Objective and Research

The Daiwa Securities Group Chair is established for studies of financial engineering, through which we would contribute to restore the Japanese economy and industries to the full strength. Of particular interests are the studies of how to carry out structural reforms for rebirth of new industries. For this purpose, we will carry out the following two research projects. The first is the optimal risk allocation. Over the past few years, the Japanese economy has shown signs of recovering from the long recession. The full recovery can be achieved only after financial institutions supply funds to the real sector in an appropriate way. This implies that the recovery depends on the proper risk allocation and its control. Over the recession period, Japanese financial sectors were reorganized, and now only a few institutions are doing investiment bankings. Their business performances have a big impact not only on the financial sectors, but also the whole Japanese economy. From this standpoint, we study the risk management of investment banking, especially how financial institutions should manage the risk when they cannot fully diversify their investments. As for the banking industry, we aim to provide solutions and answers related to the "New Basel Capital Accord" that will come into practice in 2007. The second is the pricing of derivatives under incomplete markets. Financial engineerng has been making dramatic progress since Black and Scholes invented their celebrated price formula for European call options. It has contributed to diverse areas of economics, including the evaluation of credit risk that is essential to the issue of disposal of non-performing loans. However, while results for complete markets have been well established, results for incomplete markets are relatively scarce. It is unfortunate that no simple pricing, such as the Black-Scholes model in the complete market counterpart, has been derived for pricing assets in incomplete markets. Particular examples that are of interests to us include life insurance, nonlife insurance and real estates; the assets that are not traded in any active market. We provide the program of Financial and Securities System, aiming to develop a sound valuation and risk management framework for assets in incomplete markets.