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Quantitative FinancialRisk ManagementFundamentals, Models and TechniquesThere can be no more topical issue in financial markets than managing RISK.That is what this series of eighteen specially prepared, animated audiovisual briefingsstreamed to you when you want, where you want and as often as you want is all about.Briefings on Quantitative Financial Risk Management by many of the worlds leading experts.If you want to know how to measure and manage financial risk – and if you want thoseworking with and for you to know how to measure and manage financial risk you wantthese briefings.I CONCISE I COMPREHENSIVE I PRACTICAL I ESSENTIALSeries Editor:Dr. Stephen E. Satchell – Fellow, University of Cambridge, UKStephen Satchell is a Fellow of Trinity College and the Reader in Financial Econometrics at the University ofCambridge. He is interested in finance and econometrics and has written at least 150 papers in this area. He is anAcademic Advisor to many leading asset management companies and a frequent speaker at City conferences.Visit our website at www.hstalks.com/risk/ or contact us on Email: email@example.com Tel: +44 (0)20 7092 3479Quantitative Financial Risk ManagementSpecially prepared, animated, audiovisual briefings by leading experts from industry and academia;available when you want, where you want and as often as you want.Available on individual user license for $2500 (£1515, €1775) and on site license for $4999 (£2999,€3550) giving unlimited access for all members of an organization within a single country.To purchase the series complete and return order form on page 6.I: INTRODUCTORY REVIEWS3. Utility theory and mean varianceExpected utility representation of preferences – Rationality1. Practical use of portfolio risk managementcriteria – State independent utility – Risk averse behavior – Risktodayand insurance premium – Arrow-Pratt’s absolute risk aversioncoefficient – Risk aversion and small risk – Relative riskDefinitions of risk management (RM) in different contexts –aversion coefficient – Risk tolerance – CARA utility – CRRAPractical application rather than theory – Does RM make autility – Risk aversion and large risk – Utility and variancemajor contribution to portfolio safety? – Can RM exacerbatemeasures of risk – Variance aversion and two fund separation –adverse markets? – The impacts of regulatory risk on fundLocal risk neutrality – Marginal utility and two fund separation –managers – Appropriate or mistargeted? – How is risk forecastFactor structure and two fund separationand how does that feed into the investment process? – Doquantitative techniques add value or lower risk? – RiskDr. Norvald Instefjord – Reader in Finance, University ofstrategies: how to measure, implement and controlEssex, UKNorvald is a Reader in Finance and an Associate Director ofMr. Daryl Roxburgh – Head, BITA Risk Solutions, UK andFinance Studies at the Department of Accounting, Finance andUSAManagement at the University of Essex. He received a PhD inDaryl Roxburgh is Head of BITA Risk Solutions, the London andfinance from the London Business School in 1995 and was aNew York based portfolio construction and risk solutionsLecturer in Finance at Birkbeck College, University of London,provider. Daryl is a graduate of the City University (now Johnfrom 1994 to 2004. Norvald’s primary research interests areCass) Business School and his career commenced as a privatecorporate finance (including disclosure and corporateclient fund manager with Buckmaster & Moore. He progressedgovernance issues), banking (including risk management andto a senior management role in 1987 and was subsequentlyissues linked to fraud and operational risk), and security andappointed Director of IT in 1994 for Credit Suisse Assetmarket design. He also has extensive teaching experience inManagement. Following two years at M&G, he was recruited bygeneral and corporate finance, mathematical and theoreticalPrudential Portfolio Managers as Global Head of IT in 1998. Hefinance and market microstructure.now specializes in portfolio construction and risk analysissolutions for the quantitative, institutional and private bankingmarkets.4. Definitions of riskDistributional properties of risk – Variance – Risk aversion and2. Statistical models for risk managementvariance aversion – First order stochastic dominance – Secondorder stochastic dominance – Axiomatic approach to riskDefinition of returns: simple returns and log returns –measures – Risk as a choice variable – Acceptable and non-Distribution of returns, univariate: normal and log-normalacceptable risk – Single-dimensional risk measures – Riskdistribution – Stylized facts of historical returns – Skewness,measure and risk capital – Coherent risk measures – Value-at-kurtosis, autocorrelation and stationarity – ARCH, GARCH andrisk (VaR) is not coherent – TailVaR and worst