Handbook of Market Risk.

By: Szylar, ChristianMaterial type: TextTextSeries: Wiley Handbooks in Financial Engineering and Econometrics SerPublisher: Somerset : John Wiley & Sons, Incorporated, 2013Copyright date: ©2014Edition: 1st edDescription: 1 online resource (428 pages)Content type: text Media type: computer Carrier type: online resourceISBN: 9781118572986Subject(s): Business | Capital market | Financial risk management | Risk managementGenre/Form: Electronic books.Additional physical formats: Print version:: Handbook of Market RiskDDC classification: 332.645 LOC classification: HD61.S99 2013ebOnline resources: Click to View
Contents:
Cover -- Title page -- Copyright page -- Dedication -- Contents -- Foreword -- Acknowledgments -- About the Author -- Introduction -- Chapter One: Introduction to Financial Markets -- 1.1 The Money Market -- 1.2 The Capital Market -- 1.2.1 The Bond Market -- 1.2.2 The Stock Market -- 1.3 The Futures and Options Market -- 1.4 The Foreign Exchange Market -- 1.5 The Commodity Market -- Further Reading -- Chapter Two: The Efficient Markets Theory -- 2.1 Assumptions behind a Perfectly Competitive Market -- 2.2 The Efficient Market Hypothesis -- 2.2.1 Strong EMH -- 2.2.2 Semi-Strong EMH -- 2.2.3 Weak-Form EMH -- 2.3 Critics of Efficient Markets Theory -- 2.4 Development of Behavioral Finance -- 2.5 Beating the Market: Fundamental versus Technical -- 2.5.1 Fundamental Methods -- 2.5.2 Technical Analysis -- Further Reading -- Chapter Three: Return and Volatility Estimates -- 3.1 Standard Deviation -- 3.2 Standard Deviation with a Moving Observation Window -- 3.3 Exponentially Weighted Moving Average (EWMA) -- 3.4 Double (Holt) Exponential Smoothing Model (DES) -- 3.5 Principal Component Analysis (PCA) Models -- 3.6 The VIX -- 3.7 Geometric Brownian Motion Process -- 3.8 GARCH -- 3.9 Estimator Using the Highest and Lowest -- 3.9.1 Parkinson Estimator -- 3.9.2 Rogers Satchell Estimator -- 3.9.3 Garman-Klass Estimator -- Further Reading -- Chapter Four: Diversification, Portfolios of Risky Assets, and the Efficient Frontier -- 4.1 Variance and Covariance -- 4.2 Two-Asset Portfolio: Expected Return and Risk -- 4.3 Correlation Coefficient -- 4.3.1 Correlation Coefficient and Its Impact on Portfolio Risk -- 4.3.2 The Number of Assets in a Portfolio and Its Impact on Portfolio Risk -- 4.3.3 The Effect of Diversification on Risk -- 4.4 The Efficient Frontier -- 4.5 Correlation Regime Shifts and Correlation Estimates -- 4.5.1 Increased Correlation.
4.5.2 Severity of Correlation Changes -- 4.6 Correlation Estimates -- 4.6.1 Copulas -- 4.6.2 Moving Average -- 4.6.3 Correlation Estimators in Matrix Notation -- 4.6.4 Bollerslev's Constant Conditional Correlation Model -- 4.6.5 Engle's Dynamic Conditional Correlation Model -- 4.6.6 Estimating the Parameters of the DCC Model -- 4.6.7 Implementing the DCC Model -- Further Reading -- Chapter Five: The Capital Asset Pricing Model and the Arbitrage Pricing Theory -- 5.1 Implications of the CAPM Assumptions -- 5.1.1 The Same Linear Efficient Frontier for All Investors -- 5.1.2 Everyone Holds the Market Portfolio -- 5.2 The Separation Theorem -- 5.3 Relationships Defined by the CAPM -- 5.3.1 The Capital Market Line -- 5.3.2 The Security Market Line -- 5.4 Interpretation of Beta -- 5.5 Determining the Level of Diversification of a Portfolio -- 5.6 Investment Implications of the CAPM -- 5.7 Introduction to the Arbitrage Pricing Theory (APT) -- Further Reading -- Chapter Six: Market Risk and Fundamental Multifactors Model -- 6.1 Why a Multifactors Model? -- 6.2 The Returns Model -- 6.2.1 The Least-Squares Regression Solution -- 6.2.2 Statistical Approaches -- 6.2.3 Hybrid Solutions -- 6.3 Estimation Universe -- 6.4 Model Factors -- 6.4.1 Market Factor or Intercept -- 6.4.2 Industry Factors -- 6.4.3 Style Factors -- 6.4.4 Country Factors -- 6.4.5 Currency Factors -- 6.4.6 The Problem of Multicollinearity -- 6.5 The Risk Model -- 6.5.1 Factor Covariance Matrix -- 6.5.2 Autocorrelation in the Factor Returns -- Further Reading -- Chapter Seven: Market Risk: A Historical Perspective from Market Events and Diverse Mathematics to the Value-at-Risk -- 7.1 A Brief History of Market Events -- 7.2 Toward the Development of the Value-at-Risk -- 7.2.1 Diverse Mathematics -- 7.3 Definition of the Value-at-Risk -- 7.4 VaR Calculation Models -- 7.4.1 Variance-Covariance.
