By Kevin Dowd

This ebook offers an creation to worth 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 possibility Measurement contains assurance of:

  • Parametric and non-parametric hazard estimation

  • Simulation

  • Numerical tools

  • Liquidity hazards

  • Risk Decomposition and Budgeting

  • Backtesting

  • Stress checking out

  • Model threat
Divided into components, half one discusses a few of the hazard size strategies, when half offers a toolkit of the most instruments required to appreciate industry hazard size. A CD is packaged with the e-book, containing a MATLAB folder of threat size features, as well as a few examples in Excel/VBA.

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

Sample text

3 See Ingersoll (1987, p. 139) or Yoshiba and Yamai (2001, p. 8). 5) y is some small change in yield. , Fabozzi (2000, p. 66)). ) and, as such, they are useful, though limited, tools in the risk measurer’s armoury. , changes in bond price) to probabilities. If we are to use duration measures for risk measurement purposes in this sense, our best option is to derive the standard deviation of holding-period return and then feed that into a normal risk framework. 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.

To elaborate, suppose we are working to a daily holding or horizon period. At the end of day t − 1, we observe that the value of our portfolio is Pt−1 . However, looking forward, the value of our portfolio at the end of tomorrow, Pt , is uncertain. Ignoring any intra-day returns or intra-day interest, if Pt turns out to exceed Pt−1 , we will make a profit equal to the difference, Pt − Pt−1 ; and if Pt turns out to be less than Pt−1 , we will make a loss equal to Pt−1 − Pt . Since Pt is uncertain, as viewed from the end of t − 1, then so too is the profit or loss (P/L).

Mausser and Rosen (1998) or Yamai and Yoshiba (2001b, p. 15)). 10 See note 1 above. 3 VaR Can Discourage Diversification Another drawback is that VaR can discourage diversification, and a nice example of this effect is provided by Eber et al. (1999). Suppose there are 100 possible future states of the world, each with the same probability. There are 100 different assets, each earning reasonable money in 99 states, but suffering a big loss in one state. Each of these assets loses in a different state, so we are certain that one of them will suffer a large loss.

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