The risk management models used by banks and insurance companies are designed for when financial markets behave smoothly and efficiently. However, large risks materialize very often, and financial markets periodically go through bubbles and crashes. This book provides a road map of the most popular models of risk management and shows how they can be adapted to "turbulent times".
The risk management models used by banks and insurance companies are designed for when financial markets behave smoothly and efficiently. However, large risks materialize very often, and financial markets periodically go through bubbles and crashes. This book provides a road map of the most popular models of risk management and shows how they can be adapted to "turbulent times".
Gilles Beneplanc is the Head of Europe, Middle East, and Africa region for the Mercer consulting firm. Jean-Charles Rochet is Professor of Mathematics and Economics at the University of Toulouse.
Inhaltsangabe
* INTRODUCTION * I RISK MANAGEMENT: WHAT MUST BE CHANGED * 1 Lessons From recent Financial Crises * 1.1 The Basic Goals of Risk Management * 1.2 When Risk Management Fails * 1.3 What Should Be Done? * 2 Living in Turbulent Times * 2.1 New and Larger Risks * 2.2 Increased Management Accountability * 2.3 Need for a Global Approach * 3 The Need for a Proper Methodology * 3.1 The Necessary Ingredients * 3.2 Risk Mapping * 3.3 Loss Control * 3.4 Risk Allocation * II WHAT IS BEHIND RISK MODELING * 4 The Basic Tools of Risk Modeling * 4.1 Assessing Probabilities: The Frequentist and Subjective Approaches * 4.2 Bayesian updating * 4.3 Estimating Loss Distributions * 4.4 Combining Event Trees and Monte Carlo Methods * 4.5 The Dangers of the Stationarity Assumption * 5 Statistical Risk Measures * 5.1 The Expectation or Mean * 5.2 The Variance * 5.3 Linear Correlation * 5.4 Copulas * 5.5 The Value at Risk * 5.6 Mutualization and Diversification * 5.7 The Dangers of Using Simple Risk Measures * Appendix: Extreme Value Theory * 6 Leverage and Ruin Theory * 6.1 Leverage and Return on Equity * 6.2 Economic Capital for a Bank * 6.3 Economic Capital for an Insurance Company * 6.4 The Limits of Ruin Theory * III THE PERFECT MARKETS HYPOTHESIS AND ITS DANGERS * 7 Risk Neutral Valuation * 7.1 The Expected Present Value Criterion * 7.2 The Magic of Perfect Markets * 7.3 Complete Markets and Absence of Arbitrage Opportunities * 7.4 A Binomial Example * 7.5 The Mirages of the Perfect Markets World * 8 The Case of Incomplete Markets: Relating Risk Premiums to Economic * Fundamentals * 8.1 Solving the St Petersburg Paradox * 8.2 Certainty Equivalent * 8.3 Markets for Exchanging Risks * 8.4 The Limits of the Equilibrium Approach * 9 Risk Management in a Normal World * 9.1 The Mean-Variance Criterion * 9.2 Portfolio Choice * 9.3 The Diversification Principle * 9.4 Efficient Portfolios and the Sharpe Ratio * 9.5 The Capital Asset Pricing Model (CAPM) * 9.6 Futures Contracts and Hedging * 9.7 Capital Allocation and RaRoc * 9.8 The Dangers of Viewing the World as "Normal " * Appendix 1: Portfolio Choice with Several Risky Assets * Appendix 2: Deriving the CAPM Formula * IV RISK MANAGEMENT AND SHAREHOLDER VALUE * 10 Why Market Imperfections Matter for Shareholder Value * 10.1 Standards Methods for Assessing Shareholder Value * 10.2 Why is the Shareholder Value Function Likely to Be Non Linear: A Simple Example * 10.3 Incentive Problems Generate Financial Frictions * 11 The Shareholder Value Function * 11.1 A Target Level of Cash * 11.2 A Model for Optimizing Liquidity Management * 11.3 Liquidity and Shareholder Value * Appendix 1: Stochastic Differential Calculus * Appendix 2: Derivation of the Shareholders Value Function * 12 Risk Management and the Shareholder Value Function * 12.1 How Much Risk to Take? * 12.2 Which Risks to Insure? * 12.3 How Much Liquidity to Keep in Reserves? * 12.4 How Much hedging to Perform? * V WHAT TO DO IN PRACTICE? * 13 The Different Steps of the Implementation * 13.1 Estimating the Shareholder Value Function * 13.2 A Unifying Metric for Risk Mapping: The Risk Value Mapping * 13.3 The New Instruments of Risk Management * 14 Learning from an Example * 14.1 Presentation of Med Corp * 14.2 Risk Analysis * 14.3 Shareholder Value and RM for Med Corp * 14.4 A Risk Transfer Policy for Med Corp * 15 Conclusion: Some Simple Messages * 15.1 Message # 1: Quantitative models are needed but they have to be used * with precaution * 15.2 Message # 2: Risk Management creates value for shareholders * 15.3 Message # 3: Things to do in practice * 15.4 Message # 4: Key Ingredients for a successful RM approach * Index
* INTRODUCTION * I RISK MANAGEMENT: WHAT MUST BE CHANGED * 1 Lessons From recent Financial Crises * 1.1 The Basic Goals of Risk Management * 1.2 When Risk Management Fails * 1.3 What Should Be Done? * 2 Living in Turbulent Times * 2.1 New and Larger Risks * 2.2 Increased Management Accountability * 2.3 Need for a Global Approach * 3 The Need for a Proper Methodology * 3.1 The Necessary Ingredients * 3.2 Risk Mapping * 3.3 Loss Control * 3.4 Risk Allocation * II WHAT IS BEHIND RISK MODELING * 4 The Basic Tools of Risk Modeling * 4.1 Assessing Probabilities: The Frequentist and Subjective Approaches * 4.2 Bayesian updating * 4.3 Estimating Loss Distributions * 4.4 Combining Event Trees and Monte Carlo Methods * 4.5 The Dangers of the Stationarity Assumption * 5 Statistical Risk Measures * 5.1 The Expectation or Mean * 5.2 The Variance * 5.3 Linear Correlation * 5.4 Copulas * 5.5 The Value at Risk * 5.6 Mutualization and Diversification * 5.7 The Dangers of Using Simple Risk Measures * Appendix: Extreme Value Theory * 6 Leverage and Ruin Theory * 6.1 Leverage and Return on Equity * 6.2 Economic Capital for a Bank * 6.3 Economic Capital for an Insurance Company * 6.4 The Limits of Ruin Theory * III THE PERFECT MARKETS HYPOTHESIS AND ITS DANGERS * 7 Risk Neutral Valuation * 7.1 The Expected Present Value Criterion * 7.2 The Magic of Perfect Markets * 7.3 Complete Markets and Absence of Arbitrage Opportunities * 7.4 A Binomial Example * 7.5 The Mirages of the Perfect Markets World * 8 The Case of Incomplete Markets: Relating Risk Premiums to Economic * Fundamentals * 8.1 Solving the St Petersburg Paradox * 8.2 Certainty Equivalent * 8.3 Markets for Exchanging Risks * 8.4 The Limits of the Equilibrium Approach * 9 Risk Management in a Normal World * 9.1 The Mean-Variance Criterion * 9.2 Portfolio Choice * 9.3 The Diversification Principle * 9.4 Efficient Portfolios and the Sharpe Ratio * 9.5 The Capital Asset Pricing Model (CAPM) * 9.6 Futures Contracts and Hedging * 9.7 Capital Allocation and RaRoc * 9.8 The Dangers of Viewing the World as "Normal " * Appendix 1: Portfolio Choice with Several Risky Assets * Appendix 2: Deriving the CAPM Formula * IV RISK MANAGEMENT AND SHAREHOLDER VALUE * 10 Why Market Imperfections Matter for Shareholder Value * 10.1 Standards Methods for Assessing Shareholder Value * 10.2 Why is the Shareholder Value Function Likely to Be Non Linear: A Simple Example * 10.3 Incentive Problems Generate Financial Frictions * 11 The Shareholder Value Function * 11.1 A Target Level of Cash * 11.2 A Model for Optimizing Liquidity Management * 11.3 Liquidity and Shareholder Value * Appendix 1: Stochastic Differential Calculus * Appendix 2: Derivation of the Shareholders Value Function * 12 Risk Management and the Shareholder Value Function * 12.1 How Much Risk to Take? * 12.2 Which Risks to Insure? * 12.3 How Much Liquidity to Keep in Reserves? * 12.4 How Much hedging to Perform? * V WHAT TO DO IN PRACTICE? * 13 The Different Steps of the Implementation * 13.1 Estimating the Shareholder Value Function * 13.2 A Unifying Metric for Risk Mapping: The Risk Value Mapping * 13.3 The New Instruments of Risk Management * 14 Learning from an Example * 14.1 Presentation of Med Corp * 14.2 Risk Analysis * 14.3 Shareholder Value and RM for Med Corp * 14.4 A Risk Transfer Policy for Med Corp * 15 Conclusion: Some Simple Messages * 15.1 Message # 1: Quantitative models are needed but they have to be used * with precaution * 15.2 Message # 2: Risk Management creates value for shareholders * 15.3 Message # 3: Things to do in practice * 15.4 Message # 4: Key Ingredients for a successful RM approach * Index
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