Quantitative finance collector
C++ Matlab VBA/Excel Java Mathematica R/Splus Net Code Site Other
Feb 28

Interview: Donald R. van Deventer Risk Management

Posted by abiao at 11:14 | Interview | Comments(0) | Reads(5836)
Dr. Donald R. van Deventer is the Chairman and Chief Executive Officer of Kamakura Corporation, the world's leading provider of risk management solutions. His primary financial consulting and research interests involve the practical application of leading Kamakura Corporationedge financial theory to solve critical financial risk management problems. He was elected to the 50 member RISK Magazine Hall of Fame in 2002. Dr. Donald R. van Deventer has served on the editorial board of the Journal of Credit Risk since 2005, and has written numerous papers and several books covering a wide range of risk management.  

Tell us a little background info about yourself. Where are you from? What’s your education background?


I grew up in Los Angeles and was a double major at Occidental College in mathematics and economics.  I went to Harvard University and earned my Ph.D. in business economics in 1977.  The business economics program is a joint program of the Department of Economics and the Harvard Business School.

You had worked for a few financial institutions before founding your own company, what are the advantage and disadvantage of working in a risk solution provider over in the risk management group of a big financial firm, especially for a junior?


If one has the chance to work for a very innovative firm like Kamakura, there’s the challenge and the pleasure of making the state of the art better every day.  Within large financial institutions, a junior risk analyst is often trapped using an old fashioned legacy risk system purchased years before from a mediocre vendor.  That’s bad for one’s career for two reasons.  First, you don’t learn state of the art risk management and you run the risk of turning into a risk dinosaur at a young age. Second, if the firm is not using best practice risk management, the odds of failure are high even at a large bank as we’ve seen in the last five years.

A lot of people blame Copula or Black-Scholes formula for the current financial crisis, what’s your opinion on this debate?


My partner Prof. Robert Jarrow has a nice paper on the misuse of financial models and a video on the front page of the Kamakura web site www.kamakuraco.com on exactly this topic.  Black and Scholes certainly shouldn’t be blamed if an analyst uses the Black model (which assumes interest rates are constant) to price interest rate options.  The incorrect usage of financial models is astonishingly widespread.

You recently wrote a series of articles on CDS trading volume, and questioned that the CDS quoted spreads are highly likely to have been affected by collusion (unfamiliar readers may refer to http://www.kamakuraco.com/Blog/tabid/231/EntryId/362/Collusion-and-CDS-Dealer-Volume.aspx for detail), what’s the direct motivation of this research? Does this issue commonly exist for other assets as well?


One of the issues we deal with daily at Kamakura is the steady improvement in the accuracy of our KRIS default probability models.  We have spent a decade looking at the CDS market and analyzing whether or not to add CDS spreads to our models as inputs.  We’ve concluded that there is minimal trading in individual reference names after analyzing the DTCC warehouse trade data.  The market is dominated by a few dealers, many of which have been named in lawsuits alleging manipulation of Libor.  One would be naïve to assume the same firms would not manipulate the CDS market.

What’s the biggest change you feel the credit crisis has brought to the risk management?


The credit crisis eliminated many dinosaurs from the financial services business and brought smarter people into senior management and into risk management.  It was a tough lesson for many but in the long run the financial services industry will be smarter.

What accomplishments so far are you the most proud of?


I am very proud of the extremely strong staff we have at Kamakura and at their continued push for absolute excellence.  It’s exciting to be surrounded by so many brilliant and self-motivated people who love what they do.

What is the single toughest challenge you’ve had to face in your past projects, and how did you get through it?


Mack McQuown, one of the co-founders of KMV, once said “This business is like surfing; if you are too far out in front of the wave you stall and get pounded by the wave.  If you are too far back in the wave you get pounded too.”  In the risk business anyone with a new idea is by definition “in front of the wave” and it’s been amazing to me how long it has taken people to realize there’s a better way to do things. That being said, we’ve been very successful in both risk information and risk management software and we’re extremely grateful to the “lead steers” who have shown the world what Kamakura can do.

What have you been up to recently? What projects are you working on?


We’re enhancing both our interest rate analytics and our credit models in a very significant way that is very exciting. A new edition of my book with Kenji Imai and Mark Mesler “Advanced Financial Risk Management: Tools & Techniques for Integrated Credit Risk and Interest Rate Risk Managements” is coming out later this year as well.

How do you like to spend your free time?


I like to spend time with my three daughters. I’m an aspiring ukulele player and I’m a director of the Hawaii Bicycling League, so I ride as much as I can.

Do you have other suggestions you like to share with us?


I know that people who read this website are very smart, and I strongly urge the readers to be smart and get smarter every single day of their career.  Those who stop learning become dinosaurs.

How can people contact you for business? Do you have a website or Twitter account or Facebook “Like” page?


Please feel free to contact us in either English or Chinese at info@kamakuraco.com or at the Beijing or Shanghai offices listed on our website www.kamakuraco.com.  The company twitter account is @KamakuraCo and my twitter account is @dvandeventer.


Add a comment
Emots
Enable HTML
Enable UBB
Enable Emots
Hidden
Remember
Nickname   Password   Optional
Site URI   Email   [Register]