer Simulations and Risk Assessment

1) Blake LeBaron

2) blebaron@brandeis.edu

3) www.brandeis.edu/~blebaron/classes/ief217a

4) TA: Ritirupa Samanta

Introduction

1) Description

2) Prerequisites

3) Readings

4) Computer issues

5) Grading

6) Outline

What is this course?

1) Computer

2) Probability/Statistics

3) Finance

4) Psychology/Philosophy

Topics

1) Computational tools

2) Probability basics

3) Finance applications1) Value-at-Risk

2) Stress testing

3) Multiperiod investments

4) Dynamic trading strategies

5) Liquidity risk

Prerequisites

1) Required:1) IEF 205 (basic finance knowledge)2) Or Econ 171 for BA/MA students

2) Recommended:1) Probability/Statistics2) Computer skills (enthusiasm)

3) Who can take this course?1) 2nd year MA, MBAi2) MSF, BA/MA3) 2nd year and beyond Ph.D

Readings/Software

1) Books1) Jorion, Value at Risk

2) Sigmon and Davis, Matlab Primer

2) Papers1) Brandeis Electronic Reserves

2) Password “gambles”

3) Software1) Matlab (personal version)

2) Internet (email/web)

Computer Issues

1) Personal Computer (Windows)

2) Matlab student edition (cd rom: bookstore)

3) Can also use Sachar machines

4) Programs from course website

Grading

1) Problem sets (25%)

2) Midterm exam (30%)

3) Group project (20%)

4) Take home final (25%)

Course Outline

1) Introduction and philosophy2) Tools3) Risk measures4) Financial meltdowns5) Value-at-Risk6) VaR methods7) VaR extensions8) Stress testing9) Time, dynamics, and uncertainty10) More finance examples11) Advanced monte-carlo methods12) Liquidity risk

Introduction and philosophy

1) Basic ideas of probability2) Quantifying risky situations

1) Expected values/St. Petersburg paradox2) Variance3) Histograms/distributions

3) Further questions about risk1) Frank Knight: Risk versus uncertainty2) Ellsberg paradox

4) Computing power and risk assessment

Tools

1) The Matlab computer language2) Probability basics3) Sampling, monte-carlo, and bootstrapping

Risk Measures

1) Histograms2) Variance3) Beta4) Value-at-Risk (VaR)5) Expected utility6) Time and risk7) Chaos and complexity8) Types of risk

Financial Meltdowns

Value-at-Risk

1) Computing VaR2) Interpreting VaR3) Time scaling4) Regulation and VaR5) Estimation errors

VaR Methods

1) Delta normal2) Historical simulation3) Monte-carlo4) Bootstrap

VaR Extensions

1) Testing VaR2) VaR and portfolios3) VaR and changing volatility

Stress Testing

Time, Dynamics, and Uncertainty

1) Multiperiod investments2) Retirement problems3) Dynamic trading strategies

Further Financial Examples

1) Short positions and VaR2) Exotic option pricing3) Portfolio selection

Final Topics

1) Advanced monte-carlo tools2) Liquidity risk