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Financial Risk Management Models History and Institutions 1st edition by Allan Malz ISBN 0470481806 978-0470481806

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ISBN 10: 0470481806
ISBN 13:  978-0470481806
Author: Allan Malz 

Financial risk has become a focus of financial and nonfinancial firms, individuals, and policy makers. But the study of risk remains a relatively new discipline in finance and continues to be refined. The financial market crisis that began in 2007 has highlighted the challenges of managing financial risk. Now, in Financial Risk Management, author Allan Malz addresses the essential issues surrounding this discipline, sharing his extensive career experiences as a risk researcher, risk manager, and central banker. The book includes standard risk measurement models as well as alternative models that address options, structured credit risks, and the real-world complexities or risk modeling, and provides the institutional and historical background on financial innovation, liquidity, leverage, and financial crises that is crucial to practitioners and students of finance for understanding the world today.

Financial Risk Management is equally suitable for firm risk managers, economists, and policy makers seeking grounding in the subject. This timely guide skillfully surveys the landscape of financial risk and the financial developments of recent decades that culminated in the crisis. The book provides a comprehensive overview of the different types of financial risk we face, as well as the techniques used to measure and manage them. Topics covered include:

  • Market risk, from Value-at-Risk (VaR) to risk models for options
  • Credit risk, from portfolio credit risk to structured credit products
  • Model risk and validation
  • Risk capital and stress testing
  • Liquidity risk, leverage, systemic risk, and the forms they take
  • Financial crises, historical and current, their causes and characteristics
  • Financial regulation and its evolution in the wake of the global crisis
  • And much more

Combining the more model-oriented approach of risk management-as it has evolved over the past two decades-with an economist’s approach to the same issues, Financial Risk Management is the essential guide to the subject for today’s complex world.

Financial Risk Management Models History and Institutions 1st Table of contents

Chapter 1 Financial Risk in a Crisis-Prone World

1.1 Some History: Why Is Risk a Separate Discipline Today?

  • The Financial Industry Since the 1960s

  • The “Shadow Banking System”

  • Changes in Public Policy Toward the Financial System

  • The Rise of Large Capital Pools

  • Macroeconomic Developments Since the 1960s: From the Unraveling of Bretton Woods to the Great Moderation

1.2 The Scope of Financial Risk

  • Risk Management in Other Fields

Further Reading

Chapter 2 Market Risk Basics

2.1 Arithmetic, Geometric, and Logarithmic Security Returns

2.2 Risk and Securities Prices: The Standard Asset Pricing Model

  • Defining Risk: States, Security Payoffs, and Preferences

  • Optimal Portfolio Selection

  • Equilibrium Asset Prices and Returns

  • Risk-Neutral Probabilities

2.3 The Standard Asset Distribution Model

  • Random Walks and Wiener Processes

  • Geometric Brownian Motion

  • Asset Return Volatility

2.4 Portfolio Risk in the Standard Model

  • Beta and Market Risk

  • Diversification

  • Efficiency

2.5 Benchmark Interest Rates

Further Reading

Chapter 3 Value-at-Risk

3.1 Definition of Value-at-Risk

  • The User-Defined Parameters

  • Steps in Computing VaR

3.2 Volatility Estimation

  • Short-Term Conditional Volatility Estimation

  • The EWMA Model

  • The GARCH Model

3.3 Modes of Computation

  • Parametric

  • Monte Carlo Simulation

  • Historical Simulation

3.4 Short Positions
3.5 Expected Shortfall

Further Reading

Chapter 4 Nonlinear Risks and the Treatment of Bonds and Options

4.1 Nonlinear Risk Measurement and Options

  • Nonlinearity and VaR

  • Simulation for Nonlinear Exposures

  • Delta-Gamma for Options

  • The Delta-Gamma Approach for General Exposures

4.2 Yield Curve Risk

  • The Term Structure of Interest Rates

  • Estimating Yield Curves

  • Coupon Bonds

4.3 VaR for Default-Free Fixed Income Securities Using the Duration and Convexity Mapping

  • Duration

  • Interest-Rate Volatility and Bond Price Volatility

  • Duration-Only VaR

  • Convexity

  • VaR Using Duration and Convexity

Further Reading

Chapter 5 Portfolio VaR for Market Risk

5.1 The Covariance and Correlation Matrices
5.2 Mapping and Treatment of Bonds and Options
5.3 Delta-Normal VaR

  • The Delta-Normal Approach for a Single Position Exposed to a Single Risk Factor

  • The Delta-Normal Approach for a Single Position Exposed to Several Risk Factors

