University of Florida
This issue closes the 10th anniversary volume of The Journal of Risk. The past year has been rich in financial events with far reaching impact and which clearly fall within the purview of the journal from both methodological and topical perspectives. The papers published in this volume do indeed reflect attention to issues such as model selection, modeling innovation with associated computational and empirical techniques, risk measurement and management, mortgage-related financial products and more general financial structuring.
In this issue a number of practical empirical issues are addressed, with most illustrations made on international data. In their paper, Briner and Connor compare three common approaches to estimate equity covariance matrices, which are central to any portfolio optimization. These estimation approaches are representative of the trade-off between estimation variance and specification error. With UK equity data, the authors find that the factor model is better than the market or unstructured asset-by-asset models.
Using the Canadian Department of National Defense as a typical organization that faces significant foreign exchange risk in the acquisition and maintenance of equipment and supplies, Desmier evaluates various time-series models to estimate foreign exchange value-at-risk in an effort to strongly encourage currency hedging strategies at such organizations.
Using Finnish mutual fund data, Pätäri tests various alternatives to the standard deviation paradigm for portfolio optimization and provides additional empirical evidence to illustrate the limitations of risk criteria based on a single measure.
In his paper, Gay considers the problem of converting an employment termination lump-sumpayment into a retirement income stream. Of particular interest is the existence of strategies that are more efficient than those on the capital market line and which produce payouts. Using Australian data, he shows that such strategies are indeed feasible at reasonable annuities costs.
This issue concludes with a short note by Khaliq et al that illustrates the application of the radial basis function collocation technique as a mesh-free method to price certain options with non-smooth payouts. This paper is the last installment of a series that appeared throughout this 10th anniversary volume, starting with its inaugural issue, containing papers presented at a conference held at the University of Florida in Spring 2006 under the auspices of its Risk Management and Financial Engineering Laboratory.
A parallel time stepping approach using meshfree approximations for pricing options with non-smooth payoffs
How much structure is best? A comparison of market model, factor model and unstructured equity covariance matrices