THE UNIVERSITY OF WISCONSIN-MILWAUKEE. Department of Economics. Banking and Finance: READING LIST

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1 905-syl-S11.doc THE UNIVERSITY OF WISCONSIN-MILWAUKEE Department of Economics Banking and Finance: Spring 2011 Professor: Hamid Mohtadi Office: 850 Bolton, hours: Wed, 2:30-4:00 and by appointment Phone: x READING LIST This course surveys major quantitative and regulatory themes in banking (BASEL II) and some key concepts in finance especially as they relate to banking. Parts of the course will be rather mathematical and involve tools from mathematical finance. These tools will be derived when needed (e.g., ito s Lemma). Specific chapters or sections from the following books and federal supervisory documents will be selectively covered. In addition, a number of research papers and articles will be included. Full reference to these papers and articles is found when they are actually cited. The course draws on the most up to date research and regulatory developments in these areas, and also on my 2-year practical experience as a vice president for risk management at a large domestic bank while on leave from UWM ( ). This course will have the style of a doctoral seminar and will be interactive. Following the coverage of some key conceptual and regulatory issues, student will choose a topic for a research oriented term paper and will present that in the classroom. There will also be a midterm exam and a few problem sets in addition to the term paper. Books Coles SG An Introduction to Statistical Modeling of Extreme Values. Springer Verlag: London. Dixit, Avinash and Robert Pindyck. Investments Under Uncertainty 1993 Hennie van Greuning and Sonja Brajovic Bratanovic Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Financial Risk Management (World Bank Monograph Series) 2009 Hull, John. Options, Futures and other Derivatives. 7 th Edition Taleb, Nassim Nicholas, The Black Swan The Impact of the Highly Improbable. Random House,

2 Federal Supervisory, Consultative and Technical Documents Bank for International Settlements (BIS), Basel Committee on Banking Supervision Consultative document Proposed revisions to the Basel II market risk framework (July 2008) Bank for International Settlements (BIS), Basel Committee on Banking Supervision, Background note on LGD quantification, December 6, 2004 Bank for International Settlements (BIS), Basel Committee on Banking Supervision, Studies on the Validation of Internal Rating Systems Working Paper No. 14, Revised version, May 2005 Department of the Treasury, Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Federal Register, Rules and Regulations, Vol. 72, No. 235 / Friday, December 7, 2007 (referred to as the Final Rule) Department of the Treasury, Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advanced Capital Framework 2008 Note: Information on Economics Department policies on participation by students with disabilities, accommodation for religious observations, academic conduct, complaint procedure, grade appeal procedures and other standing policies (e.g., sexual harassment, incomplete) is available in the main office of Economics Department, Bolton

3 Course Outline I. BANKING Background Why banks need Capital? Analyzing Banking Risk, Ch. 6, Section 6.1 pp Capital and Basel. Analyzing Banking Risk, Ch. 6, Section 6.2 pp Supply of Capital. Analyzing Banking Risk, Ch. 6, Section 6.3 pp Demand for Capital. Analyzing Banking Risk The Risk Weighted Capital Approach, Ch. 6, page 130 and Section pp How to Measure Risk Weighted Capital (Regulation in Detail): Conceptual Overview and Value at Risk. Final Rule pp Overview of the Final Rule. Final Rule pp Credit Risk Exposure at Default (EAD), Loss Given Default (LGD), Probability of Default (PD) and Risk Weighted Assets Final Rule pp BIS, Background note on LGD quantification BIS, Studies on the Validation of Internal Rating Systems Jacobs, Michael An Empirical Study of Exposure at Default Office of the Comptroller of the Currency, June 2008 Mohtadi, H. and M. Naza. Systemic Risk and Heavy Tails: The Case of Banks Loan Portfolio. (Under review) University of Wisconsin Working Paper

4 Liquidity Risk Overview Mohtadi, H. Liquidity Risk: A Brief Survey US Bank White Paper and UWM Working Paper Liquidity Risk and Capital Adequacy OCC, FED, FDIC, Supervisory Guidance (page 12-15) Measurement and Models Bangia, Anil, Francis X. Diebold, Til Schuermann and John D. Stroughair Modeling Liquidity Risk, With Implications for Traditional Market Risk Measurement and Management Wahrton School Working Paper 99-06, Jarrow, Robert and Philip Protter (2005) Liquidity Risk and Risk Measure Computation Cornell University Working paper Systemic Effects Brunnermeier, Markus and Lasse Heje Pedersen Market Liquidity and Funding Liquidity RFS Advance Access published December 10, 2008 and Princeton University and New York University working paper Brunnermeier, Markus Deciphering the Liquidity and Credit Crunch Journal of Economic Perspectives, 2009 Volume 23 (1): (also NBER Working Paper No December 2008) Market Risk Regulatory Guidance BIS, Proposed revisions to the Basel II market risk framework Measurement See Value at Risk under Finance 4

5 II. FINANCE Stochastic Processes Stochastic Processes and Ito s Lemma Investments Under Uncertainty. Ch. 3, pp Wiener Processes and Ito s Lemma Options and Futures., Ch. 12, pp The Black-Scholes-Merton Model Options and Futures., Ch. 13, pp Interest Rates Interest rate Futures Options and Futures., Ch. 6, pp Interest rate Swaps Options and Futures., Ch. 7, pp Value at Risk Value at Risk Options and Futures., Ch. 20, pp Select Topics Extreme Risks, Heavy Tails and Black Swans An Introduction to Statistical Modeling of Extreme Values. Ch. 3, pp and Ch. 4 pp The Black Swan (skim the entire book. I will cover select parts) Statistics of Rare events: Financial and Non-Financial Mohtadi, H. and M. Naza. Systemic Risk and Heavy Tails: The Case of Banks Loan Portfolio. (Under review) University of Wisconsin Working Paper

6 Gabaix, X., Gopikrishnan, P., Plerou, V., Stanley. Quantifying and Understanding the Economics of Large Financial Movements, Journal of Economic Dynamics & Control, vol. 32(1), 2008, p Mohtadi, H. and A. Murshid "The Risk of Catastrophic Terrorism: An Extreme Value Approach." Journal of Applied Econometrics 2009, 24: Mohtadi, H. and A. Murshid Risk Analysis of Chemical, Biological, or Radionuclear Threats: Implications for Food Security (with Antu Murshid), Risk Analysis 2009, 29: Mohtadi, H. and A. Murshid Developing Risk Metrics to Estimate Risks of Catastrophic Biological and Bioterrorist Events: Applications to the Food Industry in Wiley Handbook of Science and Engineering for Homeland Security, John G. Voeller (ed.) John Wiley & Sons 2009 (New York, NY). 6