handout02_marketrisk

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 ±nancial risks Financial risks can be broadly classifed into several categories, namely market risk, credit risk, liquidity risk, operational risk, and legal risk. Market risk is the risk o± loss arising ±rom changes in the value o± tradable or traded assets. Credit risk is the risk o± loss due to the ±ailure o± the counterparty to pay the promised obligation. Liquidity risk is the risk o± loss arising ±rom the inability either to meet payment obligations (±unding liquidity risk) or to liquidate positions with little price impact (asset liquidity risk). Operational risk is the risk o± loss caused by inadequate or ±ailed internal processes, people and systems, or external events. Legal risk is the risk o± loss arising ±rom uncertainty about the en±orceability o± 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 ±ocused 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 ±rom which the banks calculate their capital requirements. One requirement is that the risk management group in charge o± the development and execution o± these models should be independent o± 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 ±ully integrated into the bank’s risk measurement and management, and backtesting and stress testing should be per±ormed on their per±ormance 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 Fnancial institution’s position due to market movements over a given holding period with a given level of conFdence.
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This note was uploaded on 10/30/2011 for the course AMS 517 taught by Professor Xinghaipeng during the Spring '11 term at SUNY Stony Brook.

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handout02_marketrisk - Outline Financial risk VaR ES...

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