On a rainy Thursday in October, I enter Maastricht University, on my way to interview Eric Beutner, Stephan Smeekes and Alexander Heinemann—the recipients of a prestigious grant from the Netherlands Organization for Scientific Research (NWO).
The NWO finances scientific research in all disciplines. Its financial resources are allocated based on an annual national competition of researchers. In 2015, 335 applications were submitted and 29 were granted. Beutner, Smeekes and Heinemann recently won a grant for Research Talent, the NWO programme that finances PhD projects.
A complex research topic
The subject of research for which they won the NWO grant is quite difficult to explain. The title of their proposal is “Bootstrap Inference for Risk Measures.” Risk management has become an increasingly sophisticated and important practice for businesses. It is the process of identifying, quantifying and managing risks that a financial institution or business faces.
Pension funds managers, for example, employ risk management to minimize the risk of benefit cuts for beneficiaries. After the financial crisis of 2008, we all realize that nothing is certain and even our money or pension isn’t 100 percent safe.
In that respect, regulators aspire to create a sustainable business environment. Their purpose is to establish and maintain financial stability by strengthening bank capital requirements.
In their project, Beutner, Smeekes and Heinemann develop methods for constructing confidence and prediction intervals for risk measures of financial time series by means of the bootstrap. The bootstrap is a simulation-based statistical technique that has proven to be a powerful tool while safeguarding against a wide range of possible misspecifications.
Getting to work
The research will be in progress for the next four years. During the first year Heinemann is working on equations that can prove the foundation for the methods financial institutions use. In weekly meetings the three of them discuss issues, find solutions for problems and ways to move forward.
They have a high-level direction point to work toward and a list of topics to cover. Some parts may turn out not to be feasible and some new problems may present themselves and need solving. Evaluation is a continuous process and they assure me they can always go further with the research. The NWO gives them all the space they need to be creative.
Their goal is to prove the foundation of risk measurement methods currently used by central banks. And to improve the accuracy of these models and develop new ones.
They invited me to stay for their regular meeting. They talked about the Delta method and the different opinions they have on it, and they discuss the equations Heinemann has been working on, which are written and rewritten on a whiteboard. They discuss Beta, Pi, events in terms of Epsilon, probabilities, what equals 0 and so on. It is enough input for Heinemann to continue his search for the validation of methods to be used in risk measurement.
The challenge is big, the process is fluid and the passion for their subject huge. That should lead to success.