Financial Market Risk

Financial Market Risk

by Cornelis Los
Released June 2013
Publisher(s): Routledge
ISBN: 9781134469314

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Book description

This new book uses advanced signal processing technology to measure and analyze risk phenomena of the financial markets. It explains how to scientifically measure, analyze and manage non-stationarity and long-term time dependence (long memory) of financial market returns. It studies, in particular, financial crises in persistent financial markets, such as stock, bond and real estate market, and turbulence in antipersistent financial markets, such as anchor currency markets. It uses Windowed Fourier and Wavelet Multiresolution Analysis to measure the degrees of persistence of these complex markets, by computing monofractal Hurst exponents and multifractal singularity spectra. It explains how and why financial crises and financial turbulence may occur in the various markets and why we may have to reconsider the current wave of term structure modeling based on affine models. It also uses these persistence measurements to improve the financial risk management of global investment funds, via numerical simulations of the nonlinear diffusion equations describing the underlying high frequency dynamic pricing processes.

Table of contents

  1. Cover
  2. Half Title
  3. Routledge International Studies in Money and Banking
  4. Full Title
  5. Copyright
  6. Dedication
  7. Contents
  8. List of figures
  9. List of tables
  10. Preface
  11. Introduction
  12. PART I Financial risk processes
    1. 1 Risk — asset class, horizon and time
      1. 1.1 Introduction
      2. 1.2 Uncertainty
      3. 1.3 Nonparametric and parametric distributions
      4. 1.4 Random processes and time series
      5. 1.5 Software
      6. 1.6 Exercises
    2. 2 Competing financial market hypotheses
      1. 2.1 Introduction
      2. 2.2 EMH: martingale theory
      3. 2.3 FMH: fractal theory
      4. 2.4 Importance of identifying the degree of market efficiency
      5. 2.5 Software
      6. 2.6 Exercises
    3. 3 Stable scaling distributions in finance
      1. 3.1 Introduction
      2. 3.2 Affine traces of speculative prices
      3. 3.3 Invariant properties: stationarity versus scaling
      4. 3.4 Invariances of (Pareto—Lévy) scaling distributions
      5. 3.5 Zolotarev parametrization of stable distributions
      6. 3.6 Examples of closed form stable distributions
      7. 3.7 Stable parameter estimation and diagnostics
      8. 3.8 Software
      9. 3.9 Exercises
    4. 4 Persistence of financial risk
      1. 4.1 Introduction
      2. 4.2 Serial dependence
      3. 4.3 Global dependence
      4. 4.4 (G)ARCH processes
      5. 4.5 Fractional Brownian Motion
      6. 4.6 Range/Scale analysis
      7. 4.7 Critical color categorization of randomness
      8. 4.8 Software
      9. 4.9 Exercises
  13. PART II Financial risk measurement
    1. 5 Frequency analysis of financial risk
      1. 5.1 Introduction
      2. 5.2 Visualization of long-term financial risks
      3. 5.3 Correlation and time convolution
      4. 5.4 Fourier analysis of stationary price innovations
      5. 5.5 Software
      6. 5.6 Exercises
    2. 6 Fourier time-frequency analysis of risk
      1. 6.1 Introduction
      2. 6.2 FT for aperiodic variables
      3. 6.3 Hurst exponent identification from risk spectrum
      4. 6.4 Heisenberg Uncertainty Principle
      5. 6.5 Windowed FT for transient price innovations
      6. 6.6 Software
      7. 6.7 Exercises
    3. 7 Wavelet time-scale analysis of risk
      1. 7.1 Introduction
      2. 7.2 Wavelet analysis of transient pricing
      3. 7.3 Mallat's MRA
      4. 7.4 Wavelet Parseval Risk Decomposition Theorem
      5. 7.5 Software
      6. 7.6 Exercises
    4. 8 Multiresolution analysis of local risk
      1. 8.1 Introduction
      2. 8.2 Measurement of local financial market risk
      3. 8.3 Homogeneous Hurst exponents of monofractal price series
      4. 8.4 Multiresolution analysis of multifractal price series
      5. 8.5 Software
      6. 8.6 Exercises
  14. PART III Term structure dynamics
    1. 9 Chaos — nonunique equilibria processes
      1. 9.1 Introduction
      2. 9.2 Logistic parabola regimes
      3. 9.3 General nonlinear dynamic systems
      4. 9.4 Detecting attracting points and aperiodic orbits
      5. 9.5 Summary of aperiodic cyclical steady-state equilibria
      6. 9.6 Software
      7. 9.7 Exercises
    2. 10 Measuring term structure dynamics
      1. 10.1 Introduction
      2. 10.2 Dynamic investment cash flow theory
      3. 10.3 Nonlinear relationships in finance
      4. 10.4 Liquidity and financial turbulence
      5. 10.5 Software
      6. 10.6 Exercises
    3. 11 Simulation of financial turbulence
      1. 11.1 Introduction
      2. 11.2 Theories of physical and financial turbulence
      3. 11.3 Measurement and simulation of turbulence
      4. 11.4 Simulation of financial cash flow turbulence
      5. 11.5 Multiresolution analysis of financial turbulence
      6. 11.6 Wavelet solutions of financial diffusion equations
      7. 11.7 Software
      8. 11.8 Exercises
  15. PART IV Financial risk management
    1. 12 Managing VaR and extreme values
      1. 12.1 Introduction
      2. 12.2 Global dependence of financial returns
      3. 12.3 VaR for stable distributions
      4. 12.4 VaR for parametric distributions
      5. 12.5 Extreme value theory
      6. 12.6 VaR and fractal pricing processes
      7. 12.7 Software
      8. 12.8 Exercises
  16. Appendix A: original scaling in financial economics
  17. Appendix B: S&P500 daily closing prices for 1988
  18. Index

Product information

  • Title: Financial Market Risk
  • Author(s): Cornelis Los
  • Release date: June 2013
  • Publisher(s): Routledge
  • ISBN: 9781134469314