SYLLABUS: ADVANCED RISK ANALYSIS, OPRE 7372

Alain BENSOUSSAN

Fall 2008: Monday 12.30 p.m.

First Class: August 25th

1-CONTEXT

The field of Risk Analysis is in full development. An important trend

concerns a comprehensive approach of risks: technical, operational, financial
or environmental. This is justified in organizations by the link which exists
between all types of risks. It is also justified by the common mathematical
approach based on probabilistic modeling and statistical methods.

There is active research in Risk Analysis to progress on mathematical tools,

since a quantitative appraisal is sought after. Financial Engineering has
created many techniques to mitigate financial risks resulting in active
research to adapt these techniques to other types of risks arising in industry.

2-OBJECTIVES

This course concentrates on advanced probabilistic, statistical and

optimization methods needed in Risk Analysis and Decision Making.
It is aimed at PhD students in Operations Management, Finance or Applied
Mathematics interested in the domain as a research field.

Probabilistic models used in queuing theory, insurance, and financial

markets will be presented. Risk analysis and statistical methods used to
estimate, forecast, and reduce uncertainties will also be described.
Techniques to mitigate risks in decision making, like options in Finance and
real options in industry will also be explained.

The students will have a comprehensive overview of the concepts, methods

and applications, so that they will be able to pick fast a research topic with
promising potential.
3- BACKGROUND

The course is self-contained. A good aptitude to learn mathematical

techniques will be very useful to obtain rapid progress. Some knowledge of
probability theory and stochastic processes will facilitate the learning.

4- TEXTBOOKS

Full lecture notes will be provided. Therefore, a text book is not

indispensable. However, some good references will help the students.
Here are some recommended books in the field:

David Vose, Risk Analysis, Wiley 2003.

Alexander J. McNeil, Rüdiger Frey, Paul Embrechts, Quantitative Risk

Management, Princeton series in finance, Princeton University Press, 2005.

Avinash K. Dixit, Robert S. Pindyck, Investment under Uncertainty,

Princeton University Press, 1994.

5- GRADING

Assignments: 40%
Presentations: 40%
Participation: 20%

6-CONTENTS

Lectures I & II: ELEMENTS OF QUEUING THEORY:

M/M/1
LITTLE's LAW
POLLACZEK-KHINTCHINE FORMULA
GENERALIZATION TO M/G/1
SUPPLY CHAIN APPLICATIONS.
Lectures III & IV: RELIABILITY THEORY AND
APPLICATIONS:

LINEAR THEORY
NONLINEAR THEORY
SEISMIC HAZARDS MODELLING
FAILURE RISK AND LIFE TIME ANALYSIS
AFFINE PROCESSES
APPLICATION TO FINANCIAL ENGINEERING
Lecture V: MITIGATION OF RISKS

INSURANCE-CLAIM MODELS
THE PROBLEM OF RUIN
CONTINUOUS TIME MAINTENANCE
MAINTENANCE MANAGEMENT

Lecture VI: SIMULATION AND ESTIMATION:

MONTE CARLO SIMULATION

DETERMINISTIC ESTIMATION THEORY
PROBABILISTIC ESTIMATION THEORY
SUFFICIENT STATISTICS
MINIMUM MEAN-SQUARE ESTIMATORS
MAXIMUM LIKELIHOOD ESTIMATORS
DYNAMIC MODELS
DISCRETE TIME KALMAN FILTER

Lecture VII: DISTRIBUTIONS OF UNCERTAIN PARAMETERS:

STATISTICAL INFERENCE
BAYESIAN INFERENCE
BOOTSTRAP METHOD
MAXIMUM ENTROPY PRINCIPLE
COMPARISON OF METHODS FOR THE REGRESSION

Lecture VIII: DETERMINING DISTRIBUTION FROM DATA:

NON-PARAMETRIC
DISTRIBUTION FOR A CONTINUOUS VARIABLE
NON-PARAMETRIC DISTRIBUTION FOR
A DISCRETE VARIABLE
PARAMETRIC DISTRIBUTION

Lecture IX: MODELLING DEPENDENCIES:

SPEARMAN'S RANK ORDER
THE REGRESSION METHOD
THE ENVELOPE METHOD
Lecture X: TIME SERIES ANALYSIS:

SEASONALITY
MOVING AVERAGES
FORECASTING
EXPONENTIAL SMOOTHING
HOLT-WINTERS FORECASTING

Lecture XI: MEASUREMENT AND REDUCTION OF RISKS:

VAR, CVAR
UTILITY FUNCTIONS
MEAN VARIANCE ANALYSIS
TWO FUND THEOREM, EFFICIENT FRONTIER
PORTFOLIO WITH A RISK-FREE ASSET, ONE FUND THEOREM
STATIC CAPITAL ASSET PRICING MODEL
CONSUMPTION-BASED CAPITAL ASSET PRICING MODEL

Lecture XII: DYNAMIC CAPITAL ASSET PRICING MODEL:

BINOMIAL MODEL
OPTIMAL PORTFOLIO AND CONSUMPTION
DYNAMIC PROGRAMMING APPROACH
CONTINUOUS TIME FRAMEWORK

Lectures XIII & IV: REAL OPTIONS:

TRADABLE ASSETS
RISK PREMIUM AND CCAPM
VALUATION OF
CONTINGENT CLAIMS
VALUATION OF A PROJECT
VALUATION OF AN OPTION TO INVEST
THE OPTION OF ABANDONMENT
EQUILIBRIUM MODEL