Research
Research Studies–Proposal Requests
Financial Industry Use of Correlation Matrices and Other Approaches
- Background
Recently, many financial institutions have developed correlation matrices to use in their internal capital models. However, it is unclear to what extent correlation matrices have been employed and the range of practice of their use. In addition, there has not been a comprehensive analysis of the methods being used with a focus on their strengths and weaknesses to help guide their future use. With such an analysis, recommendations could be made on how the financial industry can more efficiently and effectively incorporate correlation matrices as an aggregation tool within their internal capital models and move the state of the art forward.
- Research Objective
To better understand the range of practice currently used in the development and application of correlation matrices for internal capital models, the CAS/CIA/SOA’s Risk Management Section Research Team is seeking research proposals to develop and issue a survey that would explore current financial industry practice. The researchers would identify target companies willing to respond, collect and aggregate the responses, and analyze the results. Based on these results, the researchers would prepare a report summarizing the merits of the methods used among other findings as well as thoughts for future use. The report would be made publicly available as a product of the Risk Management Section.
The survey and resulting report should cover the following list of items (although not
necessarily limited to the following):
- The methodology and development of correlation matrices
- The key drivers and assumptions used in developing the correlation matrix
- The risk factors represented in the correlation matrix
- The range of correlation factors for different risk factors in the financial services industry
- Observations on current practices
- Future improvements to current practice and recommendations for best practice
- Data requirements and tools needed for both current and future, improved practice
- An examination of whether numerical methods can be used to improve the speed of calculation by applying
sparse matrix techniques
- Other approaches for internal capital models
- Proposal
To facilitate the evaluation of proposals, the following information should be submitted:
- Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
- An outline of the approach to be used, emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
- Cost estimates for the research, including computer time, salaries, report preparation, research costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
- A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions.
- Ideas regarding the form and distribution of the final report, both for immediate release and for permanent reference (e.g., submission to North American Actuarial Journal, SOA Monograph Series, CD ROM).
- Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed
- Selection Process
The CAS/CIA/SOA Risk Management Research Team is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the committee will make the final decision. The SOA's Research Actuary will provide staff actuarial support. A POG will be appointed to oversee the project upon selection of the proposal.
- Questions
Any questions regarding this RFP should be directed to:
Steven Siegel, SOA Research Actuary
Society of Actuaries
475 N. Martingale Road, Suite 600
Schaumburg, IL 60173–2226.
ph: 847.706.3578
f: 847.273.8578
- Notification of Intention to Submit Proposal
If you intend to submit a proposal, please send written notification to:
Jeanne Nallon
ph: 847.706.3592
f: 847.273.8592
- Submission of Proposal
If you intend to submit a proposal, please send written notification by February 15th, 2007 to:
Jeanne Nallon
ph: 847.706.3592
f: 847.273.8592
Proposals must be received no later than February 28, 2007. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than March 15, 2007.
Note: Proposals are considered confidential and proprietary.
- Conditions
The CAS/CIA/SOA Risk Management Research Team reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available to proceed. The SOA also reserves the right to redirect the project as is deemed advisable. The SOA intends to copyright and publish the results of this research. The research will be considered work-for-hire and all rights thereto belong to SOA. However, appropriate credit will be given to the researcher(s).
If you intend to submit a proposal please send written notification by February 15, 2007 to:
Jeanne Nallon
ph: 847.706.3592
f: 847.273.8592