Mathematical Finance Seminar
Rudower Chaussee 25; Room 1.115
Bernadette Walter & Michael Kalkbrener

The Deutsche Bank Risk Center

Bernadette Walter:
The Quant Institute at Deutsche Bank Risk Center: A center for development and validation of models for Risk Management across major risk types
Model risk in the model landscape for the trading book
We give an overview of the challenges banks face in identifying and measuring model risk in the complex model landscape required to run a trading operation. We explain the changes in the assessment and regulation of model risk since the Global Financial Crisis, and the consequences this has had on modelling and model governance in banks. We will use the example of pricing models to illustrate this and to articulate the problems that remain to be solved.
Michael Kalkbrener:
Credit rating migration processes based on economic-state-dependent transition matrices
We develop a model for rating migration. The objective is to study rating migration processes and corresponding default rates. It is generally accepted that rating migrations depend on economic factors. We use the theory of time-homogeneous Markov chains to jointly model the rating process and the state of the economy. Although the rating process itself is neither Markovian nor time-homogeneous in general, we show that sequence of the rating process’ transition matrices converges to a limit. We further analyse the properties of different rating methods, namely point-in-time (PIT) ratings and through-the-cycle (TTC) ratings. Although these rating philosophies have become important from a regulatory perspective, to the best of our knowledge, no formal definition exists yet. We further discuss if and how a rating philosophy can be detected from given rating transition time series.