Preface ......................................................... V
Contributors .................................................. XXV
Part I. IT Systems, Infrastructure and Applications in
Finance Introduction to Part ........................... 13
Chapter 1 SOA in the Financial Industry - Technology
Impact in Companies' Practice ........................ 9
Heiko Paoli, Carsten Holtmann, Stephan
Stathel, Olaf Zeitnitz, Marcel Jakobi
1.1. Introduction ............................................... 9
1.2. SOA - Different Perspectives .............................. 11
1.3. SOA - Technical Details ................................... 12
1.3.1. Elements and Layers ................................ 12
1.3.2. Comparison with State-of-the-art Distributed
Architecture Alternatives .......................... 15
1.4. Value Proposition of SOA .................................. 17
1.5. Case Study Union Investment ............................... 18
1.5.1. Introduction to the Use Case Company ............... 18
1.5.2. SOA Implementation at the Use Case Company ......... 20
1.6. Discussion ................................................ 23
1.7. Conclusion ................................................ 25
Chapter 2 Information Systems and IT Architectures for
Securities Trading .................................. 29
Feras Dabous, Fethi Rabhi
2.1. Introduction .............................................. 29
2.2. Financial Markets: Introduction and Terminology ........... 30
2.2.1. Introduction to Financial Markets .................. 30
2.2.2. Capital Markets Trading Instruments ................ 31
2.2.3. Equity Market ...................................... 31
2.2.4. Derivatives Market ................................. 32
2.2.5. Types of Orders .................................... 32
2.2.6. Classifications of Marketplaces .................... 33
2.3. Information Systems for Securities Trading ................ 34
2.3.1. Securities Trading Information Flow ................ 34
2.3.2. Categories of Capital Markets' Information
Systems ............................................ 37
2.4. Case Studies .............................................. 39
2.4.1. SMARTS ............................................. 39
2.4.2. X-STREAM ........................................... 42
2.5. IT Integration Architectures and Technologies ............. 44
2.5.1. Transport Level .................................... 45
2.5.2. Contents (Data) Level .............................. 46
2.5.3. Business Process Level ............................. 47
2.6. Conclusion ................................................ 49
Chapter 3 Product Management Systems in Financial Services
Software Architectures .............................. 51
Christian Knogler, Michael Linsmaier
3.1. The Initial Situation ..................................... 51
3.2. Weaknesses in Software Architectures and Business
Processes ................................................. 52
3.3. Objectives and Today's Options ............................ 55
3.4. A 'Product Server Based Business Application
Architecture' ............................................. 56
3.4.1. Business Considerations ............................ 56
3.4.2. Technical Considerations ........................... 58
3.5. Migrating into a New Architecture ......................... 60
3.5.1. Blueprint .......................................... 62
3.5.2. Product Data Analysis .............................. 62
3.5.3. Repository ......................................... 62
3.5.4. Consolidated Architecture .......................... 64
3.5.5. Innovated Architecture ............................. 65
3.6. Impacts on Software Development ........................... 67
3.7. Conclusion ................................................ 69
CHAPTER 4 Management of Security Risks - A Controlling
Model for Banking Companies ......................... 73
Ulrich Faisst, Oliver Prokein
4.1. Introduction .............................................. 73
4.2. The Risk Management Cycle ................................. 74
4.2.1. Identification Phase ............................... 74
4.2.2. Quantification Phase ............................... 77
4.2.3. Controlling Phase .................................. 79
4.2.4. Monitoring Phase ................................... 80
4.3. A Controlling Model for Security Risks .................... 82
4.3.1. Assumptions ........................................ 82
4.3.2. Determining the Optimal Security and Insurance
Level .............................................. 85
