Measurement and Assessment of Liquidity Risks
The liquidity of a financial instrument refers to the ease with which a position can be liquidated or built up within a short time and in large amounts without negative price effects. It plays a role for all investors who may wish to trade the security in the future. The importance of liquidity became apparent during the financial crisis following the collapse of the investment bank Lehman Brothers, which brought trading in many financial products to a virtual standstill.
However, the consideration of liquidity in theory and practice is made more difficult by the fact that it is difficult to quantify. In most cases only the price dimension is considered, which can be measured by transaction costs and the price influence of a transaction. However, a time dimension must also be taken into account for a complete coverage. This can be expressed, for example, by the time required to liquidate a particular position. On the other hand, a quantity dimension is necessary (trading in a security is usually not possible in any amount). If investors can choose between securities of different liquidity levels, they will demand an appropriate remuneration for holding a more illiquid security, e.g. in the form of an illiquidity premium. This should also include a risk premium for the risk of changing liquidity.
Possible topics for theses would be:
- Compensation of investors for assumed illiquidity risks on the bond market
- Investigation of the connection between liquidity risk and other risks (e.g. interest rate risk, credit risk)
- Measurement of liquidity on different markets
Contact persons for this topic are Michael Reichenbacher and Jelena Eberbach.
Credit Risks
The significance of credit risk has moved into the focus of public attention with the financial crisis. In particular, so-called credit default swaps (CDS) now form an important market for financial products and are regularly discussed in the press. In principle, a CDS is nothing more than an insurance policy under which one party undertakes to make a compensation payment to the other party in the event of a credit event (e.g. default) of a company or a state (the reference entity). In return, the other party undertakes to pay an (insurance) premium.
In addition to CDS, there are a large number of other capital market products that are dependent on credit risks (including bonds, CDOs, asset-backed securities, etc.). Due to the rapidly changing global capital markets, there are numerous interesting research questions in this area.
Possible topics for theses would be:
- Theoretical modeling of common failures
- Empirical investigation of the impact of regulatory measures and market structures
- Modelling of Top-Down Processes
- Empirical investigation of credit risk models
Contact person for this topic is Caroline Grauer.
Blockchain Technology in Finance
In 2008 a first so-called crypto currency, Bitcoin, was introduced. This is a decentralized network that can process transactions in an environment without trust and could thus create a monetary system away from the established fiat currencies. The block chain technology underlying Bitcoin is believed to have the potential to fundamentally change the financial markets. For example, it could revolutionize the settlement of securities transactions and simplify the trading of OTC derivatives.
In practice, the potential applications of this technology are still little used today. The block chain technology is mainly used to trade the meanwhile four-digit number of different crypto currencies. In doing so, significantly different technological solutions are used for different crypto currencies. Against this background, an economic research of the crypto currencies and the use cases of the block chain technology is necessary. In this environment many exciting research questions arise.
Possible topics for theses would be:
- Use cases of the block chain technology
- Model-theoretical evaluation of crypto currencies
- Design value drivers of crypto currencies
Contact person for this topic is Fabian Eska.
Financial Engineering and Derivatives in Energy and Emissions Markets
Due to the changes in the global commodity, energy and emissions markets, the previously negligible price risk has become a crucial issue in these markets. For example, the liberalization of some markets leads to prices no longer secured by monopolies, or the start of trade in emission certificates leads to completely new markets. These risks, which have only recently emerged for companies, must be managed by means of an adapted risk management system.
However, it is not always possible to transfer the methods known from the stock markets directly to these new markets. In particular, the lack of storage, transport or short selling opportunities as well as regulatory requirements call for alternative theoretical valuation concepts that need to be developed and empirically tested.
Possible topics for theses would be:
- Characteristics of commodity, energy and emission certificate prices and their pricing processes
- Models for the valuation of commodity, energy and emission derivatives
- Valuation approaches for real options
- Possibilities of risk management and hedging in these markets
Contact person for this topic area is Jelena Eberbach.