7.4.2 Historical Simulation -- 7.4.3 Monte Carlo Simulation -- 7.4.4 Incremental VaR -- 7.4.5 Marginal VaR -- 7.4.6 Component VaR -- 7.4.7 Expected Shortfall -- 7.4.8 VaR Models Summary -- 7.4.9 Mapping of Complex Instruments -- 7.4.10 Cornish-Fisher VaR -- 7.4.11 Extreme Value Theory (EVT) -- Further Reading -- Chapter Eight: Financial Derivative Instruments -- 8.1 Introducing Financial Derivatives Instruments -- 8.1.1 Swap -- 8.1.2 The Forward Contract -- 8.1.3 The Futures Contract -- 8.1.4 Options -- 8.1.5 Warrant -- 8.2 Market Risk and Global Exposure -- 8.2.1 Global Exposure -- 8.2.2 Sophisticated versus Nonsophisticated UCITS -- 8.2.3 The Commitment Approach with Examples on Some Financial Derivatives -- 8.2.4 Calculation of Global Exposure Using VaR -- 8.3 Options -- 8.3.1 Different Strategies Using Options -- 8.3.2 Black Scholes Formula -- 8.3.3 The Greeks -- 8.3.4 Option Value and Risk under Monte Carlo Simulation -- 8.3.5 Evaluating Options and Taylor Expansion -- 8.3.6 The Binomial and Trinomial Option Pricing Models -- Further Reading -- Chapter Nine: Fixed Income and Interest Rate Risk -- 9.1 Bond Valuation -- 9.2 The Yield Curve -- 9.3 Risk of Holding a Bond -- 9.3.1 Duration -- 9.3.2 Modified Duration -- 9.3.3 Convexity -- 9.3.4 Factor Models for Fixed Income -- 9.3.5 Hedge Ratio -- 9.3.6 Duration Hedging -- Further Reading -- Chapter Ten: Liquidity Risk -- 10.1 Traditional Methods and Techniques to Measure Liquidity Risk -- 10.1.1 Average Traded Volume -- 10.1.2 Bid-Ask Spread -- 10.1.3 Liquidity and VaR -- 10.2 Liquidity at Risk -- 10.2.1 Incorporation of Endogenous Liquidity Risk into the VaR Model -- 10.2.2 Incorporation of Exogenous Liquidity Risk into the VaR Model -- 10.2.3 Exogenous and Endogenous Liquidity Risk in VaR Model -- 10.3 Other Liquidity Risk Metrics -- 10.4 Methods to Measure Liquidity Risk on the Liability Side.
Further Reading -- Chapter Eleven: Alternatives Investment: Targeting Alpha, Idiosyncratic Risk -- 11.1 Passive Investing -- 11.2 Active Management -- 11.3 Main Alternative Strategies -- 11.4 Specific Hedge Fund Metrics -- 11.4.1 Market Factor versus Multifactor Regression -- 11.4.2 The Sharpe Ratio -- 11.4.3 The Information Ratio -- 11.4.4 R-Square (R2) -- 11.4.5 Downside Risk -- Further Reading -- Chapter Twelve: Stress Testing and Back Testing -- 12.1 Definition and Introduction to Stress Testing -- 12.2 Stress Test Approaches -- 12.2.1 Piecewise Approach -- 12.2.2 Integrated Approach -- 12.2.3 Designing and Calibrating a Stress Test -- 12.3 Historical Stress Testing -- 12.3.1 Some Examples of Historical Stress Test Scenarios -- 12.3.2 Other Stress Test Scenarios -- 12.4 Reverse Stress Test -- 12.5 Stress Testing Correlation and Volatility -- 12.6 Multivariate Stress Testing -- 12.7 What Is Back Testing? -- 12.7.1 VaR Is Not Always an Accurate Measure5 -- 12.8 Back Testing: A Rigorous Approach Is Required -- 12.8.1 Test of Frequency of Tail Losses or Kupiec's Test -- 12.8.2 Conditional Coverage of Frequency and Independence of Tail Losses6 -- 12.8.3 Clean and Dirty Back Testing -- Further Reading -- Chapter Thirteen: Banks and Basel II/III -- 13.1 A Brief History of Banking Regulations -- 13.2 The 1988 Basel Accord -- 13.2.1 Definition of Capital -- 13.2.2 Credit Risk Charge -- 13.2.3 Off-Balance Sheet Items -- 13.2.4 Drawbacks from the Basel Accord -- 13.2.5 1996 Amendment -- 13.3 Basel II -- 13.3.1 The Credit Risk Charge -- 13.3.2 Operational Risk Charge -- 13.3.3 The Market Risk Charge -- 13.4 Example of the Calculation of the Capital Ratio -- 13.5 Basel III and the New Definition of Capital -- The Introduction of Liquidity Ratios -- Further Reading -- Chapter Fourteen: Conclusion -- Index.
Summary: A ONE-STOP GUIDE FOR THE THEORIES, APPLICATIONS, AND STATISTICAL METHODOLOGIES OF MARKET RISK   Understanding and investigating the impacts of market risk on the financial landscape is crucial in preventing crises. Written by a hedge fund specialist, the Handbook of Market Risk is the comprehensive guide to the subject of market risk. Featuring a format that is accessible and convenient, the handbook employs numerous examples to underscore the application of the material in a real-world setting. The book starts by introducing the various methods to measure market risk while continuing to emphasize stress testing, liquidity, and interest rate implications. Covering topics intrinsic to understanding and applying market risk, the handbook features: An introduction to financial markets The historical perspective from market events and diverse mathematics to the value-at-risk Return and volatility estimates Diversification, portfolio risk, and efficient frontier The Capital Asset Pricing Model and the Arbitrage Pricing Theory The use of a fundamental multi-factors model Financial derivatives instruments Fixed income and interest rate risk Liquidity risk Alternative investments Stress testing and back testing Banks and Basel II/III   The Handbook of Market Risk is a must-have resource for financial engineers, quantitative analysts, regulators, risk managers in investments banks, and large-scale consultancy groups advising banks on internal systems. The handbook is also an excellent text for academics teaching postgraduate courses on financial methodology.
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Cover -- Title page -- Copyright page -- Dedication -- Contents -- Foreword -- Acknowledgments -- About the Author -- Introduction -- Chapter One: Introduction to Financial Markets -- 1.1 The Money Market -- 1.2 The Capital Market -- 1.2.1 The Bond Market -- 1.2.2 The Stock Market -- 1.3 The Futures and Options Market -- 1.4 The Foreign Exchange Market -- 1.5 The Commodity Market -- Further Reading -- Chapter Two: The Efficient Markets Theory -- 2.1 Assumptions behind a Perfectly Competitive Market -- 2.2 The Efficient Market Hypothesis -- 2.2.1 Strong EMH -- 2.2.2 Semi-Strong EMH -- 2.2.3 Weak-Form EMH -- 2.3 Critics of Efficient Markets Theory -- 2.4 Development of Behavioral Finance -- 2.5 Beating the Market: Fundamental versus Technical -- 2.5.1 Fundamental Methods -- 2.5.2 Technical Analysis -- Further Reading -- Chapter Three: Return and Volatility Estimates -- 3.1 Standard Deviation -- 3.2 Standard Deviation with a Moving Observation Window -- 3.3 Exponentially Weighted Moving Average (EWMA) -- 3.4 Double (Holt) Exponential Smoothing Model (DES) -- 3.5 Principal Component Analysis (PCA) Models -- 3.6 The VIX -- 3.7 Geometric Brownian Motion Process -- 3.8 GARCH -- 3.9 Estimator Using the Highest and Lowest -- 3.9.1 Parkinson Estimator -- 3.9.2 Rogers Satchell Estimator -- 3.9.3 Garman-Klass Estimator -- Further Reading -- Chapter Four: Diversification, Portfolios of Risky Assets, and the Efficient Frontier -- 4.1 Variance and Covariance -- 4.2 Two-Asset Portfolio: Expected Return and Risk -- 4.3 Correlation Coefficient -- 4.3.1 Correlation Coefficient and Its Impact on Portfolio Risk -- 4.3.2 The Number of Assets in a Portfolio and Its Impact on Portfolio Risk -- 4.3.3 The Effect of Diversification on Risk -- 4.4 The Efficient Frontier -- 4.5 Correlation Regime Shifts and Correlation Estimates -- 4.5.1 Increased Correlation.

