Understanding Risk Control Models for the Management of Asset Portfolios

Dr. William T. Ziemba
Alumni Professor of Management Science, University of British Columbia
Vancouver, Canada

This talk will describe some of the opportunities and dangers in today's financial markets. Plausible but unlikely events (scenarios) have led to many financial disasters in the billions of dollars. To attempt to prevent such imbalances in the future regulators have embraced and required Value at Risk calculations. What is Value at Risk? Will it help prevent such disasters in the future?

I will describe a better approach based on, what is called, multiperiod stochastic programming. The discussion will be simple and focus on how to make and use such models for asset management, asset and liability management, hedge fund and bank trading department risk control. The fall 1998 multibillion dollar collapse of Long Term Capital Management (set up by Nobel Prize winners in Economics) will be used as an example of how the new approach could and should be used to avoid or mitigate such disasters.

Dr Ziemba has been a consultant to the Frank Russell Company and other financial institutions on matters related to worldwide asset and liability management. He pioneered the use of such models in the 1970s and helped develop the Russell-Yasuda Kasai model. A survey of this field is in his recent co-edited book with this title published in 1998 by Cambridge University Press.

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