conditionalstochastic volatility (SV) models – Distribution of returns,expectations – Rotschild/Stiglitz increasing risk – Conclusions:multivariate: multivariate normal distribution – Multivariaterisk definition depends on context and purposeGARCH and SV models – Copulas and non-linear dependenceDr. Norvald Instefjord – Reader in Finance, University ofProf. John Knight – Professor of Economics, University ofEssex, UKWestern Ontario, CanadaNorvald is a Reader in Finance and an Associate Director ofJohn Knight received his PhD from the University of New SouthFinance Studies at the Department of Accounting, Finance andWales, Australia in 1980. He has held teaching and researchManagement at the University of Essex. He received a PhD inpositions in the US, Australia, UK and Canada and has been infinance from the London Business School in 1995 and was ahis current position since 1987. His extensive list of researchLecturer in Finance at Birkbeck College, University of London,publications are in theoretical econometrics and more recentlyfrom 1994 to 2004. Norvald’s primary research interests arein financial econometrics. In 2002 he was awarded a Pluracorporate finance (including disclosure and corporateScripsit Award by the journal Econometric Theory. He has alsogovernance issues), banking (including risk management andwon awards for his graduate teaching and PhD supervision.issues linked to fraud and operational risk), and security andCurrent research interests include stochastic volatility modelingmarket design. He also has extensive teaching experience inand the estimation of continuous time processes in finance.general and corporate finance, mathematical and theoreticalfinance and market microstructure.Quantitative Financial Risk Management5. VolatilityMr. Jason MacQueen – Chairman, Alpha Strategies, LLC, UKJason MacQueen founded QUANTEC in 1980, which was the firstVolatility is the most heavily used measure of risk in financialfirm to develop risk models for equity markets outside the USA. Indecision making – Discussion of validity of various measures of1984 QUANTEC launched the first global asset allocation model,risk – Statement of conditions under which volatility is a goodwhich was enhanced in 1985 by the addition of currency hedgingmeasure – Explanation of the empirical properties of data andoverlays and in 1986 by reverse optimization for efficient portfoliotheir dynamics – Why models need to capture theserebalancing. Jason also pioneered the development and use ofcharacteristics – Analysis of various approaches of volatilitymulti-factor stock selection models in both the USA and Japanestimation with particular emphasis on dynamic models in bothand the investment track record of his long-term collaborators isunivariate and multivariate contexts – Techniques for volatilityexceptional. In the late 1990s he helped to develop the first trulymodel validation – Explanation of possible pitfalls – Out-of-global risk model and a global stock selection model, bothsample volatility forecasting using dynamic models and variousincorporating global common factors. He is currently workingmethods for volatility forecast evaluationwith R-Squared to develop customized hybrid risk models forinstitutional investors and with Apollo Advisors, which uses aDr. George A. Christodoulakis – Assistant Professor ofproprietary risk overlay system to manage a fund of funds andFinance, University of Manchester, UK and Advisor, Bank ofoptimize the portfolio risk-return trade-off.Greece, GreeceGeorge A. Christodoulakis is Assistant Professor of Finance atManchester Business School, University of Manchester and8. Risk decomposition (and risk budgeting)Advisor at the Bank of Greece. In the past he has heldpositions at Cass Business School of City University, LondonThe standard method of decomposing portfolio risk intoand the University of Exeter and has provided advice for acontributions from individual assets – ‘Risk budgeting’ bynumber of companies. He holds a PhD and MSc in financepension funds – Unfortunately, while this analysis gives afrom the University of London as well as an MSc and BSc inunique answer for absolute risk, it gives three very differenteconomics and econometrics from the AUEB in Athens. Hisanswers for tracking error, or risk relative to some benchmarkexpertise concerns the area of credit and market risk theory(such as the pension fund’s liabilities) – Description of what isand applications, approached from both a mathematicalhappening – Analysis used by most practitioners does not givefinance and a financial econometrics perspective. George is athe most useful answerregular contributor to international refereed research journalsand a frequent speaker in specialist conferences.Mr. Jason MacQueen – Chairman, Alpha Strategies, LLC, UKJason MacQueen founded QUANTEC in 1980, which was thefirst firm to develop risk models for equity markets outside the6. Hedge