  • The Delta-Normal Approach for a Portfolio of Securities

5.4 Portfolio VaR via Monte Carlo Simulation
5.5 Option Vega Risk

  • Vega Risk and the Black-Scholes Anomalies

  • The Option Implied Volatility Surface

  • Measuring Vega Risk

Further Reading

Chapter 6 Credit and Counterparty Risk

6.1 Defining Credit Risk
6.2 Credit-Risky Securities

  • The Economic Balance Sheet of the Firm

  • Capital Structure

  • Security, Collateral, and Priority

  • Credit Derivatives

6.3 Transaction Cost Problems in Credit Contracts
6.4 Default and Recovery: Analytic Concepts

  • Default

  • Probability of Default

  • Credit Exposure

  • Loss Given Default

  • Expected Loss

  • Credit Risk and Market Risk

6.5 Assessing Creditworthiness

  • Credit Ratings and Rating Migration

  • Internal Ratings

  • Credit Risk Models

6.6 Counterparty Risk

  • Netting and Clearinghouses

  • Measuring Counterparty Risk for Derivatives Positions

  • Double Default Risk

  • Custodial Risk

  • Mitigation of Counterparty Risk

6.7 The Merton Model
6.8 Credit Factor Models
6.9 Credit Risk Measures

  • Expected and Unexpected Loss

  • Jump-to-Default Risk

Further Reading

Chapter 7 Spread Risk and Default Intensity Models

7.1 Credit Spreads

  • Spread Mark-to-Market

7.2 Default Curve Analytics

  • The Hazard Rate

  • Default Time Distribution Function

  • Default Time Density Function

  • Conditional Default Probability

7.3 Risk-Neutral Estimates of Default Probabilities

  • Basic Analytics of Risk-Neutral Default Rates

  • Time Scaling of Default Probabilities

  • Credit Default Swaps

  • Building Default Probability Curves

  • The Slope of Default Probability Curves

7.4 Spread Risk

  • Mark-to-Market of a CDS

  • Spread Volatility

Further Reading

Chapter 8 Portfolio Credit Risk

8.1 Default Correlation

  • Defining Default Correlation

  • The Order of Magnitude of Default Correlation

8.2 Credit Portfolio Risk Measurement

  • Granularity and Portfolio Credit Value-at-Risk

8.3 Default Distributions and Credit VaR with the Single-Factor Model

  • Conditional Default Distributions

  • Asset and Default Correlation

  • Credit VaR Using the Single-Factor Model

8.4 Using Simulation and Copulas to Estimate Portfolio Credit Risk

  • Simulating Single-Credit Risk

  • Simulating Joint Defaults with a Copula

Further Reading

Chapter 9 Structured Credit Risk

9.1 Structured Credit Basics

  • Capital Structure and Credit Losses in a Securitization

  • Waterfall

  • Issuance Process

9.2 Credit Scenario Analysis of a Securitization

  • Tracking the Interim Cash Flows

  • Tracking the Final-Year Cash Flows

9.3 Measuring Structured Credit Risk via Simulation

  • The Simulation Procedure and the Role of Correlation

  • Means of the Distributions

  • Distribution of Losses and Credit VaR

  • Default Sensitivities of the Tranches

  • Summary of Tranche Risks

9.4 Standard Tranches and Implied Credit Correlation

  • Credit Index Default Swaps and Standard Tranches

  • Implied Correlation

  • Summary of Default Correlation Concepts

9.5 Issuer and Investor Motivations for Structured Credit

  • Incentives of Issuers

  • Incentives of Investors

Further Reading

Chapter 10 Alternatives to the Standard Market Risk Model

10.1 Real-World Asset Price Behavior
10.2 Alternative Modeling Approaches

  • Jump-Diffusion Models

  • Extreme Value Theory

10.3 The Evidence on Non-Normality in Derivatives Prices

  • Option-Based Risk-Neutral Distributions

  • Risk-Neutral Asset Price Probability Distributions

  • Implied Correlations

Further Reading

Chapter 11 Assessing the Quality of Risk Measures

11.1 Model Risk

  • Valuation Risk

  • Variability of VaR Estimates

  • Mapping Issues

  • Case Study: The 2005 Credit Correlation Episode

  • Case Study: Subprime Default Models

11.2 Backtesting of VaR
11.3 Coherence of VaR Estimates

Further Reading

Chapter 12 Liquidity and Leverage

12.1 Funding Liquidity Risk

  • Maturity Transformation

  • Liquidity Transformation

  • Bank Liquidity

  • Structured Credit and Off-Balance-Sheet Funding

  • Funding Liquidity of Other Intermediaries

  • Systematic Funding Liquidity Risk

12.2 Markets for Collateral

  • Structure of Markets for Collateral

  • Economic Function of Markets for Collateral

  • Prime Brokerage and Hedge Funds

  • Risks in Markets for Collateral

12.3 Leverage and Forms of Credit in Contemporary Finance

  • Defining and Measuring Leverage

  • Margin Loans and Leverage

  • Short Positions

  • Derivatives

  • Structured Credit

  • Asset Volatility and Leverage

12.4 Transactions Liquidity Risk

  • Causes of Transactions Liquidity Risk

  • Characteristics of Market Liquidity

12.5 Liquidity Risk Measurement

  • Measuring Funding Liquidity Risk

  • Measuring Transactions Liquidity Risk

12.6 Liquidity and Systemic Risk

  • Funding Liquidity and Solvency

  • Funding and Market Liquidity

  • Systemic Risk and the “Plumbing”

  • “Interconnectedness”

Further Reading

Chapter 13 Risk Control and Mitigation

13.1 Defining Risk Capital
13.2 Risk Contributions

  • Risk Contributions in a Long-Only Portfolio

  • Risk Contributions Using Delta Equivalents

  • Risk Capital Measurement for Quantitative Strategies

13.3 Stress Testing

  • An Example of Stress Testing

  • Types of Stress Tests

13.4 Sizing Positions

  • Diversification

  • Optimization and Implied Views

13.5 Risk Reporting
13.6 Hedging and Basis Risk

Further Reading

Chapter 14 Financial Crises

14.1 Panics, Runs, and Crashes

  • Monetary and Credit Contraction

  • Panics

  • Rising Insolvencies

  • Impairment of Market Functioning

 

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