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    • 23 May 2022
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    Abstract:

    Joint presentation with Rui Ding. The paper presents a new dynamic portfolio performance risk measure called Expected Regret of Drawdown (ERoD) which is an average of the drawdowns exceeding a specified threshold (e.g. 20%). ERoD is similar to Conditional Drawdown-at-Risk (CDaR) which is the average of some percentage of the largest drawdowns. CDaR and ERoD portfolio optimization problems are equivalent and result in the same set of optimal portfolios. Necessary optimality conditions for ERoD portfolio optimization lead to Capital Asset Pricing Model (CAPM) equations. ERoD Beta, similar to the Standard Beta, relates returns of the securities and those of a market. ERoD Beta is equal to [average losses of a security over time intervals when market is in drawdown exceeding the threshold] divided by [average losses of the market in drawdowns exceeding the threshold]. Therefore, a negative ERoD Beta identifies a security which has positive returns when the market has drawdowns exceeding the threshold. ERoD Beta accounts only for time intervals when the market is in drawdown and conceptually differs from Standard Beta which does not distinguish up and down movements of the market. Moreover, ERoD Beta provides quite different results compared to the Downside Beta based on Lower Semi-deviation. ERoD Beta is conceptually close to CDaR Beta which is based on a percentage of worst case market drawdowns. However, ERoD Beta has some advantage compared to CDaR Beta because the magnitude of the drawdowns is known (e.g. exceeding a 20% threshold), while CDaR Beta is based on a percentage of the largest drawdowns with unknown magnitude. We have built a website reporting CDaR and ERoD Betas for stocks and the SP 500 index as an optimal market portfolio. The case study showed that CDaR and ERoD Betas exhibit persistence over time and can be used in risk management and portfolio construction.

    Bio:

    Stan Uryasev is Professor and Frey Family Endowed Chair of Quantitative Finance at the Stony Brook University.

    He received his M.S. in Applied Mathematics from the Moscow Institute of Physics and Technology (MIPT), Russia, in 1979 and Ph.D. in Applied Mathematics from the Glushkov Institute of Cybernetics, Kiev, Ukraine in 1983. From 1979 to 1987 he held a research position at the Glushkov Institute. From 1988 to 1992 he was a Research Scholar at the International Institute for Applied System Analysis, Luxenburg, Austria. From 1992 to 1998 he held the Scientist position at the Risk and Reliability Group, Brookhaven National Laboratory, Upton, NY. From 1998 to 2019 he was the George and Rolande Willis Endowed Professor at the University of Florida, and the director of the Risk Management and Financial Engineering Lab.

    His research is focused on efficient computer modeling and optimization techniques and their applications in finance and DOD projects. He published four books (two monographs and two edited volumes) and more than 130 research papers. He is a co-inventor of the Conditional Value-at-Risk and the Conditional Drawdown-at-Risk optimization methodologies. He developed optimization software in risk management area, including Drawdown and Credit Risk minimization.

    His joint paper with Prof. Rockafellar on Optimization of Conditional Value-At-Risk in The Journal of Risk, Vol. 2, No. 3, 2000 is among the 100 most cited papers in Finance. Many risk management/optimization packages implemented the approach suggested in this paper (MATLAB implemented a toolbox).

    Stan Uryasev is a frequent speaker at academic and professional conferences. He has delivered seminars on the topics of risk management and stochastic optimization. He is on the editorial board of a number of research journals and is Editor Emeritus and Chairman of the Editorial Board of the Journal of Risk.

Latest News

March 1, 2022

Dr. Peter Carr’s Passing

It is with sadness that the IAQF has learned of Senior Fellow Dr. Peter Carr passing from a recent battle with an illness. Dr. Carr most recently served as Department Chair of the Department of Finance & Risk Engineering at NYU Tandon School of Engineering. He was previously the Executive Director of the Math Finance program at NYU's Courant Institute from 2010 to 2015. He was a Managing Director at Morgan Stanley with over 20 years of experience in the derivatives industry. He was also a finance professor for 8 years at Cornell University, after obtaining his PhD from UCLA in 1989. Dr. Carr is presently the Treasurer of the Bachelier Finance Society, and a trustee for the Museum of Mathematics in New York. He has over 90 publications in academic and industry-oriented journals and serves as an associate editor for 8 journals related to mathematical finance. He was selected as Quant of the Year by Risk Magazine in 2003 and shared in the ISA Medal for Science in 2008. In 2010, the International Association of Quantitative Finance and Sungard jointly selected Dr. Carr as its Financial Engineer of the Year. Dr. Carr was selected in Institutional Investor’s prestigious annual Tech 50 from 2011 to 2014. 

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Robert Litterman

Robert Litterman is a founding partner of Kepos Capital; a New York City based systematic global macro firm, and the Chairman of the Kepos Capital Risk Committee. Prior to joining Kepos Capital in 2010, Dr. Litterman enjoyed a 23-year career at Goldman Sachs & Co., where he served in research, risk management, investments and thought leadership roles. He oversaw the Quantitative Investment Strategies Group in the Asset Management division.

While at Goldman, Dr. Litterman also spent six years as one of three external advisors to Singapore's Government Investment Corporation (GIC). Dr. Litterman was named a partner of Goldman Sachs in 1994 and became head of the firm-wide risk function; prior to that role, he was co-head of the Fixed Income Research and Model Development Group with Fischer Black. During his tenure at Goldman, Dr. Litterman researched and published a number of ground breaking papers in asset allocation and risk management. He is the co-developer of the Black-Litterman Global Asset Allocation Model, a key tool in investment management, and has co-authored books including The Practice of Risk Management and Modern Investment Management: An Equilibrium Approach (Wiley & Co.).

Dr. Litterman earned a Ph.D. in Economics from the University of Minnesota and a B.S. in Human Biology from Stanford University. He was inducted into Risk Magazine's Risk Management Hall of Fame and named the 2013 Risk Manager of the Year by the Global Association of Risk Professionals. In 2012, he was the inaugural recipient of the S. Donald Sussman Fellowship at MIT's Sloan School of Management. In 2008, Mr. Litterman received the Nicholas Molodovsky Award from the CFA Institute Board as well as the International Association of Financial Engineers/SunGard Financial Engineer of the Year Award. Mr. Litterman serves on a number of boards, including Commonfund, where he was elected Chair in 2014, the Niskanen Center, Resources for the Future, Robert Wood Johnson Foundation, Ceres, World Wildlife Fund, the Sloan Foundation, the Woodwell Climate Research Center, and the Climate Leadership Council, where he serves as co-chair of the Board.  Dr. Litterman also chaired the CFTC Climate-Related Market Risk Subcommittee, which published its report, “Managing Climate Risk in the U.S. Financial System,” in September 2020. 

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