Financial Risk Management: Models, History, and Institutions

Contents

List of Figures

Preface

CHAPTER 1 Financial Risk in a Crisis-Prone World

1.1 Some History: Why Is Risk a Separate Discipline Today?

1.1.1 The Financial Industry Since the 1960s

1.1.2 The “Shadow Banking System”

1.1.3 Changes in Public Policy Toward the Financial System

1.1.4 The Rise of Large Capital Pools

1.1.5 Macroeconomic Developments Since the 1960s: From the Unraveling of Bretton Woods to the Great Moderation

1.2 The Scope of Financial Risk

1.2.1 Risk Management in Other Fields

Further Reading

CHAPTER 2 Market Risk Basics

2.1 Arithmetic, Geometric, and Logarithmic Security Returns

2.2 Risk and Securities Prices: The Standard Asset Pricing Model

2.2.1 Defining Risk: States, Security Payoffs, and Preferences

2.2.2 Optimal Portfolio Selection

2.2.3 Equilibrium Asset Prices and Returns

2.2.4 Risk-Neutral Probabilities

2.3 The Standard Asset Distribution Model

2.3.1 Random Walks and Wiener Processes

2.3.2 Geometric Brownian Motion

2.3.3 Asset Return Volatility

2.4 Portfolio Risk in the Standard Model

2.4.1 Beta and Market Risk

2.4.2 Diversification

2.4.3 Efficiency

2.5 Benchmark Interest Rates

Further Reading

CHAPTER 3 Value-at-Risk

3.1 Definition of Value-at-Risk

3.1.1 The User-Defined Parameters

3.1.2 Steps in Computing VaR

3.2 Volatility Estimation

3.2.1 Short-Term Conditional Volatility Estimation

3.2.2 The EWMA Model

3.2.3 The GARCH Model

3.3 Modes of Computation

3.3.1 Parametric

3.3.2 Monte Carlo Simulation

3.3.3 Historical Simulation

3.4 Short Positions

3.5 Expected ...