For many of us, risk is something unknown or somehow tied to chance and fortune. But for Yuyu Chen, a PhD candidate in the Department of Statistics and Actuarial Science, there is no guesswork to risk at all.
Chen’s research is in the field of robust risk aggregation, evaluating the risk levels of investment portfolios for banks and insurance companies. Portfolios for financial institutions typically have many component parts, so assessing the overall risk is no easy feat. Researchers and actuaries use mathematical models to help them understand the risk for a given portfolio.
Chen recently added a new tool to the kit of actuarial science that makes the models even more precise.
“In any portfolio, there are several different risks, and we need to know the combined behaviours of the different risks,” said Chen. “What I’m focusing on in my research is a way to add new constraints to the models so we can shrink the risk bounds, which makes the bounds more practical and useful.”
Risk bounds are a calculated range of uncertainty for evaluating a portfolio and a crucial part of actuarial models. Making bounds more precise means less uncertainty, which means a better understanding of risk in a portfolio.
Chen, along with two co-authors, recently won the Maplesoft Best Student Paper Award at the International Congress on Insurance: Mathematics and Economics, the largest international academic conference in actuarial science.
While aspects of Chen’s research are highly theoretical and nuanced, he is also motivated by practical concerns.
“One of the reasons why I’m interested in evaluating the risk of a portfolio is because of the financial crisis in 2008. Before that event, people disregarded the importance of dependence among different risks. And so, they underestimated the risks to all those stocks and assets. And finally, they got a financial crash in 2008.”
Better understanding risk, in this sense, is immediately relevant to society at large since events like the 2008 financial crisis impact the lives of millions of people. The financial institutions and the individuals affected would undoubtedly have benefited from a more robust understanding of aggregate risk.
By improving models to understand risk, Chen’s research is also immediately relevant to governments and financial regulators since they are responsible for maintaining the economy’s health and are concerned about whether the banks or the insurance companies are solvent.
As Chen explains, “regulators typically set an acceptable risk level or set a level of capital that the insurance company or the bank needs to hold so they can pay for losses that could happen in the future.”
Although Chen’s research is valuable and relevant for financial institutions and regulators alike, he remains interested in academic work and intends to stay in the university past his PhD.
“I like to do research," said Chen. "And I also like teaching and working with students. If I can find an academic job, I’d like to continue my research and teaching rather than working in industry or for the banks.”
“I enjoy the atmosphere and working with researchers like my supervisor and other professors in the department. Everyone has helped me so much, and I want to be able to help others in the same way.”
The full version of Chen and his co-author’s award-winning paper, “Ordered risk aggregation under dependence uncertainty,” is available online for interested readers.