Elements of Financial Risk Management (eBook)

Cover 1
Contents 7
Preface 11
Acknowledgments 13
1 RISK MANAGEMENT AND FINANCIAL RETURNS 15
1.1. CHAPTER OUTLINE 15
1.2. LEARNING OBJECTIVES 15
1.3. RISK MANAGEMENT AND THE FIRM 16
1.4. A BRIEF TAXONOMY OF RISKS 18
1.5. STYLIZED FACTS OF ASSET RETURNS 20
1.6. OVERVIEW OF THE BOOK 23
1.7. FURTHER RESOURCES 23
1.8. EMPIRICAL EXERCISES ON CD-ROM 24
REFERENCES 1 32
2 VOLATILITY MODELING 33
2.1. CHAPTER OVERVIEW 33
2.2. SIMPLE VARIANCE FORECASTING 34
2.3. THE GARCH VARIANCE MODEL 37
2.4. EXTENSIONS TO THE GARCH MODEL 40
2.5. MAXIMUM LIKELIHOOD ESTIMATION 42
2.6. VARIANCE MODEL EVALUATION 44
2.7. USING INTRADAY INFORMATION 46
2.8. SUMMARY 52
2.9. FURTHER RESOURCES 52
2.10. EMPIRICAL EXERCISES ON CD-ROM 53
REFERENCES 2 60
3 CORRELATION MODELING 61
3.1. CHAPTER OVERVIEW 61
3.2. VALUE AT RISK FOR SIMPLE PORTFOLIOS 62
3.3. PORTFOLIO VARIANCE 65
3.4. MODELING CONDITIONAL COVARIANCES 66
3.5. MODELING CONDITIONAL CORRELATIONS 68
3.6. QUASI-MAXIMUM LIKELIHOOD ESTIMATION 72
3.7. REALIZED AND RANGE-BASED COVARIANCE 73
3.8. SUMMARY 75
3.9. FURTHER RESOURCES 75
3.10. APPENDIX: VaR FROM LOGARITHMIC VERSUS ARITHMETIC RETURNS 76
3.11. EMPIRICAL EXERCISES ON CD-ROM 77
REFERENCES 3 84
4 MODELING THE CONDITIONAL DISTRIBUTION 85
4.1. CHAPTER OVERVIEW 85
4.2. VISUALIZING NON-NORMALITY 87
4.3. THE STANDARDIZED t(d) DISTRIBUTION 88
4.4. THE CORNISH-FISHER APPROXIMATION TO VAR 93
4.5. EXTREME VALUE THEORY (EVT) 94
4.6. THE EXPECTED SHORTFALL RISK MEASURE 99
4.7. SUMMARY 101
4.8. FURTHER RESOURCES 102
4.9. EMPIRICAL EXERCISES ON CD-ROM 103
REFERENCES 4 111
5 SIMULATION-BASED METHODS 113
5.1. CHAPTER OVERVIEW 113
5.2. HISTORICAL SIMULATION (HS) 114
5.3. WEIGHTED HISTORICAL SIMULATION (WHS) 117
5.4. MULTI-PERIOD RISK CALCULATIONS 119
5.5. MONTE CARLO SIMULATION (MCS) 122
5.6. FILTERED HISTORICAL SIMULATION (FHS) 124
5.7. SUMMARY 126
5.8. FURTHER RESOURCES 127
5.9. EMPIRICAL EXERCISES ON CD-ROM 127
REFERENCES 5 133
6 OPTION PRICING 135
6.1. CHAPTER OVERVIEW 135
6.2. BASIC DEFINITIONS 136
6.3. OPTION PRICING UNDER THE NORMAL DISTRIBUTION 137
6.4. ALLOWING FOR SKEWNESS AND KURTOSIS 143
6.5. GARCH OPTION PRICING MODELS 147
6.6. IMPLIED VOLATILITY FUNCTION (IVF) MODELS 152
6.7. SUMMARY 153
6.8. FURTHER RESOURCES 154
6.9. APPENDIX: THE OPTION PRICING FORMULA 155
6.10. EMPIRICAL EXERCISES ON CD-ROM 156
REFERENCES 6 165
7 MODELING OPTION RISK 167
7.1. CHAPTER OVERVIEW 167
7.2. THE OPTION DELTA 168
7.3. PORTFOLIO RISK USING DELTA 173
7.4. THE OPTION GAMMA 175
7.5. PORTFOLIO RISK USING GAMMA 177
7.6. PORTFOLIO RISK USING FULL VALUATION 180
7.7. A SIMPLE EXAMPLE 182
7.8. PITFALL IN THE DELTA AND GAMMA APPROACHES 185
7.9. SUMMARY 187
7.10. FURTHER RESOURCES 188
7.11. EMPIRICAL EXERCISES ON CD-ROM 189
REFERENCES 7 194
8 BACKTESTING AND STRESS TESTING 195
8.1. CHAPTER OVERVIEW 195
8.2. BACKTESTING VaRs 198
8.3. INCREASING THE INFORMATION SET 203
8.4. BACKTESTING EXPECTED SHORTFALL 204
8.5. BACKTESTING THE ENTIRE DISTRIBUTION 205
8.6. STRESS TESTING 208
8.7. SUMMARY 211
8.8. FURTHER RESOURCES 212
8.9. EMPIRICAL EXERCISES ON CD-ROM 212
REFERENCES 8 222
Index 223