New PDF release: An Introduction to Market Risk Measurement (The Wiley

By Kevin Dowd

ISBN-10: 0470847484

ISBN-13: 9780470847480

This ebook offers an advent to price in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring industry Risk (John Wiley & Sons 2002).

An creation to marketplace possibility Measurement contains insurance of:

  • Parametric and non-parametric probability estimation

  • Simulation

  • Numerical equipment

  • Liquidity hazards

  • Risk Decomposition and Budgeting

  • Backtesting

  • Stress trying out

  • Model chance
Divided into elements, half one discusses a few of the hazard dimension concepts, when half offers a toolkit of the most instruments required to appreciate marketplace possibility dimension. A CD is packaged with the publication, containing a MATLAB folder of chance dimension services, as well as a few examples in Excel/VBA.

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Extra info for An Introduction to Market Risk Measurement (The Wiley Finance Series)

Sample text

The basic concept was nicely described by Linsmeier and Pearson (1996): Value at risk is a single, summary, statistical measure of possible portfolio losses. Specifically, value at risk is a measure of losses due to ‘normal’ market movements. Losses greater than the value at risk are suffered only with a specified small probability. Subject to the simplifying assumptions used in its calculation, value at risk aggregates all of the risks in a portfolio into a single number suitable for use in the boardroom, reporting to regulators, or disclosure in an annual report.

4 VaR Not Sub-additive But there is also a deeper problem with VaR. In order to appreciate this problem, we need first to introduce the notion of sub-additivity. 9) Sub-additivity means that aggregating individual risks does not increase overall risk. Sub-additivity matters for a number of reasons: r If risks are sub-additive, then adding risks together would give us an overestimate of combined r r risk, and this means that we can use the sum of risks as a conservative estimate of combined risk.

8) If we want a risk measure, the easiest step is to assume that bond prices are approximately normal and we can then work out the probabilities of specified gains or losses, and so forth. We could also assume alternative distributions if we wished to, but the normal distribution is certainly the most convenient, and makes duration-based measures of risk more tractable than they would otherwise be. 1 VaR Basics A much better approach is to allow the P/L or return distribution to be less restricted, but focus on the tail of that distribution — the worst p percent of outcomes.

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An Introduction to Market Risk Measurement (The Wiley Finance Series) by Kevin Dowd

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