handout02_marketrisk - Outline Financial risk VaR ES...

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Outline Financial risk VaR & ES Nonlinear portfolios Stress testing & extreme value theory Statistical Methods in Market Risk Management Haipeng Xing Haipeng Xing AMS517, SUNY Stony Brook Statistical Methods in Market Risk Management Outline Financial risk VaR & ES Nonlinear portfolios Stress testing & extreme value theory Outline 1 Financial risks and measures of market risk 2 Statistical models for VaR and ES 3 Measuring risk for nonlinear portfolios 4 Stress testing and extreme value theory Haipeng Xing AMS517, SUNY Stony Brook Statistical Methods in Market Risk Management
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Outline Financial risk VaR & ES Nonlinear portfolios Stress testing & extreme value theory Types of financial risks Financial risks can be broadly classified into several categories, namely market risk, credit risk, liquidity risk, operational risk, and legal risk. Market risk is the risk of loss arising from changes in the value of tradable or traded assets. Credit risk is the risk of loss due to the failure of the counterparty to pay the promised obligation. Liquidity risk is the risk of loss arising from the inability either to meet payment obligations (funding liquidity risk) or to liquidate positions with little price impact (asset liquidity risk). Operational risk is the risk of loss caused by inadequate or failed internal processes, people and systems, or external events. Legal risk is the risk of loss arising from uncertainty about the enforceability of contracts. Haipeng Xing AMS517, SUNY Stony Brook Statistical Methods in Market Risk Management Outline Financial risk VaR & ES Nonlinear portfolios Stress testing & extreme value theory Internal models for capital requirements While the original Basel Accord focused primarily on the (credit) risks associated with the issuer, the 1996 amendment sought to give more coverage to market risk. In the amendment, there are certain regulatory requirements on the internal models from which the banks calculate their capital requirements. One requirement is that the risk management group in charge of the development and execution of these models should be independent of the business units it monitors and should report directly to senior management. Another requirement is that besides calculating the regulatory capital requirements, these models should be fully integrated into the bank’s risk measurement and management, and backtesting and stress testing should be performed on their performance on a regular basis. Haipeng Xing AMS517, SUNY Stony Brook Statistical Methods in Market Risk Management
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Outline Financial risk VaR & ES Nonlinear portfolios Stress testing & extreme value theory Measures of market risk — Value at Risk (VaR) Value at Risk is one of the most important and widely used risk management statistics. It measures the maximum loss of a financial institution’s position due to market movements over a given holding period with a given level of confidence.
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