4.3.3. Constraints and Their Impacts ...................... 87
4.4. Conclusion ................................................ 91
Chapter 5 Process-Oriented Systems in Corporate
Treasuries: A Case Study from BMW Group ...... 95
Christian Ullrich, Jan Henkel
5.1. Introduction .............................................. 95
5.2. The Technological Environment ............................. 97
5.3. Challenges for Corporate Treasuries ...................... 101
5.4. Portrait BMW Group ....................................... 104
5.5. Portrait BMW Group Treasury .............................. 105
5.5.1. Organization and Responsibilities ................. 106
5.5.2. Business Process Design ........................... 108
5.6. Business Process Support ................................. 110
5.6.1. Best-of-Breed System Functionalities .............. 111
5.6.2. Decision-Support Functionalities .................. 119
5.7. Final Remarks ............................................ 120
Chapter 6 Streamlining Foreign Exchange Management
Operations with Corporate Financial Portals ........ 123
Hong Tuan Kiet Vo, Martin Glaum, Remigiusz
Wojciechowski
6.1. Introduction ............................................. 123
6.2. Challenges of Multinational Financial Management ......... 124
6.3. Corporate Financial Portals .............................. 125
6.3.1. Key Characteristics of Corporate Portals .......... 126
6.3.2. Corporate Financial Portals ....................... 127
6.4. Bayer's Corporate Foreign Exchange Management with
the Corporate Financial Portal ........................... 128
6.4.1. Corporate Foreign Exchange Management ............. 129
6.4.2. Bayer's Foreign Exchange Management Practice ...... 130
6.4.3. Redesigning Foreign Exchange Risk Management
with CoFiPot ...................................... 131
6.4.4. Lessons Learned ................................... 135
6.5. Conclusion ............................................... 138
Chapter 7 Capital Markets in the Gulf: International Access,
Electronic Trading and Regulation .................. 141
Peter Gomber, Marco Lutat, Steffen Schubert
7.1. Introduction ............................................. 141
7.2. The Evolution of GCC Stock Markets and Its
Implications ............................................. 143
7.3. Requirements of International Investors .................. 148
7.4. Systematic Analysis of the Exchanges in the Region ....... 151
7.4.1. Bahrain Stock Exchange (BSE) ...................... 151
7.4.2. Tadawul Saudi Stock Market (TSSM) ................. 154
7.4.3. Kuwait Stock Exchange (KSE) ....................... 155
7.4.4. Muscat Securities Market (MSM) .................... 156
7.4.5. Doha Securities Market (DSM) ...................... 157
7.4.6. Dubai Financial Market (DFM) ...................... 158
7.4.7. Abu Dhabi Securities Market (ADSM) ................ 159
7.5. Approaches to Further Open up the Stock Markets to
the International Community - The Dubai International
Financial Exchange (DIFX) Case ........................... 160
7.6. Conclusion ............................................... 165
7.7. Appendix ................................................. 165
CHAPTER 8 Competition of Retail Trading Venues -
Online-brokerage and Security Markets in Germany ... 171
Dennis Kundisch, Carsten Holtmann
8.1. Introduction ............................................. 171
8.2. Service Components and Fees in Securities Trading ........ 173
8.2.1. Service Components in Securities Trading .......... 173
8.2.2. Access Fees for Participants at German
Exchanges ......................................... 174
8.2.3. Fees for Price Determination Services ............. 176
8.2.4. Discussion of Services and Fees ................... 179
8.3. Analysis of the Price Models of Online-brokers ........... 181
8.3.1. Forms of Appearance of Online-brokerage ........... 181
8.3.2. Price Models of Selected Online-brokers ........... 182
8.3.3. Comparison of the Price Models and Discussion ..... 184
8.4. Outlook: Off-exchange-markets as Competitors ............. 187
8.5. Conclusion ............................................... 189
CHAPTER 9 Strategies for a Customer-Oriented
Consulting Approach ................................ 193
Alexander Schöne
9.1. Introduction ............................................. 193
9.2. Qualitative Customer Service Through Application
of Portfolio Selection Theory ............................ 194
9.2.1. Markowitz' Portfolio Selection Theory ............. 195
9.2.2. Application to Real-World Business ................ 197
