Certainty in an uncertain world



Advanced financial thought

Publications for download

Lifecycle goal achievement of portfolio volatility reduction?

M A H Dempster, Dwayne Kloppers, Elena Medova, Igor Osmolovskiy & Philipp Ustinov

This paper published in Journal of Portfolio Management in 2016 is concerned with the use of currently available technology to provide individuals, financial advisors and pension fund financial planners with detailed prospective financial plans tailored to an individual's financial goals and obligations

Benoit B. Mandelbrot (1924-2010)

M.A.H. Dempster

This is a tribute to Benoit Mandelbrot which appeared in Quantitative Finance (Volume 11.2, February 2011) by the Editor-in-Chief

The Bankers' New Clothes

M.A.H. Dempster

Review of the book by Anat Amati and Martin Hellwig

Quantitative Finance and the Credit Crisis

Michael Dempster

This article from the European Research Consortium in Informatics and Mathematics (ERCIM) News (July 2009) defends the role of quantitative finance in the credit crisis

Retire Comfortably?

Michael Dempster and Elena Medova

Pension systems are in crisis, but new products to support lifestyle advice over a lifetime are already available. This article from Financial World (2007) describes iALM, our state of the art Individual Asset Liability Management software, that can help with such advice

Individual Asset Liability Management

Elena Medova, James Murphy, Andrew Owen and Kasim Rehman

Individual financial planning is being revolutionized by the application of stochastic optimization techniques to personal wealth management. This article from the October 2008 edition of Quantitative Finance describes our cutting-edge personal financial planning tool, iALM. The paper describes the methodology of our approach and demonstrates the applicability of our tool to individual lifetime planning

Planning for Retirement: Asset Liability Management for Individuals

M.A.H. Dempster and E.A. Medova

This paper, which appeared in the Asset Liability Management Handbook, G. Mitra and K. Schwaiger (eds.), Palgrave Macmillan, 2011, describes the UK iALM system for support of lifestyle planning through lifelong savings and asset allocation. The exposition is directed to a broad audience avoiding mathematical and technical details and illustrates the creation of financial plans for a middle class UK household

Asset Liability Management for Individual Households

M.A.H. Dempster and E.A. Medova

This paper describes technical details of the UK iALM system. It was presented to a Sessional Meeting of the UK Institute of Actuaries in Staple Inn Hall, London and appeared in the British Actuarial Journal (Volume 16.2, July 2011), with the discussion of the presentation at the meeting (discussion available here)

Managing Guarantees

M.A.H. Dempster, M. Germano, E.A. Medova, M.I. Reitbergen, F. Sandrini and M. Scrowston

Changing attitudes towards risk have seen a growth in demand for guaranteed products, offering limited liability but access to potentially higher returns through exposure to risky assets. This article, from the Journal of Portfolio Management (Vol. 32.2, Winter 2006), analyzes the optimal strategic asset allocation for a closed-end guaranteed return fund over its lifetime using the techniques of dynamic stochastic optimization

Designing Minimum Guaranteed Return Funds

M.A.H. Dempster, M. Germano, E.A. Medova, M.I. Reitbergen, F. Sandrini and M. Scrowston

In recent years there has been a significant growth of investment products aimed at attracting investors who are worried about the downside potential of the financial markets. This paper from Quantitative Finance (Vol. 7.2, April 2007) introduces a dynamic stochastic optimization model for the design of such products

Risk Profiling Defined Benefit Pension Schemes

M.A.H. Dempster, M. Germano, E.A. Medova, J.K. Murphy, D. Ryan and F. Sandrini

Recent market turbulence, falling valuations of equity and property and lower long-term bond yields have again highlighted the problems of pension fund deficits. In this article, from Quantitative Fund Management (Chapman & Hall/CRC, 2008), we present a new type of solution for defined benefit pension schemes. The approach we adopt uses Monte Carlo generation of asset returns, asset prices, and liabilities of a defined benefit pension scheme over a wide range of economic conditions. We employ dynamic stochastic optimization to determine the optimal asset allocation and employer contribution rates that will enable the scheme to achieve a desired funding ratio within a given time horizon while respecting the trustees' risk appetite.

Empirical Copulas for CDO Tranche Pricing Using Relative Entropy

M.A.H. Dempster, E.A. Medova and S.W. Yang

In this paper published in the International Journal of Theoretical and Applied Finance in June 2007 we show how to construct a minimum entropy empirical copula for use in CDO tranche pricing that is as close as possible to the industry standard Gaussian copula whilst still ensuring a close fit to market tranche quotes. This approach performs noticeably better than the correlation approach in pricing non-standard tranches

Wavelet Optimized Valuation of Financial Derivatives

B. Carton de Wiart and M.A.H. Dempster

This article discusses a robust 3-dimensional PDE solution method based on interpolation wavelets to specify a sparse irregular finite difference domain. Tested on parabolic quasi-linear PDEs for valuing a variety of derivatives it is shown to halve the computing time of standard techniques. The paper appeared in the International Journal of Theoretical and Applied Finances (Volume 14.7, November 2011)

Banking Capital and Operational Risks: Comparative Analysis of Regulatory Approaches for a Bank

E.A. Medova and P. Berg-Yuen

Capital allocation for operational risks in a major European bank is studied in this paper, which appeared in the Journal of Financial Transformation (Vol. 26) in July 2009. It is shown that implementing the Basel II proposal underestimates the risks, that the bank is actually allocating too much operational risk capital, but that using extreme value theory covers the risks without misallocating the Bank's capital

Long-term Interest Rates and Consol Bond Valuation

M.A.H. Dempster, E.A. Medova and M. Villaverde

OTC structured derivatives, including hybrid Tier 1 regulatory bank capital instruments, have been sold to investors before the crisis with somewhat arbitrary pricing. In this article a three factor term structure model is applied to the pricing of structured floating rate callable consol bonds issued by many financial institutions to augment Tier 1 capital prior to the crisis.

Regulating Complex Derivatives: Can the Opaque be Made Transparent?

Michael Dempster, Elena Medova and Julian Roberts

This article, which appeared in the Journal of Banking Regulation (Volume 12.4, July 2011), discusses the general legal principles governing the relationships between banks issuing over-the-counter structured derivatives to non-bank clients. It discusses a representative sample of recent failed deals from the client's viewpoint, all the subject of current negotiation or litigation with banks in Germany

Estimating Exponential Affine Models With Correlated Measurement Errors: Applications to Fixed Income and Commodities

M.A.H. Dempster and K. Tang

This paper describes and tests corrections to the usual measurement and specification of measurement equations for latent factor models for yield and futures curves in state space form. It appeared in the Journal of Banking and Finance (Volume 35, March 2011)