Chapter 6 Introduction to Practical Risk Modelling

In this chapter, we describe the role of models in the risk management process. We discuss the different questions for which Risk Management is asked to provide answers. The element they all have in common is the need for a measure, or set of measures, that allows the risks from positions in different asset classes or participations in different types of business to be compared to each other and to the expected and actual profits of each. In addition, the measure will need to allow decision makers to aggregate the risks at different levels of their business including an accurate summary at the very top level that includes all positions and business activities. Value at Risk and Expected Tail ...

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