Handbook of Market Risk (eBook)

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.

PREFACE

ACKNOWLEDGEMENTS

ABOUT THE AUTHOR

INTRODUCTION

Chapter 1 Introduction to financial markets

1.1. The money market

1.2. The capital market

1.3. The futures and options market

1.4. The foreign exchange market

1.5. The commodity market

Chapter 2 The efficient markets theory

2.1. Assumptions behind a perfectly competitive market

2.2. The efficient market hypothesis

2.3. Critics of efficient markets theory

2.4. Development of behavioural finance

2.5. Beating the market: fundamental versus technical

Chapter 3 Return and volatility estimates

3.1. Standard deviation

3.2. Standard deviation with a moving observation window

3.3. Exponentially Weighted Moving Average

3.4. Double (Holt) Exponential Smoothing Model

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

Chapter 4 Diversification, portfolio of risky assets and efficient frontier, correlation estimates

4.1. Variance and covariance

4.2. Two asset portfolio: expected return and risk

4.3. Correlation coefficient

4.4. The efficient frontier

4.5. Correlation regime shifts and correlation estimates

4.6. Correlation estimates

Chapter 5 The Capital Asset Pricing Model and the Arbitrage Pricing Theory

5.1. Implications of the CAPM assumptions

5.3. The separation theorem

5.4. Relationships defined by the CAPM

5.5. Interpretation of Beta

5.6. Determining the level of diversification of a portfolio

5.7. Investment implications of the CAPM

5.8. Introduction to the Arbitrage Pricing Theory

Chapter 6 Market risk and fundamental multi-factors model

6.1. Why a multi-factors model

6.2. The returns model

6.3. Estimation universe

6.4. Model factors

6.5. The risk model

Chapter 7 Market Risk: an historical perspective from market events and diverse mathematics to the value-at-risk

7.1. A brief history of market events

7.2. Towards the development of the value-at-risk

7.3. The definition of value-at-risk

7.4. VaR calculation models

Chapter 8 Financial derivatives instruments

8.1. Introducing financial derivatives instruments

8.2. Market risk and global exposure

8.3. Options

Chapter 9 Fixed income and interest rate risk

9.1. Bond valuation

9.2. The yield curve

9.3. Risk of holding a bond

Chapter 10 Liquidity risk

10.1. Traditional methods and techniques to measure liquidity risk

10.2. Liquidity-at-risk

10.3. Other liquidity risk metrics

10.4. Methods to measure liquidity risk on the liability side

Chapter 11 Alternatives investment: targeting alpha, idiosyncratic risk

11.1. Passive investing

11.2. Active management

11.3. Main alternative strategies

11.4. Specific hedge funds metrics

Chapter 12 Stress testing and back testing

12.1. Definition and introduction to stress testing

12.2. Stress test main approaches

12.3. Historical Stress testing

12.4. Reverse stress test

12.5. Stress testing correlation and volatility

12.6. Multivariate stress testing

12.7. What is back testing?

12.8. Back testing: a rigorous approach is required

Chapter 13 Banks and Basel II/III

13.1. A brief history of banking regulations

13.2. The 1988 Basel Accord

13.3. Basel II

13.4. Example of calculation of the Capital Ratio

13.5. Basel III and the new definition of capital, and the introduction of liquidity ratios

Conclusion