fund risk assessmentUSA. In 1984 QUANTEC launched the first global assetallocation model, which was enhanced in 1985 by the additionEnvironmental scan/allocation strategies – Discerning howof currency hedging overlays and in 1986 by reversealpha is generated – Criteria for hedge fund success –optimization for efficient portfolio rebalancing. Jason alsoEvaluating returns – Warning signs to monitor – Portfoliopioneered the development and use of multi-factor stockconsiderationsselection models in both the USA and Japan and theinvestment track record of his long-term collaborators isMr. David Martin – Senior Vice President and Chief Riskexceptional. In the late 1990s he helped to develop the firstOfficer, AllianceBernstein L.P., USAtruly global risk model and a global stock selection model, bothDavid Martin is Senior Vice President and Chief Risk Officer ofincorporating global common factors. He is currently workingAllianceBernstein LP. Mr. Martin joined the firm in Decemberwith R-Squared to develop customized hybrid risk models for2001 and is responsible for the risk management function. Mr.institutional investors and with Apollo Advisors, which uses aMartin began his career at Price Waterhouse & Co in 1972 inproprietary risk overlay system to manage a fund of funds andthe audit and consulting practices. In 1979 he joined Citibankoptimize the portfolio risk-return trade-off.and held numerous positions during his 20-year tenure. Mr.Martin was a Senior Risk Officer responsible for the globalwindows on risk processes that were used to proactivelymanage the entire risk profile of Citigroup. From 1999-2001, Mr.III: MARKET RISKMartin was an active Director of DFD Select Group, a managerand distributor of funds of hedge funds.9. Estimating risk modelsDefining a risk model – Assembling data – Non-parametricII: PORTFOLIO RISKestimation methods – Parametric estimation methods – MonteCarlo simulation methods7. The structure of equity risk modelsProf. Kevin Dowd – Professor of Financial RiskManagement, Nottingham University, UKStock risk models for portfolio risk analysis – Generic riskKevin Dowd is Professor of Financial Risk Management atmodel data – Betas and covariances – Two significant choicesNottingham University Business School, where he works withabout structure and their consequences for estimation error –the Center for Risk and Insurance Studies. His researchThe impact on portfolio risk forecasts – A short digression oninterests cover macro, monetary and financial economics,stock selection – Choosing factorsfinancial risk management, insurance, pensions and politicaleconomy. His latest book, Measuring Market Risk (2nd edition)was published by John Wiley in 2005.Quantitative Financial Risk Management10. Measures of financial risk13. Modeling business dependencies for creditNature of financial risk – Representing financial risk using aportfoliosdensity function – VaR as a risk measure – Expected shortfall –Portfolio credit risk – Integrating macrostructural andCoherent risk measures – Worst-case scenario analysesmicrostructural interdependencies – Gaussian copula – Creditportfolio as a graph – Impact of business dependencies onProf. Kevin Dowd – Professor of Financial Riskcorrelation – Feedback effects – Marginal risk contributionManagement, Nottingham University, UKKevin Dowd is Professor of Financial Risk Management atDr. Markus A. Leippold – Assistant Professor, SwissNottingham University Business School, where he works withBanking Institute, University of Zurich, Switzerlandthe Center for Risk and Insurance Studies. His researchMarkus Leippold is Assistant Professor of Finance at the Swissinterests cover macro, monetary and financial economics,Banking Institute of the University of Zurich. Prior to movingfinancial risk management, insurance, pensions and politicalback to academia he was working for Sungard, Trading andeconomy. His latest book, Measuring Market Risk (2nd edition)Risk Management Systems and the Zurich Cantonal Bank.was published by John Wiley in 2005.Markus’ main research interests are term structure modeling,asset pricing and risk management. He was a Research Fellowat the Stern School of Business in New York and obtained his11. VaR when volatility is changingPhD from the University of St. Gallen, Switzerland, in 1999. Hehas published in several Journals such as Journal of FinancialWhat can we learn from problems with VaR models? –and Quantitative Analysis, Journal of Economic Dynamics andCommon patterns in volatility (the clustering effect) –Control, Journal of Banking and Finance, Review of DerivativeForecasting volatility using GARCH – Implications for VaR,Research, Journal of Risk, Journal of Futures Markets andstress testing and capital requirementsReview of Finance. In 2004, the research paper he co-authoredon credit contagion won the STOXX Gold Award at the annualDr. Elizabeth Sheedy – Associate Professor, Macquarieconference