Computational Finance and Financial Engineering Second R-Rmetrics User and Developer Workshop June 28th–July 2nd 2009

7/28/2019 Computational Finance and Financial Engineering Second R-Rmetrics User and Developer Workshop June 28thJuly 2nd 2009

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Computational Finance and Financial Engineering

Second R/Rmetrics User and Developer WorkshopJ une 28thJ uly 2nd

2009, Meielisalp, Lake Thune, Switzerland

Workshop Booklet

Welcome

Abstracts

www.rmetrics.org


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List of Sponsors

www.ethz.ch

www.finance.ch

www.revolution-computing.com

Marcel Fehr


3/16

Welcome

Welcome to the Third Meielisalp Workshop on "Computational Finance andFinancial Engineering" together with the Third R/Rmetrics User andDeveloper Workshop. We are very glad that you found the time to come tothe Meielisalp, and for the many of you traveling from Chicago, Bombay,Auckland and various places in Europe, hope that your journey was not tooarduous.

With the Meielisalp Workshop we have no desire to add another workshopto the existing zoo of meetings and conferences. We want to find a new

forum where not only the "older and experienced" speakers present theirresearch and work. Instead we wish to give "younger" people, the students,the chance to attend, to give a presentation and to engage in discussionswith participants from academia and industry. The environment for thisworkshop should be a place a little bit aside from the mainstreamconference of venues, and we are happy to have found this beautiful placehere at the Meielisalp.

About 50 participants are attending the workshop, and the mixture, asplanned, is quite heterogeneous. One third are from academia, and anotherthird from the software and financial industries, including banks. Importantly,

one third of the participants are students, and some of them are presentingtalks about their Masters or PhD thesis work.

Last, but not least, we have to thank our sponsors who made this eventpossible: ETH Zurich, Finance Online Zurich, Revolution Computing NewHaven, and Marcel Fehr. Thanks also to Yohan Chalabi and Andrew Ellis forhelping us in the local organization.

We wish you an interesting workshop with many inspiring and stimulatingdiscussions.

Diethelm Wrtz and David Scott


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Commoditymod

ellinginR

PhilippErb

D

avidLuthi

May29,20

09

Abstract

Stochasticfactormodelswereintrod

ucedinGibsonandSchwartz

(1990)andSchwartz(1997)todescribe

commodity-linkedsecurities.

Wepresentthetwo-factormodelanditsimplementationintheR-

packageschwartz97.Asopposedtoacom

modityterm-structuremodel,

theSchwartz97two-factormodelexplicitlygivesthespotpricedynam-

icstogetherwiththedynamicsoftheconvenienceyield.Ageometric

Brownianmotionisimposedforthespot

priceprocessandanOrnstein-

Uhlenbeckprocessfortheconveniencey

ield,whichentersthedriftof

thespotpriceprocess.

Eventhoughthetwo-factormodelhasthedrawbackoflittleflexi-

bilityconcerningtheforwardcurve,we

believethatitisareasonable

trade-offbetweenstatisticaltractability

andsophistication.

Sincethetwo-factormodeladmitsa

naffinerepresentationitcan

becastinstatespaceform.Inthistalkwewilldescribethefitting

procedurebasedonfuturesdataandth

eKalmanfilteraswellasthe

pricingoffuturesandEuropeanoptionsonfuturesaccordingtoMil-

tersenandSchwartz(1998).Finally,we

presentanempiricalstudyof

themodelsperformance.

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MultivariateCopulaatwork

MatthiasFischer

D

epartmentofStatisticsandEconometrics

U

niversityofErlangen-Nrnberg,Germany


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8/16

OptimizationMeth

odsinFinance

P.

Henaff

BankofAmeric

a,

London

and

ENST-Bretagne,Brest

1June2009

Abstract

QuantitativeFinanceisarichapplicationdomainforoptimization

methods.Oneimmediatelythinksaboutportfoliooptimizationandthe

entireindustrythathasdevelopedfromt

heworkpioneeredbyH.Markowitz.

Inthistalk,

however,

Ifocusonperhapslesserknown,

butnevertheless

powerfulapplicationsofoptimizationmethodstoquantitativefinance.

Theseareasmostlyrelatetothepricingandhedgingofcomplexinstru-

ments.

