Investment Risk and Uncertainty Advanced Risk Awareness Techniques for the Intelligent Investor

by Greiner, Steven P.

• ISBN13: 9781118300183
• ISBN10: 1118300181
• Edition: 1st
• Format: Hardcover
• Copyright: 2013-03-25
• Publisher: Wiley

Summary

This book is unique in that it's very comprehensive. It's a treatise that makes available in a single volume all the modern methods applied in risk management for many very different asset classes. Usually equities, fixed income, currencies and so forth are dealt with as individual "silos" and the impact of holding a portfolio consisting of all of them isn't discussed or if so very partially and only in passing. Equity, fixed income, currency and commodity investors speak different languages. Since this book is going to be written by specialists in all those fields, it essentially will detail the risk measurements of true multi-asset class portfolios, while bridging the gap for managers in each discipline, giving them a single source of information clearly explained.

Author Biography

STEVEN GREINER is currently the head of Risk Research for FactSet Research Systems. He has served as the senior quantitative strategist and portfolio manager for Allegiant Asset Management (now wholly owned by PNC Capital Advisors) and was a member of its investment committee. Prior to this, Greiner was a senior quantitative strategist for large capitalization investments at Harris Investment Management. He has more than twenty years of quantitative and modeling experience. Greiner received his BS in mathematics and chemistry from the University at Buffalo, his MS and PhD in physical chemistry from the University of Rochester, and attained postdoctoral experience from the Free University Berlin, Department of Physics. Greiner has published numerous papers and is the author of the Wiley book Ben Graham Was a Quant.

Table of Contents

Foreword

Preface

Acknowledgments

Introduction: Why Risk Management Is Mostly Misunderstood (Steven P. Greiner, Ph.D.)

Quantitative Risk Management Beginnings

Quantitative Risk Management Successes

Quantitative Risk Management Failures

Warren Buffet’s Risk Management Strategy

Defining Risk Management

Fat-Tails, Stationarity, Correlation, and Optimization

Managing the Risks of a Risk Management Strategy

The Risk Management Opportunity Set

Part I

Chapter 1: Exposed Versus Experienced Risk Revisited (Steven P. Greiner, Ph.D. and Andrew Geer, CFA, FRM)

Exposure Hedge versus Dollar Hedge

How the Credit Crisis Moved Risk Management to the Forefront

Risks beyond Volatility

What Risk Management Should Provide

Clarifying Expectations of Risk Management

An Example

Notes

Chapter 2: Definitions of Tractable Risk (Steven P. Greiner, Ph.D. and Andrew Geer, CFA, FRM)

The Effect of Uncertainty on Objectives

Identifying and Measuring Risks

Forecasting and Hedging Risks

Portfolio View versus Security Level View

Total Risk View of Multi-Asset Class (MAC) Portfolios

Stability and Accuracy

Notes

Chapter 3: Introduction to Asset Class Specifics (Steven P. Greiner, Ph.D., Andrew Geer, CFA, FRM, and William F. McCoy, CFA, PRM)

Equities

Fixed Income

Conclusion

Chapter 4: Commodities and Currencies (Steven P. Greiner, Ph.D. and William F. McCoy, CFA, PRM)

Commodities

Introduction to Currency Risk

Conclusion

Chapter 5: Options and Interest Rate Derivatives (Steven P. Greiner, Ph.D., William F. McCoy, CFA, PRM, and Mido Shammaa, CFA, FRM)

Short History of Option Pricing

Volatility Smile

Implied Volatility Model

Baroni-Adesi Whaley (BAW) Option Pricing Methodology

Other Option Pricing Methods

Swaps, Swaptions, Forwards, and Futures

Conclusion

Chapter 6: Measuring Asset Association and Dependence (Steven P. Greiner, Ph.D.; Andrew Geer, CFA, FRM; Christopher Carpentier, CFA, FRM and Dan diBartolomeo, PRM)

The Sample Covariance Matrix

Estimation Error Maximization

Minimizing the Extremes

The Copula, the Most Comprehensive Dependent Structure Measure

The Model Covariance Matrix

Chapter 7: Risk Model Construction (Steven P. Greiner, Ph.D.; Andrew Geer, CFA, FRM; Jason McQueen; Laurence Wormald, Ph.D.)

Multi-Factor Pre-Specified Risk Models

Principal Component (Statistical) Risk Models

Customized Hybrid Risk Models

Part II

Chapter 8: Fixed Income Issues (David Mieczkowski, Ph.D. and William F. McCoy, CFA, PRM)

Variety. Illiquidity. Size.