of the European Financial ManagementApplied Finance Center, Macquarie University, AustraliaAssociation. During 2005, he was a Visiting Researcher at theElizabeth Sheedy joined Macquarie University in 1993. Prior toFederal Reserve Bank in New York.this she worked in the finance industry for institutions includingMacquarie Bank and Westpac. She now teaches financial riskmanagement courses in the popular master of applied financeprogram. Her current research focus is on volatility clustering14. Extreme value theory and copulasand its application to modeling market risk. She is also on theExtremes in quantitative risk management – Limiting behaviorAcademic Advisory Committee for the Professional Riskof sums and maxima – Fisher/Tippett theorem – Extreme valueManagers’ International Association (PRMIA). She co-edited thedistributions and domains of attraction – Block maxima methodProfessional Risk Managers’ Guides recently published by– Threshold exceedances – Picands/Balkema/de Haan theoremMcGraw-Hill.– Threshold selection – Quantile estimation – Point processapproach – Banking and insurance regulation – CriticalappraisalIV: APPLICATIONS TO CREDIT RISK ANDProf. Paul Embrechts – Professor of Mathematics, SwissMARKET RISKFederal Institute of Technology, SwitzerlandPaul Embrechts is Professor of Mathematics at ETH Zurichspecializing in actuarial mathematics and quantitative risk12. Structural and reduced form modelsmanagement. Previous academic positions include theUniversities of Leuven, Limburg and London (Imperial College).Structural models – The Merton approach: bond pricing, stockProf. Embrechts has held visiting appointments at thepricing, default probability, credit spreads, bond volatility –University of Strasbourg, ESSEC Paris, the Scuola Normale inParameter estimation – Limitations – Extending Merton: thePisa and the London School of Economics (CentennialCreditGrades model reduced form models – Default intensity –Professor of Finance). He is an Elected Fellow of the Institute ofExamples: constant, deterministic and stochastic intensities –Mathematical Statistics, Honorary Fellow of the Institute ofLinking reduced and structural models – Recovery ratesActuaries, corresponding member of the Italian Institute ofActuaries and Associate Editor of numerous journals. His areasDr. Theo Darsinos – Associate Director, Fixed Incomeof specialization include insurance risk theory, quantitative riskTrading, Barclays Capital, UKmanagement, the interplay between insurance and finance andTheo Darsinos is an Associate Director of Fixed Income Tradingthe modeling of rare events. He co-authored the influentialat Barclays Capital. Prior to this he was a Vice President in thebooks Modelling of Extremal Events for Insurance and Finance,global markets, fixed income research division of DeutscheSpringer, 1997 and Quantitative Risk Management: Concepts,Bank. Theo received his PhD in financial econometrics from theTechniques and Tools, Princeton University Press, 2005.University of Cambridge and a BSc in mathematics from theUniversity of London. Prior to joining Deutsche Bank in 2003,Dr. Johanna Neslehova – Postdoctoral Research Fellow,he was a Research Fellow in the Department of AppliedSwiss Federal Institute of Technology, SwitzerlandEconomics, University of Cambridge.Johanna Neslehova is currently a Postdoctoral Research Fellowat the risk management research centre RiskLab, ETH Zurich.She completed her PhD on dependence of non-continuousrandom variables with Professor Dietmar Pfeifer at theUniversity of Oldenburg in 2004. Her research interests includestochastic methods for quantitative risk management inQuantitative Financial Risk Managementfinance, dependence modeling, discrete copulas, pointDr. Dirk Tasche – Head of Modeling for Corporate Marketsprocesses, extreme value theory and operational risk. She hasRating Systems, Lloyds TSB Bank, UKspoken at various conferences on risk management. She isDirk Tasche is currently Head of Modeling for Corporateinvolved in the German e-learning project EStat and wrote aMarkets Rating Systems at Lloyds TSB Bank. In this role, hebook on elementary mathematics with Erhard Crameroversees development and maintenance of all wholesale ratingpublished by Springer in 2004.models for the Basel II IRB approach. Dirk has more thantwelve years experience in risk management, from industry,supervisory and academic positions. Before joining Lloyds15. Dependence modeling with copulasTSB, he was a Senior Director at Fitch Ratings, heading theQuantitative Financial Research Group in London. He hasImpact of extremes and dependence in finance and insurance –published a number of papers on the measurement of financialCorrelation issues – Copulas and Sklar’s theorem – Copularisk and capital allocation in refereed journals. He holds a PhDgeneration – Frechet-Hoeffding bounds – Limitations ofin probability theory from Berlin