4.5.2 Severity of Correlation Changes -- 4.6 Correlation Estimates -- 4.6.1 Copulas -- 4.6.2 Moving Average -- 4.6.3 Correlation Estimators in Matrix Notation -- 4.6.4 Bollerslev's Constant Conditional Correlation Model -- 4.6.5 Engle's Dynamic Conditional Correlation Model -- 4.6.6 Estimating the Parameters of the DCC Model -- 4.6.7 Implementing the DCC Model -- Further Reading -- Chapter Five: The Capital Asset Pricing Model and the Arbitrage Pricing Theory -- 5.1 Implications of the CAPM Assumptions -- 5.1.1 The Same Linear Efficient Frontier for All Investors -- 5.1.2 Everyone Holds the Market Portfolio -- 5.2 The Separation Theorem -- 5.3 Relationships Defined by the CAPM -- 5.3.1 The Capital Market Line -- 5.3.2 The Security Market Line -- 5.4 Interpretation of Beta -- 5.5 Determining the Level of Diversification of a Portfolio -- 5.6 Investment Implications of the CAPM -- 5.7 Introduction to the Arbitrage Pricing Theory (APT) -- Further Reading -- Chapter Six: Market Risk and Fundamental Multifactors Model -- 6.1 Why a Multifactors Model? -- 6.2 The Returns Model -- 6.2.1 The Least-Squares Regression Solution -- 6.2.2 Statistical Approaches -- 6.2.3 Hybrid Solutions -- 6.3 Estimation Universe -- 6.4 Model Factors -- 6.4.1 Market Factor or Intercept -- 6.4.2 Industry Factors -- 6.4.3 Style Factors -- 6.4.4 Country Factors -- 6.4.5 Currency Factors -- 6.4.6 The Problem of Multicollinearity -- 6.5 The Risk Model -- 6.5.1 Factor Covariance Matrix -- 6.5.2 Autocorrelation in the Factor Returns -- Further Reading -- Chapter Seven: Market Risk: A Historical Perspective from Market Events and Diverse Mathematics to the Value-at-Risk -- 7.1 A Brief History of Market Events -- 7.2 Toward the Development of the Value-at-Risk -- 7.2.1 Diverse Mathematics -- 7.3 Definition of the Value-at-Risk -- 7.4 VaR Calculation Models -- 7.4.1 Variance-Covariance.

7.4.2 Historical Simulation -- 7.4.3 Monte Carlo Simulation -- 7.4.4 Incremental VaR -- 7.4.5 Marginal VaR -- 7.4.6 Component VaR -- 7.4.7 Expected Shortfall -- 7.4.8 VaR Models Summary -- 7.4.9 Mapping of Complex Instruments -- 7.4.10 Cornish-Fisher VaR -- 7.4.11 Extreme Value Theory (EVT) -- Further Reading -- Chapter Eight: Financial Derivative Instruments -- 8.1 Introducing Financial Derivatives Instruments -- 8.1.1 Swap -- 8.1.2 The Forward Contract -- 8.1.3 The Futures Contract -- 8.1.4 Options -- 8.1.5 Warrant -- 8.2 Market Risk and Global Exposure -- 8.2.1 Global Exposure -- 8.2.2 Sophisticated versus Nonsophisticated UCITS -- 8.2.3 The Commitment Approach with Examples on Some Financial Derivatives -- 8.2.4 Calculation of Global Exposure Using VaR -- 8.3 Options -- 8.3.1 Different Strategies Using Options -- 8.3.2 Black Scholes Formula -- 8.3.3 The Greeks -- 8.3.4 Option Value and Risk under Monte Carlo Simulation -- 8.3.5 Evaluating Options and Taylor Expansion -- 8.3.6 The Binomial and Trinomial Option Pricing Models -- Further Reading -- Chapter Nine: Fixed Income and Interest Rate Risk -- 9.1 Bond Valuation -- 9.2 The Yield Curve -- 9.3 Risk of Holding a Bond -- 9.3.1 Duration -- 9.3.2 Modified Duration -- 9.3.3 Convexity -- 9.3.4 Factor Models for Fixed Income -- 9.3.5 Hedge Ratio -- 9.3.6 Duration Hedging -- Further Reading -- Chapter Ten: Liquidity Risk -- 10.1 Traditional Methods and Techniques to Measure Liquidity Risk -- 10.1.1 Average Traded Volume -- 10.1.2 Bid-Ask Spread -- 10.1.3 Liquidity and VaR -- 10.2 Liquidity at Risk -- 10.2.1 Incorporation of Endogenous Liquidity Risk into the VaR Model -- 10.2.2 Incorporation of Exogenous Liquidity Risk into the VaR Model -- 10.2.3 Exogenous and Endogenous Liquidity Risk in VaR Model -- 10.3 Other Liquidity Risk Metrics -- 10.4 Methods to Measure Liquidity Risk on the Liability Side.

