[Prof. Dr. Raimond Maurer, Huy Thanh Vo, E-Finance Lab, Frankfurt University]

The focus of the project is on institutional investors such as investment funds, insurance companies or “Pensionskassen”. The primary objective of such financial institutions is to invest (substantial) revenues from their ongoing business activities in an appropriate portfolio consisting of financial assets (equities, bonds, real estate) and derivative instruments (options, futures, swaps) in national and international financial markets.
When we observe high uncertainty in financial markets, institutional investors prefer predefined minimum rates of return at a predefined risk level to have more certainty when funding their guaranteed liabilities. Some guaranteed liabilities are inevitable because they are imposed by law such as the nominal maintenance of capital (Riester contracts) or the minimum rate of return (insurance contracts). The “Total Return” approach raises a lot of questions regarding the design and implementation of the much needed but complex trading strategies.
Dealing with estimation risk plays a predominant role. The reason why, is that even fundamental parameters such as the risk and return of an investment can neither be specified in advance nor forecasted with certainty. Scientific methods to incorporate parameter uncertainty from historical data and forecasting models into more precise estimations are essential for modern investment management.