9.2.3. Consideration of Existing Assets .................. 199
9.2.4. Illiquid Asset Classes and Transaction Costs ...... 200
9.2.5. Conclusions for Daily Use ......................... 201
9.3. Support of Customer-Oriented Consulting Using Modern
Consulting Software ...................................... 202
9.3.1. Architecture of a Customer-Oriented
Consulting Software ............................... 202
9.3.2. Mobile Consulting as a Result of Customer-
Orientation ....................................... 205
9.4. Conclusion ............................................... 208
Chapter 10 A Reference Model for Personal Financial
Planning ........................................... 209
Oliver Braun, Gütnter Schmidt
10.1.Introduction ............................................. 209
10.2.State of the Art ......................................... 210
10.2.1.Personal Financial Planning ....................... 210
10.2.2.Systems and Models ................................ 212
10.2.3.Reference Models .................................. 214
10.2.4.Requirements for a Reference Model for Personal
Financial Planning ................................ 216
10.3.Framework for a Reference Model for Personal
Financial Planning ....................................... 218
10.4.Analysis Model ........................................... 220
10.4.1.Dynamic View on the System: Use Cases ............. 220
10.4.2.Structural View on the System: Class Diagrams ..... 221
10.4.3.Use Case Realization: Sequence and Activity
Diagrams .......................................... 222
10.4.4.Example Models .................................... 222
10.5.System Architecture ...................................... 230
10.6.Conclusion and Future Trends ............................. 233
Chapter 11 Internet Payments in Germany ....................... 239
Malte Krueger, Kay Leibold
11.1.Introduction: The Long Agony of Internet Payments ........ 239
11.2.Is There a Market for Innovative Internet Payment
Systems? ................................................. 240
11.2.1.Use of Traditional Payment Systems: Internet
Payments and the Role of Payment Culture .......... 240
11.2.2.The Role of Technology ............................ 242
11.2.3.The Role of Different Business Models ............. 244
11.3.Internet Payments in Germany: A View from Consumers
and Merchants ............................................ 247
11.3.1.The Consumers' View ............................... 247
11.3.2.The Merchants'View ................................ 249
11.4.SEPA ..................................................... 253
11.5.Outlook .................................................. 254
Chapter 12 Grid Computing for Commercial Enterprise
Environments ....................................... 257
Daniel Minoli
12.1.Introduction ............................................. 257
12.2.What is Grid Computing and What are the Key Issues? ...... 259
12.3.Potential Applications and Financial Benefits
of Grid Computing ........................................ 268
12.4.Grid Types, Topologies, Components, Layers -
A Basic View ............................................. 271
12.5.Comparison with other Approaches ......................... 279
12.6.A Quick View at Grid Computing Standards ................. 283
12.7.A Pragmatic Course of Investigation on Grid Computing .... 284
Chapter 13 Operational Metrics and Technical Platform
for Measuring Bank Process Performance ............. 291
Markus Kress, Dirk Wölfing
13.1.Introduction ............................................. 291
13.2.Industrialisation in the 21st Century? ................... 292
13.3.Process Performance Metrics as an Integral Part of
Business Performance Metrics ............................. 293
13.3.1.Work Processes, Qualitative Criteria and
Measuring Process Value ........................... 294
13.4.Controls for Strategic Alignment and Operational
Customer and Resource Management ......................... 296
13.5.Metrics Used for Input/Output Analysis ................... 296
13.6.Output Metrics: Cash Inflows a Function of Output
Quality .................................................. 297
13.7.Cash Outflows a Function of Available Capacity ........... 298
13.8.Time and Volume as Non-financial Metrics of Process
Performance .............................................. 298
13.8.1.Fundamental Input/Output Process Performance
Characteristics ................................... 299
13.9.Technical Realization .................................... 299
13.9.1.Monitoring Challenges ............................. 300
13.10.Related Work ............................................ 301
13.11.SOA Based Business Process Performance Monitoring ....... 302
13.11.1.Data Warehouse ................................... 305
13.11.2.Complex Event Processing ......................... 305
13.11.3.Measuring "Time" ................................. 306
13.11.4.Measuring "Volume" ............................... 307
13.11.5.Measurement "Capacity" ........................... 307
13.11.6.Measuring "Quality" .............................. 308
13.11.7.Measuring "Costs" or "Discounted Cash Flows"
(DCF) ............................................ 308
13.12.Conclusion .............................................. 308
CHAPTER 14 Risk and IT in Insurances .......................... 311
Ute Werner
14.1.The Landscape of Risks in Insurance Companies ............ 311
14.2.IT's Function for Risk Identification and Analysis ....... 314
14.2.1.Components of Underwriting Risk ................... 314
14.2.2.Assessing Hazard, Exposure, Vulnerability
and Potential Loss ................................ 316
14.2.3.Information Management - Chances and Challenges ... 321
14.3.IT as a Tool for Managing the Underwriting Risk .......... 324
14.3.1.Disaster Assistance ............................... 324
14.3.2.Claims Handling ................................... 326
14.3.3.Market Development ................................ 327
14.4.Conclusion ............................................... 329
CHAPTER 15 Resolving Conceptual Ambiguities in
Technology Risk Management ......................... 333
Christian Cuske, Tilo Dickopp, Axel
Korthaus, Stefan Seedorf
15.1.New Challenges for IT Management ......................... 333
15.2.Knowledge Management Applications in Finance ............. 334
15.2.1.An Extended Perspective of Operational
Risk Management ................................... 334
15.2.2.Formal Ontologies as an Enabling Technology ....... 336
15.2.3.The Case for Ontology-based Technology Risk
Management ........................................ 337
15.3.Technology Risk Management Using OntoRisk ................ 338
15.3.1.The Technology Risk Ontology ...................... 339
15.3.2.The OntoRisk Process Model ........................ 343
15.3.3.System Architecture ............................... 347
15.4.Case Study: Outsourcing in Banking ....................... 348
15.4.1.Motivation and Influencing Factors ................ 348
15.4.2.Trading Environment ............................... 349
15.4.3.Analysis and Results .............................. 352
15.5.Conclusion ............................................... 352
Chapter 16 Extracting Financial Data from SEC Filings
for US GAAP Accountants ............................ 357
Thomas Stümpert
16.1.Introduction ............................................. 357
16.2.Structure of 10-K and 10-Q Filings ....................... 359
16.2.1.Structure of Document Elements .................... 359
16.2.2.Embedded Plain Text ............................... 360
16.2.3.Embedded HTML ..................................... 361
16.2.4.Financial Reports Overview ........................ 362
16.3.Information Retrieval Within EASE ........................ 363
16.3.1.Information Extraction from Traditional
Filings ........................................... 364
16.3.2.Standard Vector Space Model ....................... 365
16.3.3.Extended Vector Space Model ....................... 367
16.3.4.Extraction of HTML Documents ...................... 368
16.4.The Role of XBRL ......................................... 371
16.5.Empirical Results ........................................ 371
16.6.Conclusion ............................................... 373
Part II.IT Methods in Finance Introduction to Part II ......... 379
Chapter 17 Networks in Finance ................................ 383
Anna Nagurney
17.1.Introduction ............................................. 383
17.2.Financial Optimization Problems .......................... 385
17.3.General Financial Equilibrium Problems ................... 388
17.3.1.A Multi-Sector, Multi-Instrument Financial
Equilibrium Model ................................. 389
17.3.2.Model with Utility Functions ...................... 394
17.3.3.Computation of Financial Equilibria ............... 395
17.4.Dynamic Financial Networks with Intermediation ........... 397
17.4.1.The Demand Market Price Dynamics .................. 400
17.4.2.The Dynamics of the Prices at the
Intermediaries .................................... 401
17.4.3.Precursors to the Dynamics of the Financial
Flows ............................................. 401
17.4.4.Optimizing Behavior of the Source Agents .......... 402
17.4.5.Optimizing Behavior of the Intermediaries ......... 403
17.4.6.The Dynamics of the Financial Flows Between
the Source Agents and the Intermediaries .......... 404
17.4.7.The Dynamics of the Financial Flows Between
the Intermediaries and the Demand Markets ......... 405
17.4.8.The Projected Dynamical System .................... 406
17.4.9.A Stationary/Equilibrium Point .................... 406
17.4.10.Variational Inequality Formulation of
Financial Equilibrium with Intermediation ......... 407
17.4.11.The Discrete-Time Algorithm (Adjustment
Process) .......................................... 408
17.4.12.The Euler Method ................................. 408
17.4.13.Numerical Examples ............................... 410
17.5.The Integration of Social Networks with Financial
Networks ................................................. 412
Chapter 18 Agent-based Simulation for Research in
Economics .......................................... 421
Clemens van Dinther
18.1.Introduction ............................................. 421
18.2.Simulation in Economics .................................. 423
18.2.1.Benefits of Simulation ............................ 423
18.2.2.Difficulties of Simulation ........................ 424
18.3.Agent-based Simulation Approaches ........................ 427
18.3.1.Pure Agent-based Simulation: The Bottom-up
Approach .......................................... 427
18.3.2.Monte Carlo Simulation ............................ 428
18.3.3.Evolutionary Approach ............................. 430
18.3.4.Reinforcement Learning ............................ 432
18.4.Summary .................................................. 438
CHAPTER 19 The Heterogeneous Agents Approach to Financial
Markets - Development and Milestones ............... 443
Jörn Dermietzel
19.1.Introduction ............................................. 443
19.2.Fundamental Assumptions in Financial Theory .............. 444
19.2.1.Rationality ....................................... 444
19.2.2.Efficient Market Hypothesis ....................... 445
19.2.3.Representative Agent Theory ....................... 445
19.3.Empirical Observations ................................... 446
19.4.Evolution of Models ...................................... 447
19.4.1.Fundamentalists vs.Chartists ...................... 447
19.4.2.Social Interaction ................................ 450
19.4.3.Adaptive Beliefs .................................. 452
19.4.4.Artificial Stock Markets .......................... 454
19.5.Competition of Trading Strategies ........................ 456
19.5.1.Friedman Hypothesis Revisited ..................... 456
19.5.2.Dominant Strategies ............................... 457
19.6.Multi-Asset Markets ...................................... 458
19.7.Extensions and Applications .............................. 459
19.8.Conclusion and Outlook ................................... 459
Chapter 20 An Adaptive Model of Asset Price and Wealth
Dynamics in a Market with Heterogeneous Trading
Strategies ......................................... 465
Carl Chiarella, Xue-Zhong He
20.1.Introduction ............................................. 465
20.2.Adaptive Model with Heterogeneous Agents ................. 468
20.2.1.Notation .......................................... 469
20.2.2.Portfolio Optimization Problem of Heterogeneous
Agents ............................................ 470
20.2.3.Market Clearing Equilibrium Price - A Growth
Model ............................................. 471
20.2.4.Population Distribution Measure ................... 471
20.2.5.Heterogeneous Representative Agents and Wealth
Distribution Measure .............................. 472
20.2.6.Performance Measure, Population Evolution
and Adaptiveness .................................. 472
20.2.7.An Adaptive Model ................................. 474
20.2.8.Trading Strategies ................................ 475
20.2.9.Fundamental Traders ............................... 475
20.2.10.Momentum Traders ................................. 475
20.2.11.Contrarian Traders ............................... 476
20.3.An Adaptive Model of Two Types of Agents ................. 477
20.3.1.The Model for Two Types of Agents ................. 477
20.3.2.Wealth Distribution and Profitability
of Trading Strategies ............................. 478
20.3.3.Population Distribution and Herd Behavior ......... 478
