Raymond A. Mason School of Business Events
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Raymond A. Mason School of Business
[PAST EVENT] Mathematics Colloquium/CSUMS Lecture
March 30, 2012
3:30pm - 4:30pm
Title: Stochastic Models in Asset-Backed Finance
Abstract:
Capital investment is an important component of manufacturing and service operations, but one that is also fraught with many varieties of risk. In this talk, I will discuss a stochastic model developed for use in managing risks associated with loans and leases for purchases of equipment with finite economic lifetimes, such as aircraft, heavy construction and manufacturing equipment, and energy-generating assets. Risks associated with default and declines in asset value, as well as their dependence, are specifically modeled in an analytically-tractable framework, allowing for ease in implementation, calibration to data, and use in industry. As a case study, export credit guarantees, a type of insurance contract widely used in supporting manufacturing purchases, are valued and the costs associated with proposed regulatory changes are examined.
In the second half of my talk, I will discuss promising initial work on managing risks in residential real estate mortgage lending. Prepayment and default risk are critically important considerations in making real estate loans. We present a dynamic programming algorithm based on Monte Carlo simulation that captures the homeowner's decision to prepay or default. The Monte Carlo framework has several advantages over alternative models in the literature due to its ability to work in high dimensions absent the so-called "curse of dimensionality". As high-dimensional models are often appropriate for the risks associated with real estate, this methodology has the potential to provide insight into proposals for improving the health of the housing market.
Abstract:
Capital investment is an important component of manufacturing and service operations, but one that is also fraught with many varieties of risk. In this talk, I will discuss a stochastic model developed for use in managing risks associated with loans and leases for purchases of equipment with finite economic lifetimes, such as aircraft, heavy construction and manufacturing equipment, and energy-generating assets. Risks associated with default and declines in asset value, as well as their dependence, are specifically modeled in an analytically-tractable framework, allowing for ease in implementation, calibration to data, and use in industry. As a case study, export credit guarantees, a type of insurance contract widely used in supporting manufacturing purchases, are valued and the costs associated with proposed regulatory changes are examined.
In the second half of my talk, I will discuss promising initial work on managing risks in residential real estate mortgage lending. Prepayment and default risk are critically important considerations in making real estate loans. We present a dynamic programming algorithm based on Monte Carlo simulation that captures the homeowner's decision to prepay or default. The Monte Carlo framework has several advantages over alternative models in the literature due to its ability to work in high dimensions absent the so-called "curse of dimensionality". As high-dimensional models are often appropriate for the risks associated with real estate, this methodology has the potential to provide insight into proposals for improving the health of the housing market.
Contact
Rex Kincaid rrkinc@wm.edu