Cambridge-Kaiserslautern-Finance-Alliance, London, July 21, 2008 Finance at Fraunhofer- The Bridge between Academia and Industry Prof. Dr. Ralf Korn (TU Kaiserslautern & Fraunhofer ITWM)
0. The Fraunhofer Gesellschaft Fraunhofer Gesellschaft FhG = The German Organisation for doing research for the industry with a view towards commercial success (annual turnover 1.3 Billion Euro) Non-profit organization 56 Institutes at 40 locations Itzehoe Rostock Bremen Berlin Hannover Potsdam Braunschweig Teltow Nuthetal Paderborn Magdeburg Oberhausen Dortmund Cottbus Halle Leipzig Duisburg Schmallenberg Schkopau Dresden Erfurt Sankt Augustin Aachen Ilmenau Jena Euskirchen Chemnitz Darmstadt Würzburg Wertheim Erlangen St. Ingbert Kaiserslautern Fürth Saarbrücken Nürnberg Pfinztal Karlsruhe Stuttgart Freising München Freiburg Oberpfaffenhofen Holzkirchen Seite 2
1. The Fraunhofer ITWM (Institute for Industrial Mathematics): A Survey - 1995: founded in Kaiserslautern with the aim to become a member of the FhG - 2000: evaluated, Fraunhofer Institute since 1.1.2001 (first one with focus on mathematics) - 8 Departments (ca. 300 Employees (150 Scientists, 50 PhD students, 120 research students...),..) Adaptive Systems Image Analysis Financial Mathematics High Performance Computing Dynamics and Durability Optimization Flows and Complex Structures Transport Processes Seite 3
1. The Fraunhofer ITWM (Institute for Industrial Mathematics): The Budget Fraunhofer Model: 40-49% industry projects 30-40% public projects ca. 30% base funding 10 % 18 % 44 % Base funding 28 % Fraunhofer internal programs Public projects Industry Seite 4
1. The Fraunhofer ITWM (Institute for Industrial Mathematics): Some Project Partners Wild-Gruppe Siemens Medical S. Hypovereinsbank AP2 (S) Seite 5 Volkswagen DaimlerChrysler GE Transp. Systems Linux Networx
2. The Financial Mathematics Group at ITWM -1- PD Dr Marlene Müller (Head, statistics, multivariate data analysis, credit rating, Basel II, statistical programming) Dr Ulrich Nögel (Deputy-Head, structured equity products, stochastic volatility, credit derivatives, basket default swaps, CDOs, software engineering) Prof Dr Ralf Korn (Scientific advisor, stochastic calculus and control theory, portfolio optimization, Monte Carlo) Dr Gerald Kroisandt (asset liability management, Solvency II, time series, Basel II, scientific programming) Dr habil Jörg Wenzel (interest rate models, credit derivatives, scientific programming) Dr Alexander Szimayer (option pricing, excutive stock options, financial econometrics) Seite 6
2. The Financial Mathematics Group at ITWM -2- Dr Sarp Kaya Acar (option pricing, crediti derivatitives, LIBOR models, scientific programming) Dr Christina Erlwein (hidden Markov models, financial statistics) Dr Georgi Dimitroff (option pricing, stochastic processes) Dipl Math Johan de Kock (credit derivatives, scientific progamming) Dipl Math Melanie Hollstein (commodities, asset liability management) Dipl Math Stefan Lorenz (forward-backward SDEs, software verification and validation, scientific progamming) Dr Kalina Natcheva-Acar (stochastic and local volatility, convertible bonds) Dr Peter Ruckdeschel (robust statistics, R, operational risk) Seite 7
2. The Financial Mathematics Group at ITWM -3- PhD Students Msc Fin Math Evren Baydar (credit derivatives) Dipl Math Eva-Maria Zimmermann (portfolio optimization) Dipl Math Sascha Desmettre (portfolio optimization) Scientific Consultants Prof Dr Holger Kraft (financial mathematics, banking, derivatives, optimal portfolios, interest rates) Prof Dr Susanne Kruse (financial mathematics stochastic volatility, macro derivatives) Prof Dr Jürgen Franke (mathematical statistics, time series, risk management) Seite 8
3. Competences in Financial Mathematics - Methodology In all areas of finance: Option pricing (From vanilla to exotics and in all kind of models ) Portfolio optimization (Classical and modern methods) Asset liability management (Including an own simulation engine) Credit rating and credit risk (From Basel II to CDOs) Statistics, time series, bootstrap Interest rate models and risk management Specials: Dividend modelling, inflation, dynamic mortality... Seite 9
