Journal of Risk

Identification of specific sources of risk in a portfolio, the factor-based estimation of risk measures, together with the impact of model risk on capital reserves and regulator-driven interest risk management constitute the focus of this issue of The Journal of Risk.

In the first paper, "Improved estimation methods for value-at-risk, expected shortfall and risk contributions with high precision", Yukio Muromachi proposes a technique based on the saddlepoint approximation to quickly and accurately estimate common portfolio risk measures and their associated marginal component contributions. With the assumption of conditional independence, which is pervasive in credit risk models, the author derives tractable expressions for the generating functions of
conditional cumulants.

In our second paper, "Better risk and performance estimates with factor-model Monte Carlo", Yindeng Jiang and Doug Martin exploit the long history of factors affecting the performance of portfolios with only a short history. They show that by incorporating the time series of these factors with Monte Carlo simulation they can improve over the maximum likelihood estimates of portfolio performance metrics with less stringent, semiparametric assumptions.

The emergence of new regulatory environments such as Basel II and Solvency II has brought the need to properly assess the quality of internal models of risk management to the fore. In the third paper of this issue, "The impact of model risk on capital reserves: a quantitative analysis", Philip Bertram, Philipp Sibbertsen and Gerhard Stahl propose a variety of simple yet illustrative quantitative concepts of model risk. In an empirical study, they show how the differences between definitions of model risk materially affect capital requirements.

In the issue's fourth paper, "Nonmaturity deposits and banks' exposure to interest rate risk: issues arising from the Basel regulatory framework", Rosa Cocozza, Domenico Curcio and Igor Gianfrancesco address the shortcomings of a major assumption in the Basel accords regarding interest-risk exposure. Specifically, they propose two models to incorporate optionality features that are ignored by the constant demand sensitivity assumption that is made by the regulators and demonstrate the empirical significance of the models based on Italian banking data.

Farid AitSahlia
University of Florida

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