State-of-the-Art Research in Enterprise Risk Management

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State-of-the-Art Research in Enterprise Risk
Management

• Desheng Dash WU
• Dash_at_risklab.ca

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(No Transcript)
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Outline

• Why, What, How 3 step process
• Tool
• Our model
• Conclusion

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Step-by-step Risk ManagementConfucius (551 B.C.
479 B.C.)
self-cultivating family-regulating state-ha
rmonizing (land governed.)
William Shakespeare The man very probable
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NETLIB Problem PILOT4 (Ben-Tal Nemirovksi
Study)Uncertainty in Optimization Models
What Happens if Parameters are Inaccurate by
0.1? ????????????,?????
Worst Case Constraint RHS Violated by Over 450
In real-world applications of Linear Programming
a small uncertainty in the data can make the
usual optimal solution completely meaningless
from practical viewpoint. (www2.isye.gatech.edu/
nemirovs/)
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Risk view of Economic family- family-regulating
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7/26
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ERM Natural Disasters??????!
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Risk management Definition
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Enterprise risk management (ERM)What

• Systematic, integrated approach
• Manage all risks facing organization
• Concerned with a broad financial and operating
  perspective
• Recognizes interdependencies corporate,
  financial, and environmental factors
• COSO ERM "process, effected by an entity's board
  of directors, management, and other personnel,
  applied in strategy setting and across the
  enterprise, designed to identify potential events
  that may affect the entity, and manage risk to be
  within its risk appetite, to provide reasonable
  assurance regarding the achievement of entity
  objectives."

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Outline

• Why, What, How 3 step process
• Tool
• Our model
• Conclusion

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Analytic Risk Management Tools

• Duration 1938
• Markowitz mean-variance 1952
• perfect capital markets, log-normally distributed
  
• Sharpes CAPM 1964
• perfect capital markets, log-normally distributed
• Multiple factor models 1966
• Black-Merton-Scholes model 1973
• RAROC (Bank Trust) 1983
• Limits by duration buckets 1986

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Analytic Risk Management Tools

• Risk-weighted assets (banks) 1988
• Stress Testing 1992
• Value-at-Risk, VaR 1993
• RiskMetrics 1994
• CreditMetrics 1997
• Integration of credit and market 1998-
• Enterprise RM 2000- (Refer to Olson
  and Wu, 2007)

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Finance market risk

• Olson Wu, Springer book 2010

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Finance Credit risk

• Olson Wu, Springer book 2010

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March 2013. ERM Committee of the American Academy
of Actuaries. Insurance Enterprise Risk
Management Practices
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Keep ATM ERM Strategy how

• Olson Wu, Springer book 2010
• Risk Keep
• Top management, CRO
• Appetite
• Risk Avoid
• Risk Transfer
• Risk Mitigate

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Outline

• Why, What, How 3 step process
• Tool
• Our model
• Conclusion

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TopAimer ERM Decision Supporthow

• Olson Wu, Springer book 2010
• Risk Appetite
• Top management,CRO
• Risk culture, organization, governance
• HydroOne a risk management team from top level
• Risk Identification
• Market, credit, operations
• Risk Matrix
• VaR
• Risk Enumeration
• algorithm
• Risk Review
• audit

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TopAimer Uncertain Optimization Model
Minimize f ( x, z )
Minimize a1x1 a2x2 anxn
Subject To g 1( x, z ) b1 g 2( x, z )
b2 g m( x, z ) bm
Subject To a11x1 a12x2 a1nxn b1
a21x1 a22x2 a2nxn b2 am1x1 am2x2
amnxn bm
DecisionVariables x
DecisionVariables x
UncertainParams z
All aij depend on uncertain z
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Hydro One Example Harvard business review
case Jul 03, 2008 also in Wu and Olson, 2009
Electricity Pricein Year 1
Demandin Year 1
Buy Ele and Resell Immediately
Buy Ele contract and Store for Next Year
Storage Cost
Electricity Pricein Year 2
Demandin Year 2
Buy Ele and Resell in Year 2

• Case 1 Make All Three Decisions Today
• Case 2 Make 3rd Decision on Wait and See Basis

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TopAimer based on Excel RiskSolver
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Conclusions

• Risky world
• Risk unavoidable
• Integration ERM
• ERM new philosophy of RM