By Kevin Dowd
This e-book presents 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 threat Measurement contains insurance of:
- Parametric and non-parametric probability estimation
- Numerical equipment
- Liquidity hazards
- Risk Decomposition and Budgeting
- Stress trying out
- Model chance
Read or Download An Introduction to Market Risk Measurement (The Wiley Finance Series) PDF
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Extra info for An Introduction to Market Risk Measurement (The Wiley Finance Series)
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.
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. If we invest in one of these assets only, then our VaR will be negative at, say, the 95% conﬁdence level, because the probability of incurring a loss is 1%.
These ﬁrms were keen to encourage their management consultancy businesses, but at the same time they were conscious of the limitations of their own models and wary about giving too many secrets away. Whilst most ﬁrms kept their models secret, JP Morgan decided to make its data and basic methodology available so that outside parties could use them to write their own risk management software. Early in 1994, Morgan set up the RiskMetrics unit to do this and the RiskMetrics model — a simpliﬁed version of the ﬁrm’s own internal model — was completed in eight months.