Elements of financial risk management

Preface

Acknowledgments

Part I. Background

1. Risk Management and Financial Returns

1. Chapter Outline

2. Learning Objectives

3. Risk Management and the Firm

4. A Brief Taxonomy of Risks

5. Asset Returns Definitions

6. Stylized Facts of Asset Returns

7. A Generic Model of Asset Returns

8. From Asset Returns to Portfolio Returns

9. Introducing the Value-at-Risk (VaR) Risk Measure

10. Overview of the Book

Appendix: Return VaR and $VaR

Further Resources

References

Empirical Exercises

2. Historical Simulation, Value at Risk, and Expected Shortfall

1. Chapter Overview

2. Historical Simulation

3. Weighted Historical Simulation (WHS)

4. Evidence from the 2008-2009 Crisis

5. The True Probability of Breaching the HS VaR

6. VaR with Extreme Coverage Rates

7. Expected Shortfall

8. Summary

Further Resources

References

Empirical Exercises

3. A Primer on Financial Time Series Analysis

1. Chapter Overview

2. Probability Distributions and Moments

3. The Linear Model

4. Univariate Time Series Models

5. Multivariate Time Series Models

6. Summary

Further Resources

References

Empirical Exercises

Part II. Univariate Risk Models

4. Volatility Modeling Using Daily Data

1. Chapter Overview

2. Simple Variance Forecasting

3. The GARCH Variance Model

4. Maximum Likelihood Estimation

5. Extensions to the GARCH Model

6. Variance Model Evaluation

7. Summary

Appendix A. Component GARCH and GARCH(2,2)

Appendix B. The HYGARCH Long-Memory Model

Further Resources

References

Empirical Exercises

5. Volatility Modeling Using Intraday Data

1. Chapter Overview

2. Realized Variance: Four Stylized Facts

3. Forecasting Realized Variance

4. Realized Variance Construction

5. Data Issues

6. Range-based Volatility Modeling

7. GARCH Variance Forecast Evaluation Revisited

8. Summary

Further Resources

References

Empirical Exercises

6. Nonnormal Distributions

1. Chapter Overview

2. Learning Objectives

3. Visualizing Nonnormality Using QQ Plots

4. The Filtered Historical Simulation Approach

5. The Cornish-Fisher Approximation to VaR

6. The Standardized t Distribution

7. The Asymmetric t Distribution

8. Extreme Value Theory (EVT)

9. Summary

Appendix A. ES for the Symmetric and Asymmetric t Distributions

Appendix B. Cornish-Fisher ES

Appendix C. Extreme Value Theory ES

Further Resources

References

Empirical Exercises

Part III. Multivariate Risk Models

7. Covariance and Correlation Models

1. Chapter Overview

2. Portfolio Variance and Covariance

3. Dynamic Conditional Correlation (DCC)

4. Estimating Daily Covariance from Intraday Data

5. Summary

Further Resources

References

Empirical Exercises

8. Simulating the Term Structure of Risk

1. Chapter Overview

2. The Risk Term Structure in Univariate Models

3. The Risk Term Structure with Constant Correlations

4. The Risk Term Structure with Dynamic Correlations

5. Summary

Further Resources

References

Empirical Exercises

9. Distributions and Copulas for Integrated Risk Management

1. Chapter Overview

2. Threshold Correlations

3. Multivariate Distributions

4. The Copula Modeling Approach

5. Risk Management Using Copula Models

6. Summary

Further Resources

References

Empirical Exercises

Part IV. Further Topics in Risk Management

10. Option Pricing

1. Chapter Overview

2. Basic Definitions

3. Option Pricing Using Binomial Trees

4. Option Pricing under the Normal Distribution

5. Allowing for Skewness and Kurtosis

6. Allowing for Dynamic Volatility

7. Implied Volatility Function (IVF) Models

8. Summary

Appendix: The CFG Option Pricing Formula

Further Resources

References

Empirical Exercises

11. Option Risk Management

1. Chapter Overview

2. The Option Delta

3. Portfolio Risk Using Delta

4. The Option Gamma

5. Portfolio Risk Using Gamma

6. Portfolio Risk Using Full Valuation

7. A Simple Example

8. Pitfall in the Delta and Gamma Approaches

9. Summary

Further Resources

References

Empirical Exercises

12. Credit Risk Management

1. Chapter Overview

2. A Brief History of Corporate Defaults

3. Modeling Corporate Default

4. Portfolio Credit Risk

5. Other Aspects of Credit Risk

6. Summary

Further Resources

References

Empirical Exercises

13. Backtesting and Stress Testing

1. Chapter Overview

2. Backtesting VaRs

3. Increasing the Information Set

4. Backtesting Expected Shortfall

5. Backtesting the Entire Distribution

6. Stress Testing

7. Summary

Further Resources

References

Empirical Exercises

Index