Financial Risk Management: Models, History, and Institutions

750 Pages·2011·5.06 MB·English

by  Allan M. Malz

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Financial Risk
Management
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Financial Risk
Management
Models, History, and Institutions
ALLAN M. MALZ
John Wiley & Sons, Inc.
iii
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Copyright (cid:2)C 2011 by Allan M. Malz. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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LibraryofCongressCataloging-in-PublicationData:
Malz,AllanM.
Financialriskmanagement:models,history,andinstitution:models,history,and
institution/AllanM.Malz.
p. cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-48180-6(cloth);ISBN978-1-118-02291-7(ebk);
ISBN978-1-118-02290-0(ebk);ISBN978-1-118-02289-4(ebk)
1.Financialriskmanagement. I.Title.
HD61.M2562011
332–dc22 2010043485
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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To
Karin, Aviva, and Benjamin
with love
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Contents
ListofFigures xvii
Preface xxi
CHAPTER1
FinancialRiskinaCrisis-ProneWorld 1
1.1 SomeHistory:WhyIsRiskaSeparateDisciplineToday? 1
1.1.1 TheFinancialIndustrySincethe1960s 2
1.1.2 The“ShadowBankingSystem” 9
1.1.3 ChangesinPublicPolicyTowardthe
FinancialSystem 15
1.1.4 TheRiseofLargeCapitalPools 17
1.1.5 MacroeconomicDevelopmentsSincethe
1960s:FromtheUnravelingofBretton
WoodstotheGreatModeration 20
1.2 TheScopeofFinancialRisk 34
1.2.1 RiskManagementinOtherFields 34
FurtherReading 41
CHAPTER2
MarketRiskBasics 43
2.1 Arithmetic,Geometric,andLogarithmicSecurityReturns 44
2.2 RiskandSecuritiesPrices:TheStandardAsset
PricingModel 49
2.2.1 DefiningRisk:States,SecurityPayoffs,and
Preferences 50
2.2.2 OptimalPortfolioSelection 54
2.2.3 EquilibriumAssetPricesandReturns 56
2.2.4 Risk-NeutralProbabilities 61
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viii CONTENTS
2.3 TheStandardAssetDistributionModel 63
2.3.1 RandomWalksandWienerProcesses 64
2.3.2 GeometricBrownianMotion 71
2.3.3 AssetReturnVolatility 74
2.4 PortfolioRiskintheStandardModel 75
2.4.1 BetaandMarketRisk 76
2.4.2 Diversification 82
2.4.3 Efficiency 85
2.5 BenchmarkInterestRates 88
FurtherReading 91
CHAPTER3
Value-at-Risk 93
3.1 DefinitionofValue-at-Risk 94
3.1.1 TheUser-DefinedParameters 97
3.1.2 StepsinComputingVaR 98
3.2 VolatilityEstimation 99
3.2.1 Short-TermConditionalVolatilityEstimation 99
3.2.2 TheEWMAModel 104
3.2.3 TheGARCHModel 106
3.3 ModesofComputation 108
3.3.1 Parametric 108
3.3.2 MonteCarloSimulation 109
3.3.3 HistoricalSimulation 111
3.4 ShortPositions 113
3.5 ExpectedShortfall 114
FurtherReading 116
CHAPTER4
NonlinearRisksandtheTreatmentofBondsandOptions 119
4.1 NonlinearRiskMeasurementandOptions 121
4.1.1 NonlinearityandVaR 123
4.1.2 SimulationforNonlinearExposures 126
4.1.3 Delta-GammaforOptions 127
4.1.4 TheDelta-GammaApproachforGeneral
Exposures 134
4.2 YieldCurveRisk 136
4.2.1 TheTermStructureofInterestRates 138
4.2.2 EstimatingYieldCurves 141
4.2.3 CouponBonds 144