Georg Bol Svetlozar T. Rachev Reinhold Würth (Editors) Risk Assessment. Decisions in Banking and Finance. Physica-Verlag. A Springer Company

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1 Risk Assessment

2 Georg Bol Svetlozar T. Rachev Reinhold Würth (Editors) Risk Assessment Decisions in Banking and Finance Physica-Verlag A Springer Company

3 Editors Prof. Dr. Georg Bol Prof. Dr. Svetlozar T. Rachev University of Karlsruhe (TH) Kollegium am Schloss, Geb Karlsruhe Germany Prof. Dr. h.c. mult. Reinhold Würth Reinhold-Wü rth-str Künzelsau-Gaisbach Germany ISBN e-isbn DOI: / Contributions to Economics ISSN Library of Congress Control Number: Physica-Verlag Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permissions for use must always be obtained from Physica-Verlag. Violations are liable for prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg Printed on acid-free paper springer.com

4 Preface On April 5 7, 2006, the 9th Econometric Workshop with the title Risk Assessment: Decisions in Banking and Finance was held at the University of Karlsruhe (TH), Germany. The workshop was organized by the Institute for Statistics and Mathematical Economics and the Adolf Würth GmbH & Co.KG, Künzelsau. More than 20 invited speakers and 70 participants attended the workshop. The papers presented at the conference dealt with new approaches and solutions in the field of risk assessment and management, covering all types of risk (i.e., market risk, credit risk, and operational risk). This volume includes 12 of the papers presented at the workshop. We are delighted with the range of papers, especially from practitioners. Many people have contributed to the success of the workshop: Sebastian Kring and Sven Klussmeier did the major part of organizing the workshop. The organizational skills of Markus Höchstötter, Wei Sun, Theda Schmidt, Nadja Safronova, and Aksana Hurynovich proved indispensable. Jens Büchele und Lyuben Atanasov were responsible for the technical infrastructure while Thomas Plum prepared the design for this volume. All of their help is very much appreciated. The organization committee wishes also to thank the School of Economics and Business Engineering, Vice-Dean Professor Dr. Christof Weinhardt, and Professor Dr. Frank Fabozzi (Yale University s School of Management) for their cooperation. Last but certainly not least we thank Professor Dr. h.c. Reinhold Würth and the Adolf Würth GmbH & Ko.KG for their generous support of this conference. Karlsruhe, April 2008 Georg Bol Svetlozar T. Rachev Reinhold Würth

5 Contents Automotive Finance: The Case for an Industry-Specific Approach to Risk Management Christian Diekmann... 1 Evidence on Time-Varying Factor Models for Equity Portfolio Construction Markus Ebner and Thorsten Neumann Time Dependent Relative Risk Aversion Enzo Giacomini, Michael Handel, and Wolfgang K. Härdle Portfolio Selection with Common Correlation Mixture Models Markus Haas and Stefan Mittnik A New Tempered Stable Distribution and Its Application to Finance Young Shin Kim, Svetlozar T. Rachev, Michele Leonardo Bianchi, and Frank J. Fabozzi Estimation of α-stable Sub-Gaussian Distributions for Asset Returns Sebastian Kring, Svetlozar T. Rachev, Markus Höchstötter, and Frank J. Fabozzi Risk Measures for Portfolio Vectors and Allocation of Risks Ludger Rüschendorf The Road to Hedge Fund Replication: The Very First Steps Lars Jaeger Asset Securitisation as a Profits Management Instrument Markus Schmidtchen...205

6 VIII Contents Recent Advances in Credit Risk Management Frances Cowell, Borjana Racheva, and Stefan Trück Stable ETL Optimal Portfolios and Extreme Risk Management Svetlozar T. Rachev, R. Douglas Martin, Borjana Racheva, and Stoyan Stoyanov Pricing Tranches of a CDO and a CDS Index: Recent Advances and Future Research Dezhong Wang, Svetlozar T. Rachev, and Frank J. Fabozzi...263

Bottom Line Management

Bottom Line Management Gary Fields Bottom Line Management 123 Prof. Gary Fields Cornell University ILR School 354 Ives Hall Ithaca, NY 14853 USA gsf2@cornell.edu ISBN 978-3-540-71446-0 e-isbn 978-3-540-71447-7