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Assistant Professor  Investing is risky business, but there are strategies investors can use to manage risk. Successfully employing these strategies requires knowing just how much risk you have exposed yourself to. Stefan Weber finds better ways to do just that. “I’m looking at the question: ‘How do you measure the downside risk of financial positions in a reasonable way?’” he says. “The standard risk measurement tool used now has drawbacks. I’m interested in how we can improve it.” Weber came to Cornell from the Institute for Mathematics at Humboldt University of Berlin, where he earned his Ph.D. He was drawn here by the prospect of working with “superstars” of financial engineering, both in the School of Operations Research and Information Engineering and at the Johnson Graduate School of Management. “Cornell is a university with a lot of excellent probabilists,” he says. “In this interdisciplinary area, you have a lot of really good people, in a lot of departments.” By answering questions about risk, Weber’s research does more than help investment banks make money. It can also help governments take steps to avoid economic upheaval. “All these banks are interacting with each other, so if a bank exposes itself to a particular risk and then defaults, that could lead to other banks getting in trouble,” he says. “We need to understand how you regulate banks optimally, and for that you have to understand what capital constraints you want to impose, and to do that, you need to know how you will measure risk.” Like a sickness, financial collapse can spread quickly from one bank to another, a phenomenon Weber has also studied known as credit contagion. That’s not just a convenient metaphor, for it can be modeled with the same mathematics used to model the spread of diseases. “The interesting thing is that the methods we used there are drawn from those used in statistical physics and mathematical biology,” he says. “They are also used to model magnets, semi-conductors, and the distribution of animal populations.” Enhancing the stability and efficiency of markets produces not only better investment opportunities, but also better ways to insure against another kind of risk—that posed by hurricanes and other natural disasters. To protect themselves from huge losses, insurance companies re-insure themselves with bigger insurance companies, but, says Weber, catastrophe bonds backed by a huge pool of investors could also insure against these risks. “Understanding how the market works and how financial products can be structured and financial risk, all of these things can lead to new products which can be very good for people,” says Weber. |