3. Competences in Financial Mathematics - Computing -C, C++, VBA Excel, C# -mathematics and statistics packages (Matlab, R, Maple, Mathematica, SPSS) -numerical methods Monte Carlo simulation numerical integration partial & ordinary differential equations -data bases (MS Access, SQL) -software certification (ISO 9000/Bootstrap) Seite 10
4. Our philosophy Academia: TU Kaiserslautern Generalize models Industry: Banks Pension Funds Use models Elegant mathematics Efficient mathematics Abstraction as high as possible Understandable models Publication of results Implementation of methods Seite 11
4. Our philosophy Unique combination of an internationally known university-level research unit and industry consulting experience Working with world-class researchers (Cambridge-Kaiserslautern FA) Others implement latest models, we create them! We can generate capacity via networking (partner institute in Gothenburg, external researchers, ) when needed We can offer the whole solution from theory via algorithm to implementation We deliver the best of both worlds! Seite 12
5. A typical project: Credit rating and Basel II -1- Consulting and statistical expertise Tasks: Set up and calibrate/validate a credit rating system consistent with the Basel II requirements Our contributions: Data analysis Identifying influential variables (Lorenz curves, discriminatory power, accuracy ratio,..) Computing an optimal score function (choice of the class of methods, parameter estimation,..) Setting up a rating system (CART, ) Calibration and validation of the rating Use the rating in action (i.e. estimate default probabilities ) Backtesting Seite 13
5. A typical project: Dividend modelling -2- Research, consulting, implementation Tasks: Set up a dividend model that is suitable for use in option pricing Our contributions: Surveying the existing literature Judging existing models Developping a new model (Korn, Rogers: Stocks paying discrete dividends: modelling and option pricing, in: Journal of Derivatives, 2005.) Test of the model Implementing the model and corresponding option valuation routines Seite 14
5. A typical project: Asset Liability Management -3- Consulting, research and product Tasks: Develop a tool suitable for dealing with the investment problems of a pension fund Our contributions: Developed a global model of correlated asset markets, inflation and productivity plus the evolution of the insured population Built an own macro language for modelling assets and liability evolution ALMSim Calibrated all necessary parameters Trained members of the companies to use the tool Seite 15
5. Further typical projects: Of different characters Pricing strongly path-dependent options ( Suitable variant of Heston model incl. Monte Carlo, pde solver, closed form solutions for forward starting options) Credit derivatives (dependence modelling by copulas, ) Development of a stand-alone pricing tool for front office use Set up a framework for valueing inflation-linked bonds Create a framework for longevity bonds ( dynamic mortality modelling ).. Seite 16
6. Cambridge and Kaiserslautern Research Projects 2008-2010 The FhG has financed the Fraunhofer part of the CKFA with 1 Mio Euro in 2008-2010 Aims: Building up a structural partnership with an excellent European partner Doing research with commercial potential in the areas of: A Further development and practical implementation of continuous-time portfolio optimisation B Asset-Liability-Management: Test of different approaches and product development ALMSim / Product development DEBI C New stock price models D New methods of risk management in banks and insurance companies Seite 17
6. Cambridge and Kaiserslautern - What can we do for you? Our offer Note: The partnership is no pure university affair! There are contracts,. Pure research projects (New models, methods and algorithms) Consulting with a research component (Literature survey, choosing the appropriate existing model and method for your task) Full treatment (From research to implementation) Strategic alliance (Joint conferences, in-house-training for your employees, workshops on latest developments in finance) Consulting in IT-decisions (Setting up new computer networks, installing clusters, ).. Enjoy the rest of the evening! Seite 18