Quantitative Financial Risk Management - Henry Stewart Talks

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Introducing Quantitative Financial Risk Management Fundamentals, Models and Techniques A Series of Talks on CD-ROM Designed and developed by Dr Stephen E. Satchell, Trinity College, University of Cambridge, Quantitative Financial Risk Management – A Series of Talks on CD-ROM has been specifically commissioned from prominent experts in the field to brief all those who need to be aware of fundamental concepts and latest models and techniques in quantitative financial risk management. To view extracts from the Series please go to www.hstalks.com/risk/ CONTENT OF THE TALKS The Talks have been commissioned specifically for this Series to cover both the theory and practical applications of quantitative financial risk management. Topics covered include: ■ Role of Modern Risk Management at Financial Institutions ■ Utility Theory and Mean Variance ■ Volatility ■ Portfolio Risk ■ Risk Decomposition/Budgeting ■ Value at Risk ■ Applications to Credit Risk and Market Risk ■ Credit Risk Management ■ Risk Model Validation and Using Validation Techniques ■ Statistical Models for Risk Management ■ Definitions of Risk ■ Derivative Assets in Portfolios ■ Equity Risk Models ■ Market Risk ■ Nonlinear VAR Models ■ Structural and Reduced Form Models ■ Extreme Value Theory and Copulas ■ Required Economic Capital Full details of the Series can be found on the following pages. FORMAT OF THE TALKS Each of the Talks in the Series is seminar length and consists of navigable slides with an accompanying narration by its expert speaker for each of the slides. The narration is delivered at a pace suitable for clear understanding and the Talks can be played, paused, played back and replayed – as the user requires. The user is taken through the slides as at a live seminar and the personality and approach of the speaker can be clearly appreciated. The format of the Talks on the CD-ROM enables users to listen and watch each Talk as often as they want and it can be installed, copied, loaded onto an intranet and distributed to be used – and re-used – by as many people as necessary. “ This series of talks on CD-ROM is particularly relevant in today’s turbulent markets. The technology is simple and easy to use. And the calibre of the speakers and the topics covered are excellent. Mr Jason ” MacQueen, Chairman, Alpha Strategies LLC
A Henry Stewart Talks’ Series in Finance I: Introductory Reviews The Role of Modern Risk Management Mr Daryl Roxburgh, Head of BITA Risk Solutions, London and New York The presentation is based on the views of the role of modern risk management, held by Senior Fund Managers over a broad range of investment environments including pensions, insurance, quantitative boutiques, trading, UCITS and wealth management. The following topics are addressed: • Definitions of Risk Management (RM) in Different Contexts • Practical Application Rather than Theory • Does RM Make a Major Contribution to Portfolio Safety? • Can RM Exacerbate Adverse Markets? • The Impact of Regulatory Risk on Fund Managers – Appropriate or Mis-targeted? • How is Risk Forecast and How Does that Feed into the Investment Process? • Do Quantitative Techniques Add Value or Lower Risk? • Risk Strategies: How to Measure, Implement and Control Statistical Models for Risk Management Professor John Knight, Department of Economics, University of Western Ontario, London, Canada • Definition of Returns - Simple Returns - Log Returns • Distribution of Returns – Univariate - Normal and Log-normal Distribution - Stylised Facts of Historical Returns - Skewness, Kurtosis, Autocorrelation and Stationarity - ARCH, GARCH and Stochastic Volatility (SV) Models • Distribution of Returns – Multivariate - Multivariate Normal Distribution - Multivariate GARCH and SV Models - Copulas and Non-linear Dependence Utility Theory and Mean Variance Dr Norvald Instefjord, Department of Accounting, Finance and Management, University of Essex Expected utility representation of preferences – Rationality criteria – State independent utility – Risk averse behaviour – Risk and insurance premium – Arrow-Pratt’s absolute risk aversion coefficient – Risk aversion and small risk – Relative risk aversion coefficient – Risk tolerance – CARA utility – CRRA utility – Risk aversion and large risk – Utility and variance measures of risk – Variance aversion and two-fund separation – Local risk neutrality – Marginal utility and two-fund separation – Factor structure and two-fund separation – Conclusions Definitions of risk Dr Norvald Instefjord, Department of Accounting, Finance and Management, University of Essex Distributional properties of risk – Variance – Risk aversion and variance aversion – First order stochastic dominance – Second order stochastic dominance – Axiomatic approach to risk measures – Risk as a choice variable – Acceptable and nonacceptable risk – Single-dimensional risk measures – Risk measure and risk capital – Coherent risk measures – Value-at- Risk (VaR) is not coherent – TailVaR and worst conditional expectations – Rotschild/Stiglitz increasing risk – Conclusions: risk definition depends on context and purpose Volatility Dr George A. Christodoulakis, Assistant Professor of Finance at Manchester Business School, University of Manchester and Advisor at the Bank of Greece. Volatility is the most heavily used measure of risk in financial decision-making. This presentation commences with a discussion on the validity of various measures of risk, and a statement of conditions under which volatility is a good measure. It begins with an explanation of the empirical properties of data and their dynamics and why models need to capture these characteristics. This is followed by a detailed analysis of various approaches of volatility estimation with particular emphasis on dynamic models in both univariate and multivariate contexts. Then techniques for volatility model validation are given together with an explanation of a number of possible pitfalls. Finally, the presentation focuses on out-ofsample volatility forecasting using dynamic models and various methods for volatility forecast evaluation. Hedge Fund Risk Assessment Mr David Martin, Senior Vice President and Chief Risk Officer of AllianceBernstein LP • Environmental Scan/Allocation Strategies • Discerning How Alpha is Generated • Criteria for Hedge Fund Success • Evaluating Returns • Warning Signs to Monitor • Portfolio Considerations II: Portfolio Risk The Structure of Equity Risk Models Mr Jason MacQueen, Chairman, Alpha Strategies LLC Stock risk models for portfolio risk analysis – Generic risk model data – Betas and covariances – Two significant choices about structure and their consequences for estimation error – The impact on portfolio risk forecasts – A short digression on stock selection – Choosing factors – Summary Risk Decomposition (and Risk Budgeting) Mr Jason MacQueen, Chairman, Alpha Strategies LLC Risk decomposition and risk budgeting – the standard method of decomposing portfolio risk into contributions from individual assets – is used for ‘risk budgeting’ by pension funds. Unfortunately, while this analysis gives a unique answer for absolute risk, it gives three very different answers for tracking error, or risk relative to some benchmark (such as the pension fund’s liabilities). This talk describes what is happening, and shows that the analysis used by most practitioners does not give the most useful answer. To view extracts from the Series please go to www.hstalks.com/risk/
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