20.3.4.A Quasi-Homogeneous Model ......................... 479
20.4.Wealth Dynamics of Momentum Trading Strategies ........... 481
20.4.1.Case: (L1L2) = (3,5) .............................. 481
20.4.2.Other Lag Length Combinations ..................... 484
20.5.Wealth Dynamics of Contrarian Trading Strategies ......... 486
20.5.1.Case: (L1L2) = (3,5) .............................. 487
20.5.2.Other Cases ....................................... 489
20.6.Conclusion ............................................... 491
20.7.Appendix ................................................. 492
20.7.1.Proof of Proposition 1 ............................ 492
20.7.2.Time Series Plots, Statistics and
Autocorrelation Results ........................... 494
CHAPTER 21 Simulation Methods for Stochastic Differential
Equations .......................................... 501
Eckhard Platen
21.1.Stochastic Differential Equations ........................ 501
21.2.Approximation of SDEs .................................... 502
21.3.Strong and Weak Convergence .............................. 503
21.4.Strong Approximation Methods ............................. 505
21.5.Weak Approximation Methods ............................... 506
21.6.Monte Carlo Simulation for SDEs .......................... 509
21.7.Variance Reduction ....................................... 510
Chapter 22 Foundations of Option Pricing ............... 515
Peter Buchen
22.1.Introduction ............................................. 515
22.2.The PDE and EMM Methods .................................. 517
22.2.1.Geometrical Brownian Motion ....................... 517
22.2.2.The Black-Scholes pde ............................. 518
22.2.3.The Equivalent Martingale Measure ................. 519
22.2.4.Effect of Dividends ............................... 521
22.3.Pricing Simple European Derivatives ................. 521
22.3.1.Asset and Bond Binaries ........................... 522
22.3.2.European Calls and Puts ........................... 524
22.4.Dual-Expiry Options ...................................... 525
22.4.1.Second-order Binaries ............................. 525
22.4.2.Binary Calls and Puts ............................. 527
22.4.3.Compound Options .................................. 528
22.4.4.Chooser Options ................................... 529
22.5.Dual Asset Options ....................................... 530
22.5.1.The Exchange Option ............................... 531
22.5.2.A Simple ESO ...................................... 532
22.5.3.Other Two Asset Exotics ........................... 532
22.6.Barrier Options .......................................... 533
22.6.1.PDE's for Barrier Options ......................... 533
22.6.2.Image Solutions for the BS-pde .................... 534
22.6.3.The D/O Barrier Option ............................ 535
22.6.4.Equivalent Payoffs ................................ 535
22.6.5.Call and Put Barriers ............................. 536
22.7.Lookback Options ......................................... 537
22.7.1.Equivalent Payoffs for Lookback Options ........... 537
22.7.2.Generic Lookback Options .......................... 539
22.7.3.Floating Strike Lookback Options .................. 540
22.8.Summary .................................................. 540
CHAPTER 23 Long-Range Dependence, Fractal Processes,
and Intra-Daily Data ............................... 543
Wei Sun, Svetlozar (Zari) Rachev,
Frank Fabozzi
23.1.Introduction ............................................. 543
23.2.Stylized Facts of Financial Intra-daily Data ............. 545
23.2.1.Random Durations .................................. 545
23.2.2.Distributional Properties of Returns .............. 545
23.2.3.Autocorrelation and Seasonality ................... 546
23.2.4.Clustering ........................................ 546
23.2.5.Long-range Dependence ............................. 547
23.3.Computer Implementation in Studying Intra-daily Data ..... 547
23.3.1.Data Transformation ............................... 547
23.3.2.Data Cleaning ..................................... 549
23.4.Research on Intra-Daily Data in Finance .................. 550
23.4.1.Studies of Volatility ............................. 550
23.4.2.Studies of Liquidity .............................. 553
23.4.3.Studies of Market Microstructure .................. 554
23.4.4.Studies of Trade Duration ......................... 556
23.5.Long-Range Dependence .................................... 560
23.5.1.Estimation and Detection of LRD in Time Domain .... 560
23.5.2.Estimation and Detection of LRD in Frequency