Illfocusonthreeareas:

thevaluationofrealoptions,specificallythevaluationofindustrial

assetssuchasaNAturalGasstoragefacility.

theuseofstochasticoptimization

forpricingandhedgingfinancial

derivatives,and

theproblemofvaluationilliquidas

sets,usinghistoricalinformation.

Foreachtopic,weattempttoframe

theproblemandshowthecontri-

butionthatoptimizationmethodshave

provided.

Thetalkweavesprac-

ticalexamplesandtheory.

Foreachtop

ic,wepresentreal-lifenumerical

illustrations.

1

Risk-NeutralModelingofEmissionAllowancePrice

s

and

OptionValuation

JuriHinz

NationalUniversityofSingapore

DepartmentofMathematics,

FacultyofScience

The

existence

ofmandatory

emission

trading

schemes

in

Europeand

theUS,andtheincreasedliquidityoftradingon

futurescontr

actsonCO_

2emissionsallowances,lednatu

rally

tothenextstepinthedevelopmentofthesemarkets:these

futurescontractsarenow

usedasunderliersforavib

rant

derivativema

rket.Inthispaper,wegivearigorousanalysis

ofa

simplerisk-n

eutralreduced-form

modelforallowance

futures

prices,demo

nstrateitscalibrationtohistoricaldata,ands

how

howtoprice

Europeancalloptionswrittenonfuturescontracts.

Wealsoelab

orateonanR-implementationofouroptionpricing

technique.


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10/16

Introducingforeach

anditerators

BryanW.Le

wis

REvolutionCom

puting

NewHave

n

Thenewforeachanditeratorspackagesintro

ducelistcomprehensionsand

anabstractiteratorclasstotheRlanguage.T

hepackagesalsoprovidean

abstractinterfacetoparallel/distributedprogrammingwithRindependently

ofaspecificparallelimplementation.Wediscussthenewpackagesandtheir

applicationtocommonperformancebottlenecksinreal-worldproblems,

includingparameteroptimizationandothere

xamples.

RecentFinancialCrisis

Alook,perspective&lessons

MahendraMehta

NeuralTechSoft,Mumbai,India

AbstractIntherecentp

ast,theworldhasseenunprecedentedfinancialcr

isisandanear

collapseofworldsmajorfinancialgiants.Manylargeinstitutionshavebeenspendingtimein

IntensiveCareUnit(ICU)

andcouldonlysurvivewiththehelpofoxygen(whichcameinthe

formofmassivebailoutp

ackagefromtherespectiveGovernments).Afew

largeesteemed

investmentbankscouldnotevensurviveinthewakeoffinancialTsunami.

Someofthese

institutionshavebeenope

rationalformanydecadesandhavehadastonishingtrackrecord

andenviousprofitabilityinpast.

Thetalkanalyzessomeo

ftheimportantreasonsoftherecentfinancialcrisisandputsin

perspectivesomeimportantissueswhichwouldconfrontfinancialindustry,currentstructure

ofthefinancialmarkets,

regulation,professionalsandothersassociatedwiththefinancial

industry&services.


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ProblemsandSolutions

forPortfolioRisk

BrianPetersonandPeterCarl

Braverock,Ch

icago

Manycommonriskmeasuresaremostappro

priateforuseonsingleinstruments

orGaussiannormaldistributions.

Thiswork

shop-stylepresentationwillreview

thehistoryofriskmeasuresinfinance,followedbytheevolutionofmethodsfor

determiningriskoninstrumentswithnon-normaldistributions,extendthese

ideastoexaminingportfolioriskmetrics,an

dlookatriskbudgetingforportfolio

optimization.

Portfolioriskmetricsshouldideallybeabletodecomposetheunivariateriskof

aportfolioreturntothecontributionofthatr

iskofeachindividualelementof

theportfolio.

Ideallysuchameasurewouldbeacoherentriskmeasureper

Artzner,wouldbeagoodoutofsamplepredictorofrisk,andwouldbeusefulex

anteinportfoliooptimizationorriskbudgeti

ng.

Wewillexamineportfolio

extensionstoVaRandES/CVaRthathaveth

esepropertiesaswellasrobustness

todataspikesandnon-normality.Itwillalso

reviewpossibleusesofsuch

measuresinportfoliooptimizationandriskb

udgetconstraints.