University of Technology.correlation – Rank correlation measures – An application tocredit risk – Tail dependence – Bounds on risk measures –Critical appraisal17. Validation techniques II: discriminatorypower and calibrationProf. Paul Embrechts – Professor of Mathematics, SwissFederal Institute of Technology, SwitzerlandValidation principles – Predictive ability, discriminatory power andPaul Embrechts is Professor of Mathematics at ETH ZurichPD calibration – Cumulative accuracy profile (CAP) – Accuracyspecializing in actuarial mathematics and quantitative riskratio (AR) – Receiver operating characteristic – Kolmogorov-management. Previous academic positions include theSmirnov statistic – Conditional and unconditional tests – BinomialUniversities of Leuven, Limburg and London (Imperial College).test – Hosmer-Lemeshow test – Spiegelhalter test – Normal testProf. Embrechts has held visiting appointments at theUniversity of Strasbourg, ESSEC Paris, the Scuola Normale inDr. Dirk Tasche – Head of Modeling for Corporate MarketsPisa and the London School of Economics (CentennialRating Systems, Lloyds TSB Bank, UKProfessor of Finance). He is an Elected Fellow of the Institute ofDirk Tasche is currently Head of Modeling for CorporateMathematical Statistics, Honorary Fellow of the Institute ofMarkets Rating Systems at Lloyds TSB Bank. In this role, heActuaries, corresponding member of the Italian Institute ofoversees development and maintenance of all wholesale ratingActuaries and Associate Editor of numerous journals. His areasmodels for the Basel II IRB approach. Dirk has more thanof specialization include insurance risk theory, quantitative risktwelve years experience in risk management, from industry,management, the interplay between insurance and finance andsupervisory and academic positions. Before joining LloydsTSB, he was a Senior Director at Fitch Ratings, heading thethe modeling of rare events. He co-authored the influentialQuantitative Financial Research Group in London. He hasbooks Modelling of Extremal Events for Insurance and Finance,published a number of papers on the measurement of financialSpringer, 1997 and Quantitative Risk Management: Concepts,risk and capital allocation in refereed journals. He holds a PhDTechniques and Tools, Princeton University Press, 2005.in probability theory from Berlin University of Technology.Dr. Johanna Neslehova – Postdoctoral Research Fellow,Swiss Federal Institute of Technology, SwitzerlandJohanna Neslehova is currently a Postdoctoral Research FellowVI: ECONOMIC CAPITALat the risk management research centre RiskLab, ETH Zurich.She completed her PhD on dependence of non-continuousrandom variables with Professor Dietmar Pfeifer at theUniversity of Oldenburg in 2004. Her research interests include18. Leading bank credit portfolio strategiesstochastic methods for quantitative risk management inLeading banks manage their credit portfolios actively – Activefinance, dependence modeling, discrete copulas, pointcredit portfolio management objectives and principles – Activeprocesses, extreme value theory and operational risk. She hascredit portfolio management trends and success stories –spoken at various conferences on risk management. She isLeading bank economic capital management strategies – Usesinvolved in the German e-learning project EStat and wrote aof required economic capital at leading banks – Leading bankbook on elementary mathematics with Erhard Cramercredit portfolio management organizational models – Leadingpublished by Springer in 2004.bank credit portfolio management strategies – Adopting leadingbank strategiesMr. Brian Dvorak – Managing Director, Moody’s KMV CreditV: RISK MODEL VALIDATIONStrategies Group, USABrian Dvorak is the Managing Director of Moody’s KMV’s CreditStrategies Group. He supports clients globally in creating value16. Validation techniques I: regulatory andfrom their investment in the products and services of Moody’sKMV, the world’s leading provider of quantitative credit riskstatistical backgroundanalysis tools to lenders, investors and corporations. BeforeHistorical background – New capital standards (Basel II) –joining KMV in 1998, Mr. Dvorak was Vice President of ProductRequirements on quantitative validation – The binaryMarketing and Technical Support at CATS Software Inc.classification model for rating systems – Bayes’ formula –Previously, he was Executive Vice President and ChiefModeling cyclical effects – Conditional probabilities of defaultOperating Officer of LOR/Geske Bock Associates, Inc. and(PD)LORGB Investment Advisors, Inc. Mr. Dvorak received both hisAB in economics with highest honors and his MBA in financefrom the University of California, Berkeley.Quantitative Financial Risk ManagementIf you would like to purchase ac es to the Quantiative Financial Risk Management series, please fil in the form below. 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