Domain ............................................ 564
23.5.3.Econometric Modeling of LRD ....................... 566
23.6.Fractal Processes and Long-Range Dependence .............. 569
23.6.1.Specification of the Fractal Processes ............ 569
23.6.2.Estimation of Fractal Processes ................... 571
23.6.3.Simulation of Fractal Processes ................... 574
23.6.4.Implications of Fractal Processes ................. 575
23.7.Summary .................................................. 576
Chapter 24 Bayesian Applications to the Investment
Management Process ................................. 587
Biliana Bagasheva, Svetlozar (Zari) Rachev,
John Hsu, Frank Fabozzi
24.1.Introduction ............................................. 587
24.2.The Single-Period Portfolio Problem ...................... 587
24.3.Combining Prior Beliefs and Asset Pricing Models ......... 592
24.4.Testing Portfolio Efficiency ............................. 596
24.4.1.Tests Involving Posterior Odds Ratios ............. 597
24.4.2.Tests Involving Inefficiency Measures ............. 599
24.5.Return Predictability .................................... 600
24.5.1.The Static Portfolio Problem ...................... 601
24.5.2.The Dynamic Portfolio Problem ..................... 603
24.5.3.Model Uncertainty ................................. 604
24.6.Conclusion ............................................... 607
CHAPTER 25 Post-modern Approaches for Portfolio
Optimization ....................................... 613
Borjana Racheva-Iotova, Stoyan Stoyanov
25.1.Introduction ............................................. 613
25.2.Risk and Performance Measures Overview ................... 614
25.2.1.The Value-at-Risk Measure ......................... 616
25.2.2.Coherent Risk Measures ............................ 616
25.2.3.The Conditional Value-at-Risk ..................... 618
25.2.4.Performance Measures .............................. 619
25.3.Heavy-tailed and Asymmetric Models for Assets Returns .... 621
25.3.1.One-dimensional Models ............................ 622
25.3.2.Multivariate Models ............................... 623
25.4.Strategy Construction Based on CVaR Minimization ......... 624
25.4.1.Long-only Active Strategy ......................... 625
25.4.2.Long-short Strategy ............................... 627
25.4.3.Zero-dollar Strategy .............................. 628
25.4.4.Other Aspects ..................................... 629
25.5.Optimization Example ..................................... 629
25.6.Conclusion ............................................... 633
Chapter 26 Applications of Heuristics in Finance .............. 635
Manfred Gilli, Dietmar Maringer, Peter Winker
26.1.Introduction ............................................. 635
26.2.Heuristics ............................................... 636
26.2.1.Traditional Numerical vs.Heuristic Methods ........ 636
26.2.2.Some Selected Approaches .......................... 637
26.2.3.Further Methods and Principles .................... 639
26.3.Applications in Finance .................................. 642
26.3.1.Portfolio Optimization ............................ 642
26.3.2.Model Selection and Estimation .................... 648
26.4.Conclusion ............................................... 651
CHAPTER 27 Kernel Methods in Finance .......................... 655
Stephan Chalup, Andreas Mitschele
27.1.Introduction ............................................. 655
27.2.Kernelisation ............................................ 657
27.3.Dimensionality Reduction ................................. 658
27.3.1.Classical Methods for Dimensionality Reduction .... 658
27.3.2.Non-linear Dimensionality Reduction ............... 661
27.4.Regression ............................................... 664
27.5.Classification ........................................... 666
27.6.Kernels and Parameter Selection .......................... 668
27.7.Survey of Applications in Finance ........................ 670
27.7.1.Credit Risk Management ............................ 670
27.7.2.Market Risk Management ............................ 673
27.7.3.Synopsis and Possible Future Application Fields ... 675
27.8.Overview of Software Tools ............................... 678
27.9.Conclusion ............................................... 679
Chapter 28 Complexity of Exchange Markets .............. 689
Mao-cheng Cai, Xiaotie Deng
28.1.Introduction ............................................. 689
28.2.Definitions and Models ................................... 691
