Technical paper/Market risk
Contributi al rischio di fattori generici definiti dall'utente
Approfondimenti - Gestione degli investimenti
Der indirekte Blick aus dem Sattel
Der Neueste Stand. Kreditportfoliorisiken
Forward thinking for backwardation
In certain settings it's reasonable to assume that the current futures price embodies the market expectations of the spot price. However, as Gary Dorris, Sean Burrows and Vena Kostroun explain, there are distinct situations when this assumption does not…
Cracking VAR with kernels
Value-at-risk analysis has become a key measure of portfolio risk in recent years, but how can we calculate the contribution of some portfolio component? Eduardo Epperlein and Alan Smillie show how kernel estimators can be used to provide a fast,…
Maximum drawdown
The maximum loss from a market peak to a market nadir, commonly called the maximum drawdown (MDD), measures how sustained one’s losses can be. Malik Magdon-Ismail and Amir Atiya present analytical results relating the MDD to the mean return and the…
Estimating economic capital allocations for market and credit risk
Value-at-Risk (VAR) measures often are used as a basis for setting so-called"economic capital" or buffer stock measures of equity capitalization requirements.VAR measures do not account for the time value of money or theequilibrium required return…
Sensible and efficient capital allocation for credit portfolios
Michael Kalkbrener, Hans Lotter and Ludger Overbeck construct a new approach to economiccapital allocation, showing that three axioms uniquely determine a capital allocation scheme,and, more importantly, that any allocation satisfying the axioms is…
Calculating transfer risk using Monte Carlo
Marco van der Burgt constructs a model of emerging market transfer risk based on a country’s foreign exchange reserves that is combined with facility-dependent risk factors that determine counterparty exposure in the event of a moratorium. He then…
Operational and market risks of a regulated power utility
Victor Dvortsov and Ken Dragoon present an analytical method for including market and operational risks when estimating utility portfolio value-at-risk.
Correlation stress testing for value-at-risk
The correlation matrix is of vital importance for value-at-risk (VAR) modelsin the financial industry. Risk managers are often interested in stressing a subsetof market factors within large-scale risk systems containing hundreds ofmarket variables…
Evaluating credit risk models using loss density forecasts
The evaluation of credit portfolio risk models is an important issue for both banks and regulators. It is impeded by the scarcity of credit events, long forecasthorizons, and data limitations. To make efficient use of available information, the…
Contributions to credit risk
Optimisation of credit portfolios requires that risk contributions be quantified. However, there has been disagreement over which of three popular tail risk measures should be used. Here, Alexandre Kurth and Dirk Tasche offer a way forward, showing how…
Risk management based on stochastic volatility
Risk management approaches that do not incorporate randomly changing volatility tend to under- or overestimate the risk, depending on current market conditions. We show how some popular stochastic volatility models in combination with the hyperbolic…
Unsystematic credit risk
Although Basel has shifted its treatment of unsystematic credit risk from the first, capital rules pillar (where it was called the 'granularity adjustment') to the second, supervisory pillar of the forthcoming Accord, this issue is of great practical…
Minimising extremes
Portfolio diversification often breaks down in stressed market environments, but the co-movement of asset prices in a tail risk regime may be modelled using a coefficient of tail dependence. Here, Yannick Malevergne and Didier Sornette show how such…
Fallacies about the effects of market risk management systems
This paper takes another look at allegations that risk management systems have contributed to increased volatility in financial markets, with the particular example of the summer of 1998. The paper also provides new evidence on the potential effect of…
A bootstrap back-test
Back-testing
VAR you can rely on
Analytical and simulation-based methods often appear as rivals, but many real world problems are best served by judicious combinations of both approaches. In a first of a pair of computationally themed papers, Rabi De and Tanya Tamarchenko present a…
Risk and probability measures
Although its drawbacks are well known, VAR has become institutionalised as the market risk measure of choice among trading firms and regulators. Now there is a growing feeling that a reappraisal is overdue, exemplified here by Phelim Boyle, Tak Kuen Siu…
The maturity effect on credit risk capital
In a mark-to-market approach to credit risk capital, ratings or spread volatility has the effect of making longer-maturity loans more capital-intensive. This is incorporated in the current Basel II proposals via a maturity adjustment factor. Arguing that…
Testing assumptions
In calculating value-at-risk forecasts for trading portfolios, distributional assumptions are asimportant as the choice of risk factors, but it is not easy to determine the source of errorwhen rejected forecasts occur. Here, Jeremy Berkowitz develops a…
Honour your contribution
What is the best method for determining the risk contribution of a component in a portfolio? An exploration of the pros and cons of three important methods, showing that none dominates the others.
Pro-cyclicality in the new Basel Accord
Could Basel II worsen recessions? By backtesting the proposed capital rules to the last recession, D. Wilson Ervin and Tom Wilde argue that the increased risk sensitivity of loan portfolio regulatory capital in the new Accord could have unwelcome…
Stress tests and risk capital
For many financial institutions, "stress tests" are an important input into processes that set risk capital allocations. In the current regulatory environment, two distinct model-based approaches for setting regulatory capital requirements include stress…