Christian Szylar

Handbook of Market Risk (eBook, ePUB)

• Format: ePub

Produktbeschreibung

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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Produktdetails

• Verlag: John Wiley & Sons
• Seitenzahl: 432
• Erscheinungstermin: 16. Oktober 2013
• Englisch
• ISBN-13: 9781118572986
• Artikelnr.: 39905660

Autorenporträt

CHRISTIAN SZYLAR, PHD, is Global Head of Risk at Marshall Wace, LLP. Dr. Szylar has over eighteen years of working experience with international financial organizations and has advised numerous financial institutions on how best to implement efficient risk management in banking as well as in both UCITS and hedge fund markets. Dr. Szylar has taught multiple master's-level courses on market risk and speaks regularly at international conferences.

Inhaltsangabe

Foreword xv Acknowledgments xvii About the Author xix Introduction xxi 1
Introduction to Financial Markets 1 1.1 The Money Market 4 1.2 The Capital
Market 5 1.2.1 The Bond Market 6 1.2.2 The Stock Market 16 1.3 The Futures
and Options Market 19 1.4 The Foreign Exchange Market 22 1.5 The Commodity
Market 22 Further Reading 26 2 The Efficient Markets Theory 27 2.1
Assumptions behind a Perfectly Competitive Market 28 2.2 The Efficient
Market Hypothesis 30 2.2.1 Strong EMH 31 2.2.2 Semi-Strong EMH 32 2.2.3
Weak-Form EMH 32 2.3 Critics of Effi cient Markets Theory 33 2.4
Development of Behavioral Finance 35 2.5 Beating the Market: Fundamental
versus Technical 35 2.5.1 Fundamental Methods 36 2.5.2 Technical Analysis
39 Further Reading 42 3 Return and Volatility Estimates 44 3.1 Standard
Deviation 47 3.2 Standard Deviation with a Moving Observation Window 48 3.3
Exponentially Weighted Moving Average (EWMA) 50 3.4 Double (Holt)
Exponential Smoothing Model (DES) 53 3.5 Principal Component Analysis (PCA)
Models 53 3.6 The VIX 54 3.7 Geometric Brownian Motion Process 55 3.8 GARCH
56 3.9 Estimator Using the Highest and Lowest 56 3.9.1 Parkinson Estimator
56 3.9.2 Rogers Satchell Estimator 57 3.9.3 Garman-Klass Estimator 57
Further Reading 58 4 Diversification, Portfolios of Risky Assets, and the
Efficient Frontier 59 4.1 Variance and Covariance 61 4.2 Two-Asset
Portfolio: Expected Return and Risk 61 4.3 Correlation Coefficient 63 4.3.1
Correlation Coefficient and Its Impact on Portfolio Risk 63 4.3.2 The
Number of Assets in a Portfolio and Its Impact on Portfolio Risk 66 4.3.3
The Effect of Diversification on Risk 68 4.4 The Efficient Frontier 69 4.5
Correlation Regime Shifts and Correlation Estimates 80 4.5.1 Increased
Correlation 80 4.5.2 Severity of Correlation Changes 84 4.6 Correlation
Estimates 88 4.6.1 Copulas 90 4.6.2 Moving Average 91 4.6.3 Correlation
Estimators in Matrix Notation 92 4.6.4 Bollerslev's Constant Conditional
Correlation Model 93 4.6.5 Engle's Dynamic Conditional Correlation Model 94
4.6.6 Estimating the Parameters of the DCC Model 95 4.6.7 Implementing the
DCC Model 97 Further Reading 100 5 The Capital Asset Pricing Model and the
Arbitrage Pricing Theory 101 5.1 Implications of the CAPM Assumptions 102
5.1.1 The Same Linear Efficient Frontier for All Investors 102 5.1.2
Everyone Holds the Market Portfolio 102 5.2 The Separation Theorem 105 5.3
Relationships Defined by the CAPM 107 5.3.1 The Capital Market Line 107
5.3.2 The Security Market Line 109 5.4 Interpretation of Beta 110 5.5
Determining the Level of Diversifi cation of a Portfolio 112 5.6 Investment
Implications of the CAPM 112 5.7 Introduction to the Arbitrage Pricing
Theory (APT) 115 Further Reading 119 6 Market Risk and Fundamental
Multifactors Model 120 6.1 Why a Multifactors Model? 122 6.2 The Returns
Model 124 6.2.1 The Least-Squares Regression Solution 124 6.2.2 Statistical
Approaches 131 6.2.3 Hybrid Solutions 134 6.3 Estimation Universe 134 6.4
Model Factors 135 6.4.1 Market Factor or Intercept 135 6.4.2 Industry
Factors 135 6.4.3 Style Factors 138 6.4.4 Country Factors 140 6.4.5
Currency Factors 140 6.4.6 The Problem of Multicollinearity 142 6.5 The
Risk Model 143 6.5.1 Factor Covariance Matrix 143 6.5.2 Autocorrelation in
the Factor Returns 145 Further Reading 147 7 Market Risk: A Historical
Perspective from Market Events and Diverse Mathematics to the Value-at-Risk
148 7.1 A Brief History of Market Events 149 7.2 Toward the Development of
the Value-at-Risk 158 7.2.1 Diverse Mathematics 159 7.3 Definition of the
Value-at-Risk 169 7.4 VaR Calculation Models 171 7.4.1 Variance-Covariance
171 7.4.2 Historical Simulation 180 7.4.3 Monte Carlo Simulation 185 7.4.4
Incremental VaR 188 7.4.5 Marginal VaR 188 7.4.6 Component VaR 189 7.4.7
Expected Shortfall 189 7.4.8 VaR Models Summary 190 7.4.9 Mapping of
Complex Instruments 191 7.4.10 Cornish-Fisher VaR 192 7.4.11 Extreme Value
Theory (EVT) 193 Further Reading 193 8 Financial Derivative Instruments 195
8.1 Introducing Financial Derivatives Instruments 195 8.1.1 Swap 195 8.1.2
The Forward Contract 204 8.1.3 The Futures Contract 205 8.1.4 Options 206
8.1.5 Warrant 208 8.2 Market Risk and Global Exposure 208 8.2.1 Global
Exposure 209 8.2.2 Sophisticated versus Nonsophisticated UCITS 210 8.2.3
The Commitment Approach with Examples on Some Financial Derivatives 211
8.2.4 Calculation of Global Exposure Using VaR 216 8.3 Options 218 8.3.1
Different Strategies Using Options 218 8.3.2 Black Scholes Formula 218
8.3.3 The Greeks 221 8.3.4 Option Value and Risk under Monte Carlo
Simulation 227 8.3.5 Evaluating Options and Taylor Expansion 228 8.3.6 The
Binomial and Trinomial Option Pricing Models 228 Further Reading 233 9
Fixed Income and Interest Rate Risk 235 9.1 Bond Valuation 236 9.2 The
Yield Curve 236 9.3 Risk of Holding a Bond 240 9.3.1 Duration 240 9.3.2
Modified Duration 240 9.3.3 Convexity 241 9.3.4 Factor Models for Fixed
Income 241 9.3.5 Hedge Ratio 242 9.3.6 Duration Hedging 246 Further Reading
246 10 Liquidity Risk 247 10.1 Traditional Methods and Techniques to
Measure Liquidity Risk 249 10.1.1 Average Traded Volume 249 10.1.2 Bid-Ask
Spread 250 10.1.3 Liquidity and VaR 251 10.2 Liquidity at Risk 253 10.2.1
Incorporation of Endogenous Liquidity Risk into the VaR Model 254 10.2.2
Incorporation of Exogenous Liquidity Risk into the VaR Model 259 10.2.3
Exogenous and Endogenous Liquidity Risk in VaR Model 261 10.3 Other
Liquidity Risk Metrics 263 10.4 Methods to Measure Liquidity Risk on the
Liability Side 264 Further Reading 267 11 Alternatives Investment:
Targeting Alpha, Idiosyncratic Risk 269 11.1 Passive Investing 269 11.2
Active Management 271 11.3 Main Alternative Strategies 272 11.4 Specific
Hedge Fund Metrics 273 11.4.1 Market Factor versus Multifactor Regression
274 11.4.2 The Sharpe Ratio 275 11.4.3 The Information Ratio 275 11.4.4
R-Square (R2) 276 11.4.5 Downside Risk 276 Further Reading 288 12 Stress
Testing and Back Testing 289 12.1 Definition and Introduction to Stress
Testing 290 12.2 Stress Test Approaches 294 12.2.1 Piecewise Approach 294
12.2.2 Integrated Approach 296 12.2.3 Designing and Calibrating a Stress
Test 298 12.3 Historical Stress Testing 300 12.3.1 Some Examples of
Historical Stress Test Scenarios 301 12.3.2 Other Stress Test Scenarios 302
12.4 Reverse Stress Test 303 12.5 Stress Testing Correlation and Volatility
303 12.6 Multivariate Stress Testing 304 12.7 What Is Back Testing? 306
12.7.1 VaR Is Not Always an Accurate Measure 308 12.8 Back Testing: A
Rigorous Approach Is Required 310 12.8.1 Test of Frequency of Tail Losses
or Kupiec's Test 311 12.8.2 Conditional Coverage of Frequency and
Independence of Tail Losses 312 12.8.3 Clean and Dirty Back Testing 313
Further Reading 314 13 Banks and Basel II/III 315 13.1 A Brief History of
Banking Regulations 316 13.2 The 1988 Basel Accord 317 13.2.1 Definition of
Capital 318 13.2.2 Credit Risk Charge 319 13.2.3 Off-Balance Sheet Items
320 13.2.4 Drawbacks from the Basel Accord 323 13.2.5 1996 Amendment 324
13.3 Basel II 325 13.3.1 The Credit Risk Charge 326 13.3.2 Operational Risk
Charge 329 13.3.3 The Market Risk Charge 331 13.4 Example of the
Calculation of the Capital Ratio 364 13.5 Basel III and the New Defi nition
of Capital; The Introduction of Liquidity Ratios 365 Further Reading 371 14
Conclusion 373 Index 378