Further Reading -- Chapter Eleven: Alternatives Investment: Targeting Alpha, Idiosyncratic Risk -- 11.1 Passive Investing -- 11.2 Active Management -- 11.3 Main Alternative Strategies -- 11.4 Specific Hedge Fund Metrics -- 11.4.1 Market Factor versus Multifactor Regression -- 11.4.2 The Sharpe Ratio -- 11.4.3 The Information Ratio -- 11.4.4 R-Square (R2) -- 11.4.5 Downside Risk -- Further Reading -- Chapter Twelve: Stress Testing and Back Testing -- 12.1 Definition and Introduction to Stress Testing -- 12.2 Stress Test Approaches -- 12.2.1 Piecewise Approach -- 12.2.2 Integrated Approach -- 12.2.3 Designing and Calibrating a Stress Test -- 12.3 Historical Stress Testing -- 12.3.1 Some Examples of Historical Stress Test Scenarios -- 12.3.2 Other Stress Test Scenarios -- 12.4 Reverse Stress Test -- 12.5 Stress Testing Correlation and Volatility -- 12.6 Multivariate Stress Testing -- 12.7 What Is Back Testing? -- 12.7.1 VaR Is Not Always an Accurate Measure5 -- 12.8 Back Testing: A Rigorous Approach Is Required -- 12.8.1 Test of Frequency of Tail Losses or Kupiec's Test -- 12.8.2 Conditional Coverage of Frequency and Independence of Tail Losses6 -- 12.8.3 Clean and Dirty Back Testing -- Further Reading -- Chapter Thirteen: Banks and Basel II/III -- 13.1 A Brief History of Banking Regulations -- 13.2 The 1988 Basel Accord -- 13.2.1 Definition of Capital -- 13.2.2 Credit Risk Charge -- 13.2.3 Off-Balance Sheet Items -- 13.2.4 Drawbacks from the Basel Accord -- 13.2.5 1996 Amendment -- 13.3 Basel II -- 13.3.1 The Credit Risk Charge -- 13.3.2 Operational Risk Charge -- 13.3.3 The Market Risk Charge -- 13.4 Example of the Calculation of the Capital Ratio -- 13.5 Basel III and the New Definition of Capital -- The Introduction of Liquidity Ratios -- Further Reading -- Chapter Fourteen: Conclusion -- Index.

A ONE-STOP GUIDE FOR THE THEORIES, APPLICATIONS, AND STATISTICAL METHODOLOGIES OF MARKET RISK   Understanding and investigating the impacts of market risk on the financial landscape is crucial in preventing crises. Written by a hedge fund specialist, the Handbook of Market Risk is the comprehensive guide to the subject of market risk. Featuring a format that is accessible and convenient, the handbook employs numerous examples to underscore the application of the material in a real-world setting. The book starts by introducing the various methods to measure market risk while continuing to emphasize stress testing, liquidity, and interest rate implications. Covering topics intrinsic to understanding and applying market risk, the handbook features: An introduction to financial markets The historical perspective from market events and diverse mathematics to the value-at-risk Return and volatility estimates Diversification, portfolio risk, and efficient frontier The Capital Asset Pricing Model and the Arbitrage Pricing Theory The use of a fundamental multi-factors model Financial derivatives instruments Fixed income and interest rate risk Liquidity risk Alternative investments Stress testing and back testing Banks and Basel II/III   The Handbook of Market Risk is a must-have resource for financial engineers, quantitative analysts, regulators, risk managers in investments banks, and large-scale consultancy groups advising banks on internal systems. The handbook is also an excellent text for academics teaching postgraduate courses on financial methodology.

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Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2018. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.

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