skip to navigation skip to content

2016 winners

Back to The Risk Prize

2016 Risk Prize finalists.

Congratulations to the 2016 finalists

First place finalist

Rasheed Saleuddin, PhD candidate, Department of History, University of Cambridge
PhD Scholar at the Cambridge Endowment for Research in Finance

The question of whether or not to mark to (the current observable) market (price) is an important one for risk takers and risk managers, and therefore company directors, creditors and shareholders. If extremes in ABX market prices can not be said to be fundamentally based (on reasonable expectations), marking to market may overstate risk and make institutional balance sheets appear overly fragile.

This paper first introduces and expands on a naïve backward looking model utilised by Stanton and Wallace to dismiss ABX price observations during the crisis as irrational. Saleuddin’s revised model is then used to explain the problems with Gorton and GM’s similar conclusions as to ABX irrationality. In the second part of his paper, Saleuddin then approximates contemporary expectations by extrapolating fundamental data using forward looking modelling (“roll rate analysis”) that was available and well accepted by contemporary investors. Only by modelling expectations extant at the time can we legitimately assess the degree of rationality in ABX prices, and to knowledge, this paper is the first to model expectations during the crisis using such historical methods.

Should Credit Risks Be Marked to Market in Crisis? Re-examining Subprime Securities ‘Irrationality’ 2008-2010 (pdf 589KB)

Honourable mentions

Simone Goldstein, MBA candidate, Cambridge Judge Business School

Media houses are relatively young, formed around thirty years ago, and include agencies that specialise in advertising, media, creative, PR, social, and marketing, but the function and influence of each of these sectors has changed greatly since their foundation. Media agencies now have an immense breadth of scope, moving beyond the purchasing of traditional media to include the planning of digital, social, and search campaigns, content creation, analytics and partnerships. The role of consumer insights, data analytics, and content creation has also substantially changed the industry. However, there’s a much greater change ahead that media agencies need to be prepared for. Media agencies as a business structure are at risk due to threats within the media landscape at an internal and external level. Broadly speaking there are two types of agencies: those that are part of a large media conglomerate and smaller boutique agencies, and the risks are equally applicable. Internally, media agencies are too focused on their success with digital media to realise their internal structure is failing to accommodate digital media’s demands. Externally, because the tools to support digital media are more accessible, but also due to their desire for transparency, clients are moving their media planning and buying in-house. The following details the risks and potential solutions for the industry.

Internal and External Risks Threatening Media Agencies (pdf, 383KB)

Vladislav Mikhailov, MFin candidate, Cambridge Judge Business School

This paper discusses issues and challenges of long-term risk measurement from the context of Economic Capital quantification for market risk. Economic Capital reflects counter-cyclical long-term view on risk with a very high confidence level implied by target credit rating and measured with the well-known and popular Value-at-Risk (VaR) concept. The framework is widely used by financial institutions for internal capital adequacy purposes (to reflect economic, not regulatory cost of risk), efficient capital allocation and risk adjusted performance measurement of business lines. Typically, market risk is assumed to be liquid and therefore short-term VaR methods are used to reflect current market volatility and tactically manage positions within risk limits. While it is suitable for market risk steering this approach, it is inappropriate for Economic Capital quantification. But instead of rethinking VaR modelling approach, financial institutions often adjust an existing set of short-term VaR models for Economic Capital specifics (for example, long-term horizon and high confidence level). Such adjustments could be appropriate only under strict set of assumptions that often does not hold and hence lead to misleading results. As one way to address the risk measurement issues arising mainly from popular “square root of time” VaR scaling procedure one, the historical bootstrapping technique was described and compared to most popular range of practises for market risk modelling. The long-term risk measurement is highly relevant for banks and other financial institutions (for example, insurance, asset management companies) willing or obliged to accept long-term market risk due to specifics of the underlying business model. Therefore accurate and sound modelling approaches are vital to ensure confidence in risk measurement and empower efficient application of risk models to ongoing business of financial institutions.

Reconsidering Long-Term Risk Quantification Methods When Routine VaR Models Fail to Reflect Economic Cost of Risk. (pdf, 918KB)

The winner of the Prize was announced on Tuesday 21 June 2016 during the Cambridge Centre for Risk Studies 7th Risk Summit, by Dr Sven Heiligtag, Principal, McKinsey & Company.Back to top