By Kevin Dowd
This e-book offers an advent to price in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring marketplace Risk (John Wiley & Sons 2002).
An advent to marketplace danger Measurement contains assurance of:
- Parametric and non-parametric chance estimation
- Numerical equipment
- Liquidity dangers
- Risk Decomposition and Budgeting
- Stress checking out
- Model danger
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Extra info for An introduction to market risk measurement
R A short holding period is preferable for model validation or backtesting purposes: reliable validation requires a large data set, and a large data set requires a short holding period. And the conﬁdence level? For backtesting, we would usually want relatively low conﬁdence levels to get a reasonable proportion of excess-loss observations. , we would need to work with a high conﬁdence level if we were using extreme value theory), and the purposes to which our risk measures were being put. For example, we might want a high conﬁdence level if we were using our risk measures to set capital requirements.
And I’ll tell you that during the crash it was about as useful as a US theme park on the outskirts of Paris. 1 The Origin and Development of VaR In the late 1970s and 1980s, a number of major ﬁnancial institutions started work on internal models to measure and aggregate risks across the institution as a whole. They started work on these models in the ﬁrst instance for their own internal risk management purposes — as ﬁrms became more complex, 12 This problem is especially acute for gamma risk. As one risk manager noted: On most option desks, gamma is a local measure designed for very small moves up and down [in the underlying price].
VaR approaches are therefore more general. VaR approaches can be applied to a much broader range of risk problems: PT theory is limited to market risks, while VaR approaches can be applied to credit, liquidity and other risks, as well as to market risks. , the historical simulation and simulation approaches) do not. It would therefore be a mistake to regard all VaR approaches as applications (or developments) of portfolio theory. 15 A notable example is the exchange between Longerstaey and Zangari (1995) and Lawrence and Robinson (1995a) on the safety or otherwise of RiskMetrics.