FOR 518:  Price, Liquidity and Credit Risks: Measurement and Distribution

• Subject Area: Social and Behavioural Sciences
• Term: from 2003 to 2009
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 5470460

Capital market research so far concentrated mostly on price risks assuming perfect, comparative markets. In these markets each risk is tradable all the time. Liquidity problems do not exist. In real markets, important risks are non-tradable or partially tradable at best. This lack of tradability has strong implications for heterogeneous investors. An efficient allocation of risk is impossible or at least difficult to obtain.Perfect tradability and non-tradability of risks are extremes. There exist various forms of partial tradability and liquidity. Liquidity can be split into a time and a price component. The time component measures the frequency of trade. The price component measures the sensitivity of the price to order size, given the frequency of trade. The price and liquidity risks are closely intertwined.Moreover, there exists a strong relationship between these risks and the transformation of non-tradable into risk. The design of transformation contracts raises a number of important questions for banks and for researchers which have not been solved so far.Credit risks provide a very good example for the analysis of these questions since currently bankers spend much effort to make these risks tradable.The core research question of the researcher group addresses the simultaneous analysis of price and liquidity risks in financial markets, the analysis of contracts transforming non-tradable into tradable risks and the implications on price and liquidity risks. Research combines theoretical and empirical methods. Cooperation with big German banks ensures timely information on new developments in markets, critical feedback from practitioners and simplified data collection.

• DFG Programme: Research Units
• International Connection: Austria

Projects

• Bewertung von Liquiditäts- und Kreditrisiken (Applicant Bühler, Wolfgang )
• Gestaltung und Handel von CLO-Transaktionen (Applicant Franke, Günter )
• Hintergrundrisiken und die Bewertung von Finanztiteln (Applicant Franke, Günter )
• Koordination der Forschungsgruppe 518 (Applicant Franke, Günter )
• Kreditausfallwahrscheinlichkeiten und optimale Risikosteuerung in der Firma (Applicant Jackwerth, Jens Carsten )
• Kreditrisikohandel mit CDS: Existenz. Liquidität, Informationseffizienz und Banken als Handelsobjekt (Applicant Weber, Martin )
• Multivariate Analyse von Marktrisiken und Handelsprozessen auf der Transaktionsebene (Applicant Pohlmeier, Winfried Franz Xaver )
• Numerik stochastischer Differentialgleichungen und Anwendungen auf Modelle des Portfoliomangements (Applicant Denk, Robert )
• Numerik und Modellierung nichtlinearer partieller Differentialgleichungen zur Beschreibung von Kredit- und Preisrisiken (Applicant Jüngel, Ansgar )
• Wavelet-Methoden zur Modellierung multivariater Finanzzeitreihen (Applicant Beran, Jan )

• Spokesperson: Professor Dr. Günter Franke