Measuring Market Risk

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td valign="top" align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_dowd_kevin_(2005).jpg" width="136" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Measuring Market Risk</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap2"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 162, 34"> </map> <img border="0" src="../images_title/dowd_k51.gif" usemap="#FPMap2" width="163" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> </div> <div align="center"> <center> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table5"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </center> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="50%" valign="top"> <p class="body_expanded">Kevin Dowd has written an excellent introduction to VaR and related risk measures that will appeal to several audiences. The first two-thirds of the book are a non-technical treatment of market risk measures that will be accessible to all financial professionals. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table7"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p class="body_expanded">This refers to specific computational techniques that are explained in a "toolkit" that comprises the last third of the book.</p> <p class="body_expanded">The opening chapter describes standard risk measures such as duration and the Greeks. It discusses financial risk management and its origins. It then introduces VaR and assesses some of its strengths and weaknesses as a risk measurement tool. Subsequent chapters focus on how to calculate VaR. They describe VaR measures that support both quantile-of-loss and expected-tail-loss (ETL) VaR metrics. </p> <p class="body_expanded">As is his style, Dowd surveys the literature broadly, presenting a wealth of techniques discussed in the VaR literature. He cites references carefully, so you know where to follow-up for more details. In addition to standard linear, historical and Monte Carlo methods of calculating VaR, more specialized techniques are covered, including:</p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents" style="margin-top: 3; margin-bottom: 3">1. The Risk Measurement Revolution</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">2. Measures of Financial Risk</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">3. Basic Issues in Measuring Market Risk</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">4. Non-parametric VaR and ETL</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">5. Parametric VaR and ETL</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">6. Simulation Approaches to VaR and ETL Estimation</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">7. Lattice Approaches to VaR and ETL Estimation</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">8. Incremental and Component Risks</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">9. Estimating Liquidity Risks</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">10. Backtesting Market Risk Models</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">11. Stress Testing</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">12. Model Risk </p> <p class="contents" style="margin-top: 3; margin-bottom: 3"><b>Toolkit</b></p> <p class="contents" style="margin-top: 3; margin-bottom: 3">1. Estimating the Standard Errors of Quantile Estimates</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">2. Estimating VaR and ETL Using Order Statistics</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">3. The Cornish-Fisher Expansion</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">4. The Bootstrap</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">5. Non-Parametric Density Estimation</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">6. Principal Components Analysis and Factor Analysis</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">7. Fat-Tailed Distributions</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">8. Extreme Value VaR and ETL</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">9. Simulation Methods</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">10. Forecasting Variances, Covariances and Correlations</p> <p class="contents" style="margin-top: 3; margin-bottom: 3">11. Correlations and Copulas</td> </tr> </table> </td> </tr> </table> <p class="bullet_line_space" style="margin-top: 16"> <img border="0" src="../images/bullet.gif" width="20" height="10">reweighting schemes for historical VaR;<p class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">principal component remappings;<p class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">use of the Cornish-Fisher approximation when portfolio values are not normally distributed; and<p class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">incremental and component VaR.<p class="body_expanded">Closing chapters address issues related to liquidity risk, backtesting, stress testing and model risk.</p> <p class="body_expanded">I highly recommend this book to anyone who wants a broad introduction to VaR. It will also appeal to researchers as a survey of the VaR literature. <b>[Review based on first edition.]</b></p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="50%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> <div align="left"> <div align="left"> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="50%" bgcolor="#FFFFCC" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 6"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_general.htm">Risk Management - General</a></p> <p class="bullet_line_space"><img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_market_risk.htm">Risk Management - Market Risk</a></td> </tr> </table> </td> </tr> </table> </div> </div> </td> <td>  </td> </tr> </table> </div>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>