28.3.On Complexity of Arbitrage in a General Market Model ..... 694
28.4.Polynomial-Time Solvable Models of Exchange Markets ...... 697
28.5.Arbitrage on Futures Markets ............................. 699
28.6.The Minimum Number of Operations to Eliminate
Arbitrage ................................................ 702
28.7.Remarks and Discussion ................................... 703
Part III.Further Aspects and Future Trends Introduction
to Part III .......................................... 709
Chapter 29 IT Security: New Requirements, Regulations
and Approaches ..................................... 711
Günter Müller, Stefan Sackmann, Oliver Prokein
29.1.Introduction ............................................. 711
29.2.Online Services in the Financial Sector .................. 712
29.2.1.Integration of Financial Services ................. 712
29.2.2.Security Risks of Personalized Services ........... 714
29.3.Security beyond Access Control ........................... 714
29.3.1.Security: Protection Goals ........................ 715
29.3.2.Security: Dependability ........................... 717
29.4.Security: Policy and Audits .............................. 717
29.4.1.Security Policies ................................. 718
29.4.2.Logging Services .................................. 721
29.5.Regulatory Requirements and Security Risks ............... 722
29.5.1.Data Protection Laws .............................. 722
29.5.2.Regulatory Requirements ........................... 723
29.5.3.Managing Security and Privacy Risks ............... 724
29.6.Conclusion ............................................... 727
Chapter 30 Legal Aspects of Internet Banking in
Germany ............................................ 731
Gerald Spindler, Einar Recknagel
30.1.Introduction ............................................. 731
30.2.Contract Law - Establishing Business Connections,
Concluding Contracts, and Consumer Protection ............ 732
30.2.1.Establishing the Business Connection .............. 732
30.2.2.Contract Law ...................................... 732
30.2.3.Terms and Conditions .............................. 733
30.2.4.Consumer Protection - EU-Legislation and
Directives ........................................ 733
30.3.Liability - Duties and Obligations of Bank and
Customer ................................................. 736
30.3.1.Phishing and Its Variations - A Case of
Identity .......................................... 736
30.3.2.Legal Situation in Case of Phishing or Pharming ... 737
30.3.3.Procedural Law and the Burden of Proof ............ 746
Chapter 31 Challenges and Trends for Insurance
Companies .......................................... 753
Markus Frosch, Joachim Lauterbach, Markus Warg
31.1.Starting Position ........................................ 753
31.2.Challenges and Trends .................................... 754
31.2.1.Business and IT Strategy in the Balanced
Scorecard ......................................... 754
31.2.2.Self-controlling Systems: Management Based
on the Contribution Margin ........................ 756
31.2.3.Unique Selling Propositions: On Demand
Insurance ......................................... 759
31.2.4.Sales and Marketing Support: Access to Primary
Data .............................................. 761
31.2.5.Talent Management: Identify, Hire and Develop
Talented Staff .................................... 765
31.3.Summary and Outlook ...................................... 770
CHAPTER 32 Added Value and Challenges of Industry-
Academic Research Partnerships - The Example
of the E-Finance Lab ............................... 773
Wolfgang Koenig, Stefan Blumenberg, Sebastian
Martin
32.1.Introduction ............................................. 773
32.2.Structure of the EFL ..................................... 773
32.3.Generation and Sharing of Knowledge Between Science
and Practice: Research Cycle ............................. 775
32.3.1.Problem Definition ................................ 776
32.3.2.Operationalization ................................ 776
32.3.3.Application ....................................... 777
32.3.4.Analysis .......................................... 777
32.3.5.Utilization ....................................... 779
32.4.Added Value and Challenges of the Industry-Academic
Research Partnership ..................................... 783
32.5.Conclusion ............................................... 785
Index ......................................................... 787
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