Empirical Evidence

Test Portfolios and Methodology

Test Metrics

Computational Efficiency

Conclusion

Notes

Chapter 9: Interest Rate Risk (David Mieczkowski Ph.D. and Mido Shammaa, CFA, FRM)

The Term Structure

Term Structure Dynamics

Factor Models

Stochastic Differential Equations

Interest Rate Risk Exposures

Risk Forecasting

Conditional Duration and Expected Tail Duration

Conclusion

Notes

Chapter 10: Spread Risk (David Mieczkowski Ph.D. and Sameer R. Patel)

Spread Basics

Reduced Form Approach

Structural Approach

Spread Exposure

Spread Volatility

Derived Spread Approach

Euro-Sovereign Spreads

Factor Model Approach

Conclusion

Chapter 11: Fixed Income Interest Rate Volatility, Idiosyncratic and Currency Risk (David Mieczkowski, Ph.D. and Steven P. Greiner, Ph.D.)

Fixed Income Interest Rate Risk

Fixed Income Idiosyncratic Bond Risk

Fixed Income Currency Risk

Conclusion

Chapter 12: Portfolio Risk Measures (William F. McCoy, CFA, PRM and Steven P. Greiner, Ph.D.)

Coherent Risk Measures

Commonly Used Risk Measures

Marginal Contribution

Stress-Testing

Chapter 13: Risk for the Fundamental Investor (Richard Barrett, CFA, FRM; Roberto Isch, CFA, FRM; and Steven P. Greiner, Ph.D.)

Fundamental Investing vs. Other Approaches

Typical Risk Controls for Fundamental Investors

Implementing Risk Management Strategies into a Fundamental Process

Optimization

Conclusion

Chapter 14: Portfolio Optimization (Sebastian Ceria, Ph.D.; Kartik Sivaramakrishnan, Ph.D.)

The Enhanced MVO Model

Constraints and Objectives in EMVO

Further Improvements to the Enhanced MVO Model

Factor Alignment Problems

Constraint Attribution

Specially Structured MVO Models

Extreme Tail Loss Optimization

Incorporating Non-liner Instruments in the EMVO Model

Algorithms for Solving MVO Models

How to Choose an Optimizer

Notes

Part III

Chapter 15: The SUNGARD-APT Risk Management System (Laurence Wormald, Ph.D.)

Introduction to Statistical Factor Models

APT Factor Model Estimation - Equities Models

Selection of the Core Universe for Factor Modeling

Choosing the Number of APT Factors

Estimating the Risk Profiles in an APT Factor Model

APT Multi-asset Class Factor Model Estimation

Modeling Derivatives and Other Non-underlying Securities

User-defined Assets within APT Models

Conclusion

Chapter 16: Axioma Risk Models (Bill Wynne, Melissa Brown, CFA; Sebastian Ceria, Ph.D.)

Background

Risk Model Based Reporting

Role of Risk Models in Investment Decisions

Axioma Value at a High Level

Daily Risk Models, Delivered Daily

Multiple Risk Models

Empirical Results

Details of Axioma Innovations

Conclusion

Chapter 17: Distinguishing Risk Models (Steven P. Greiner, Ph.D.; Richard Barrett, CFA, FRM)

History

Risk Model Details

Risk Model Based Reporting

Conclusion

Chapter 18: Northfield’s Integration of Risk Assessments across Multiple Asset Classes (Dan diBartolomeo, PRM and Joseph J. Importico, CFA, FRM)

A Unified Framework

Interest Rate Risk

Credit Risk

Equity Factor Representation of Corporate Credit Risk

Default Correlation

Complex Instruments and Derivatives

Private Equity

Direct Real Estate and Geographically Localized Assets

Concluding Example

Conclusion

References

Chapter 19: R-Squared (Jason MacQueen)

Why Build Stock Risk Models?

Generic Risk Modeling

Practical Risk Modeling

Statistical Factor Models

Defined Factor Models

Estimate Factors or Estimate Betas?

Practical Consequences at the Stock level

Practical Consequences at the Portfolio level

A Short Digression

Hybrid Risk Models

The R-Squared Short-Term Hybrid Risk Model for Global Equities

Summary

Notes

Chapter 20: The Future of Risk Management and Analytics (Steven P. Greiner, Ph.D.; David Mieczkowski, Ph.D.; William F. McCoy, CFA, PRM; Andrew Geer, CFA, FRM; Daniel S. Mathon, Ph.D., CFA; Viviana Vieli; Christopher Carpentier, CFA, FRM; and Mido Shammaa, CFA, FRM;)

The Increasing Regulatory Environment

The Impact of Regulations with Technology

The Future View

New Types of Risk Models

Stress-Testing Your Way to Event Risk Preparedness

Index