IEF 217a: Computer Simulations and Risk Assessment

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IEF 217a Computer Simulations and Risk Assessment

• Blake LeBaron
• blebaron_at_brandeis.edu
• www.brandeis.edu/blebaron/classes/ief217a
• TA Ritirupa Samanta

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Introduction

• Description
• Prerequisites
• Readings
• Computer issues
• Grading
• Outline

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What is this course?

• Computer
• Probability/Statistics
• Finance
• Psychology/Philosophy

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Topics

• Computational tools
• Probability basics
• Finance applications
• Value-at-Risk
• Stress testing
• Multiperiod investments
• Dynamic trading strategies
• Liquidity risk

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Prerequisites

• Required
• IEF 205 (basic finance knowledge)
• Or Econ 171 for BA/MA students
• Recommended
• Probability/Statistics
• Computer skills (enthusiasm)
• Who can take this course?
• 2nd year MA, MBAi
• MSF, BA/MA
• 2nd year and beyond Ph.D

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Readings/Software

• Books
• Jorion, Value at Risk
• Sigmon and Davis, Matlab Primer
• Papers
• Brandeis Electronic Reserves
• Password gambles
• Software
• Matlab (personal version)
• Internet (email/web)

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Computer Issues

• Personal Computer (Windows)
• Matlab student edition (cd rom bookstore)
• Can also use Sachar machines
• Programs from course website

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Grading

• Problem sets (25)
• Midterm exam (30)
• Group project (20)
• Take home final (25)

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Course Outline

• Introduction and philosophy
• Tools
• Risk measures
• Financial meltdowns
• Value-at-Risk
• VaR methods
• VaR extensions
• Stress testing
• Time, dynamics, and uncertainty
• More finance examples
• Advanced monte-carlo methods
• Liquidity risk

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Introduction and philosophy

• Basic ideas of probability
• Quantifying risky situations
• Expected values/St. Petersburg paradox
• Variance
• Histograms/distributions
• Further questions about risk
• Frank Knight Risk versus uncertainty
• Ellsberg paradox
• Computing power and risk assessment

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Tools

• The Matlab computer language
• Probability basics
• Sampling, monte-carlo, and bootstrapping

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Risk Measures

• Histograms
• Variance
• Beta
• Value-at-Risk (VaR)
• Expected utility
• Time and risk
• Chaos and complexity
• Types of risk

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Financial Meltdowns
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Value-at-Risk

• Computing VaR
• Interpreting VaR
• Time scaling
• Regulation and VaR
• Estimation errors

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VaR Methods

• Delta normal
• Historical simulation
• Monte-carlo
• Bootstrap

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VaR Extensions

• Testing VaR
• VaR and portfolios
• VaR and changing volatility

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Stress Testing
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Time, Dynamics, and Uncertainty

• Multiperiod investments
• Retirement problems
• Dynamic trading strategies

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Further Financial Examples

• Short positions and VaR
• Exotic option pricing
• Portfolio selection

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Final Topics

• Advanced monte-carlo tools
• Liquidity risk