Financial Risk Management : Models, History, and Institutions

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2011-10-04
  • Publisher: Wiley
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An in-depth look at the tools and techniques professionals use to address financial risksRisk and uncertainty, as Allan Malz explains in his ground-breaking new book, are two completely different concepts. Risk is a quantifiable uncertainty that can be modeled, while uncertainty defines non-quantifiable outcomes that are not always known. Part art and part science, the study of risk remains a relatively new discipline in finance and economics that continues to be refined. Financial crisis, rather than destroying the need for risk management, has given even great nuance and meaning to what risks exist and can be managed and controlled, and a taxonomy of new risks that need to be explored in ever more meaningful ways. This definitive guide on financial risk Explores all the tools and techniques needed to cope with risk Addresses state of the art approaches to modeling and managing risks Investigates stress tests in periods of heightened uncertainty, and the impact that variables such as liquidity and correlations can have on risk mitigation Provides practicing risk professionals with useful rules of thumb, intuitions, and insights gleaned from Malz's entire career as risk researcher, chief risk officer, and financial market regulator outside his classroom at Columbia UniversityInformative and engaging, this book will help you understand why risk has become its own essential discipline on Wall Street and beyond.

Author Biography

ALLAN M. MALZ is a Senior Analytical Advisor in the Markets Group at the Federal Reserve Bank of New York, where he has also worked on implementation of the Fed's emergency liquidity programs to address the financial crisis. Before rejoining the Fed, he was chief risk officer at several multi-strategy hedge fund management firms. Previously, Malz was head of research at RiskMetrics Group, which he joined on its spinoff from J.P. Morgan. Malz spent his earlier career at the New York Fed as a researcher and foreign exchange trader. His research, which includes forecasting financial crises, risk measurement for options, and estimation of risk-neutral probability distributions, has been published in a number of industry and academic journals. Malz holds a PhD in economics from Columbia University, where he also teaches a graduate course in financial risk management.

Table of Contents

List of Figuresp. xvii
Prefacep. xxi
Financial Risk in a Crisis-Prone Worldp. 1
Some History: Why Is Risk a Separate Discipline Today?p. 1
The Scope of Financial Riskp. 34
Market Risk Basicsp. 43
Arithmetic, Geometric, and Logarithmic Security Returnsp. 44
Risk and Securities Prices: The Standard Asset Pricing Modelp. 49
The Standard Asset Distribution Modelp. 63
Portfolio Risk in the Standard Modelp. 75
Benchmark Interest Ratesp. 88
Value-at-Riskp. 93
Definition of Value-at-Riskp. 94
Volatility Estimationp. 99
Modes of Computationp. 108
Short Positionsp. 113
Expected Shortfallp. 114
Nonlinear Risks and the Treatment of Bonds and Optionsp. 119
Nonlinear Risk Measurement and Optionsp. 121
Yield Curve Riskp. 136
VaR for Default-Free Fixed Income Securities Using The Duration and Convexity Mappingp. 148
Portfolio VaR for Market Riskp. 159
The Covariance and Correlation Matricesp. 160
Mapping and Treatment of Bonds and Optionsp. 162
Delta-Normal VaRp. 163
Portfolio VAR via Monte Carlo simulationp. 174
Option Vega Riskp. 175
Credit and Counterparty Riskp. 191
Defining Credit Riskp. 192
Credit-Risky Securitiesp. 193
Transaction Cost Problems in Credit Contractsp. 196
Default and Recovery: Analytic Conceptsp. 199
Assessing creditworthinessp. 204
Counterparty Riskp. 207
The Merton Modelp. 213
Credit Factor Modelsp. 222
Credit Risk Measuresp. 226
Spread Risk and Default Intensity Modelsp. 231
Credit Spreadsp. 231
Default Curve Analyticsp. 235
Risk-Neutral Estimates of Default Probabilitiesp. 241
Spread Riskp. 261
Portfolio Credit Riskp. 265
Default Correlationp. 266
Credit Portfolio Risk Measurementp. 270
Default Distributions and Credit VaR with the Single-Factor Modelp. 275
Using Simulation and Copulas to Estimate Portfolio Credit Riskp. 284
Structured Credit Riskp. 297
Structured Credit Basicsp. 297
Credit Scenario Analysis of a Securitizationp. 309
Measuring Structured Credit Risk via Simulationp. 318
Standard Tranches and Implied Credit Correlationp. 337
Issuer and Investor Motivations for Structured Creditp. 342
Alternatives to the Standard Market Risk Modelp. 349
Real-World Asset Price Behaviorp. 349
Alternative Modeling Approachesp. 363
The Evidence on Non-Normality in Derivatives Pricesp. 372
Assessing the Quality of Risk Measuresp. 393
Model Riskp. 393
Backtesting of VaRp. 407
Coherence of VaR Estimatesp. 414
Liquidity and Leveragep. 421
Funding Liquidity Riskp. 422
Markets for Collateralp. 437
Leverage and Forms of Credit in Contemporary Financep. 448
Transactions Liquidity Riskp. 461
Liquidity Risk Measurementp. 464
Liquidity and Systemic Riskp. 469
Risk Control and Mitigationp. 477
Defining Risk Capitalp. 478
Risk Contributionsp. 480
Stress Testingp. 499
Sizing Positionsp. 506
Risk Reportingp. 509
Hedging and Basis Riskp. 512
Financial Crisesp. 517
Panics, Runs, and Crashesp. 519
Self-Reinforcing Mechanismsp. 539
Behavior of Asset Prices During Crisesp. 548
Causes of Financial Crisesp. 562
Anticipating Financial Crisesp. 583
Financial Regulationp. 597
Scope and Structure of Regulationp. 598
Methods of Regulationp. 605
Public Policy Toward Financial Crisesp. 621
Pitfalls in Regulationp. 635
Technical Notesp. 653
Binomial Distributionp. 653
Quantiles and Quantile Transformationsp. 654
Normal and Lognormal Distributionsp. 656
Hypothesis Testingp. 661
Monte Carlo Simulationp. 662
Homogeneous Functionsp. 664
Further Readingp. 666
Abbreviationsp. 667
Referencesp. 671
Indexp. 701
Table of Contents provided by Publisher. All Rights Reserved.

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