Measuring and Managing Risk in Innovative Financial Instruments

Stuart M Turnbull

Contents

Introduction to 'Lessons from the Financial Crisis'

1.

The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can be Learned?

2.

Underwriting versus Economy: A New Approach to Decomposing Mortgage Losses

3.

The Shadow Banking System and Hyman Minsky’s Economic Journey

4.

The Collapse of the Icelandic Banking System

5.

The Quant Crunch Experience and the Future of Quantitative Investing

6.

No Margin for Error: The Impact of the Credit Crisis on Derivatives Markets

7.

The Re-Emergence of Distressed Exchanges in Corporate Restructurings

8.

Modelling Systemic and Sovereign Risks

9.

Measuring and Managing Risk in Innovative Financial Instruments

10.

Forecasting Extreme Risk of Equity Portfolios with Fundamental Factors

11.

Limits of Implied Credit Correlation Metrics Before and During the Crisis

12.

Another view on the pricing of MBSs, CMOs and CDOs of ABS

13.

Pricing of Credit Derivatives with and without Counterparty and Collateral Adjustments

14.

A Practical Guide to Monte Carlo CVA

15.

The Endogenous Dynamics of Markets: Price Impact, Feedback Loops and Instabilities

16.

Market Panics: Correlation Dynamics, Dispersion and Tails

17.

Financial Complexity and Systemic Stability in Trading Markets

18.

The Martingale Theory of Bubbles: Implications for the Valuation of Derivatives and Detecting Bubbles

19.

Managing through a Crisis: Practical Insights and Lessons Learned for Quantitatively Managed Equity Portfolios

20.

Active Risk Management: A Credit Investor’s Perspective

21.

Investment Strategy Returns: Volatility, Asymmetry, Fat Tails and the Nature of Alpha

In the 2007–9 credit crisis, the issues of improper valuation and inadequate risk management in the use of credit derivatives were at the centre of the credit market turmoil. There has been much discussion about the use of such instruments as mortgage-backed securities, collateralised debt obligations (CDOs) and credit default swaps (CDSs). The crisis has raised the question of how we measure the risks of innovative financial products and manage those risks. Innovative financial instruments are typically illiquid and pose several challenges for their valuation and the measurement and management of the risks associated with them. Measuring risk at some specified time horizon requires the ability to price different assets in future states and to compute different risk measures. Managing risk requires the means to alter a risk profile, through either contractual mechanisms such as master agreements or institutions such as clearinghouses or via the use of hedging instruments. This chapter addresses some of the many issues that arise when a new form of financial instrument is introduced.

Innovation in financial instruments takes two forms: variations on existing types of instruments

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: