Research Area

The measurement of financial risks is still a major challenge to our understanding of the functioning of financial markets. It remains a challenge not only to market participants and market regulators, but also to academic research.

In the existing models for the quantification of financial risks and the valuation of various financial derivatives market incompleteness is taken into account only insufficiently. Often too simplistic models are used which neglect e.g. certain exogenous risk factors but also some endogenous risks that arise due to the various connections within the financial sector. Therefore, a main goal of the current research in quantitative finance is to better understand the existing economic risk factors and to develop quantitative models which take these into account. This task is important for the management of corporations on the one hand and for enhancing financial stability in the markets on the other hand.

The Department of Quantitative Finance is intensively working on the above mentioned problems. In the area of risk modelling various methods for the quantification of concentration risks in credit portfolios have been developed which are particularly important for creditors with less diversified portfolios.

Other works of the department focus on liquidity risk. Empirical research documents that one of the main reasons for the financial crisis of the last years was insufficient liquidity which stems from severe differences in the expiration dates of assets and liabilities of a corporation. Models for the quantification of default probabilities often neglect these risks. Recent research of the department combines the above mentioned research areas. In particular, micro prudential risks which can arise from the behaviour of creditors and the coordination problems among different obligors have been taken into account. Furthermore, the research of the department focuses also on certain macro prudential risk factors which arise e.g. from deviations in market liquidity or from contagion effects due to the interconnectedness of financial institutions in the financial systems. The quantification and reduction of these systemic risks is one of the main tasks of current banking supervision in their aim to enhance financial stability.

The research agenda of the department aims at illuminating our understanding of economic risk and at developing proper methods for the quantification of financial risks and the regulation of financial markets. The department is working in close cooperation with the Department of Mathematical Stochastics at the University of Freiburg as well as with various financial institutions in the Germany and abroad.





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