The EID WAKEUPCALL has been set up with the knowledge that, in the wake of the financial crisis, a reconsideration of fundamental assumptions that have been standard in the mathematical models for the valuation of financial and insurance products is taking place. The crisis alerted to reiterate models, assumptions, analysis and computations. It is now better understood that the usual paradigm, in which financial risks can be mitigated, spread, or even hedged away perfectly, is too simplistic for markets under stressed conditions. Lead by the Basel Committee on Banking Supervision, the financial and insurance industry is currently implementing new paradigms regarding risk management. Many of the updates in the risk measures involve sophisticated mathematics. In this sense, the crisis has provided important feedback on appropriate directions for the required mathematical improvements. As regards to hedging and risk mitigation, which are important steps in the risk management chain, nowadays even the hedging of basic financial instruments has become a complicated task. Since the 2008 crisis, the historically stable relationship between a bank's funding rate, government rates, and inter-bank offered rates is no longer valid, which can be explained by credit risk, liquidity risk, and related bid-ask spreads. More sophisticated models are needed if hedging programs are to remain effective under financial stress, but then also model risk needs to be taken into account. A good understanding of financial risks in the modern world is important for society.
The overall objective is to perform multi-disciplinary research and gain insight into a variety of aspects of financial risk, such as model risk, market risk, and credit risk. Each industrial partner focusses with an ESR on a specific risk which is important in their businesses. From the various ESR projects, the ESRs will gain expertise on risk measures and risk management for modern financial mathematical models, on computing algorithms, software, frameworks, and also consultancy expertise will result. The ESRs will have an excellent background to obtain a high level job in the industry afterwards.
