Market Risk Analysis Volume II: Practical Financial Econometrics

Preface to Volume II

For well over a decade, econometrics has been one of the major routes into finance. I took this route myself several years ago. Starting an academic career as an algebraist, I then had a brief encounter with game theory before discovering that the skills of an econometrician were in greater demand. I would have found econometrics much more boring than algebra or game theory had it not been for the inspiration of some great teachers at the London School of Economics, and of Professor Robert Engle who introduced me to GARCH models some twenty years ago.

At that time finance was one of the newest areas of applied econometrics and it was relatively easy to find interesting problems that were also useful to practitioners. And this was how my reputation grew, such as it is. I was building GARCH models for banks well before they became standard procedures in statistical packages, applying cointegration to construct arbitrage strategies for fund managers and introducing models for forecasting very large covariance matrices. In the end the appreciation of this work was much greater than the appreciation I received as an academic so I moved, briefly, to the City. Then, almost a decade ago, I returned to academic life as a professor of financial risk management. In fact, I believe I was the first professor to have this title in the UK, financial risk management being such a new profession at that time. It was the late 1990s, and by then numerous econometricians were taking ...