BrianPetersonandPeterCarl(notatMeielis

alp)aretheauthorsoftheR

packagePerformanceAnalytics.Theyhavev

ariouslyworkedatinvestment

banks,hedgefunds,andproprietarytradingfirms.Theyhaverecentlypublished

(withKrisBoudt,K.U.

Leuven,notatMeielisalp)academicpapersinRISK,t

he

JournalofRisk,ComputationalFinance,and

otherlocations.

PackageDevelopmentinR:

Implem

entingGO-GARCHModels

Dr.BernhardPfaff

GlobalQuantitativeEquity

InvescoAssetManagementDeutschlandGmbH

Inthistutorial

thepackagedevelopmentanddesignof

GO-GARCHm

odelsinRisdemonstrated.Hereby,the

neccessarysteps

involved

from

academic

paperto

designandwo

rkingRcodearebespoken.Thetouched

topicsinclude

ITrequirements,designofclassedand

methods

as

wellas

some

guidances

to

make

the

packageavaila

bletoothers.


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13/16

MarkowitzandTwoManagers

KlausRheinb

erger

ResearchCenterProcessand

ProductEngineering

FachhochschuleVorar

lberg,

Austria

WeconsiderthestandardMarkowitzportfoliooptimizationproblem

[1]inthesitu-

ationthattwomanagersoptimizeportfoliosundertherestrictionthattheymayonly

investinsubsetsofthemarket.Forthispurpose,thesetofriskyassetsisseparated

intotwodisjointsubsets.Incasethatarisklessassetisconsidered,itisincluded

inbothsubsets.Thetwomanagersoptimalp

ortfoliosarecombinedaffinelytoone

ormoreso-calledmasterportfolios.Incontrast,theoptimalportfolioofallassets

(optimizedbyonemanager)iscalledtheglobalportfolio.

Ourmainresultsare:

1.Incaseofmaximizationofquadraticutility,themasterportfoliosmaynotreach

theglobalportfolioeveninanuncorrelatedassetseparation,i.e.,whentheco-

variancematrixisblockdiagonalwithrespecttotheseparation.

2.Incaseofuncorrelatedandonlyriskyassetsubsets,everyglobalportfoliocanbe

attainedbyappropriateoptimizationint

heassetsubsetsofthetwomanagers

(usingforexampleexpectedutilitymaximizationorvarianceminimizationat

fixedreturn)andbyappropriatecombinationoftheiroptimalportfoliostoa

masterportfolio.

3.Incaseofuncorrelatedriskyassetsubsetsextendedwitharisklessasset,every

global1-fundcanbeattainedbytwomanagersbyappropriatecombinationof

their1-funds.

Conditionswhentheconversesof2and3aretrue,willbegiveninthepresentation.

Thecomputationsandfiguresofexamplesareg

eneratedusingR[2].

References

[1]DavidG.Luenberger,InvestmentScience,O

xfordUniversityPress,1997

[2]http://www.r-project.org/

1

RealTimeTradinginR

An

exampleusingtheIBrokerspackage

JeffreyA.

Ryan

[email protected]

Chicago,

IllinoisUSA

PresentedatR/Rmetrics2009

June2

8July2Meielisalp,

LakeThune,Switzerland

Whilemanyalgorithmictradingsystemsmakeuseofmultipleprogramm

ing

languages,amoreidealsolutioninvolvesusingasinglelanguagetomanage

the

entireprocess.T

hissinglelanguagemustbeabletohandleoneormoreincom

ing

datafeeds,make

tradedecisionsbasedonthisreal-timedata,andcontinuously

processordersandorder-relatedinformation.

Theadvantagesanddisadvantagestoasingle-languagesolutioninRwillbe

explored,aswellasanoverviewofthetechnicalchallengesanddesignconsider-

ationswithrespecttoasynchronousconnections,single-threadedprocesses,

and

interprettedlang

uages.

Finally,aco

mpletetradingexampleusingtheIBrokers

packagewillbe

covered.Frome

stablishingconnections,torequestinglivedataandexecuting

ordersfromwith

inR,theflexibilityofthelanguagewillbeexploredtohighlight

thepowerofmak

ingRthesingle-languagetoolofchoiceforalgorithmictrad

ing.

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Documents

Computational Finance and Financial Engineering Second R-Rmetrics User and Developer Workshop June 28th–July 2nd 2009