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Handbook of Market Risk

Book Description

A ONE-STOP GUIDE FOR THE THEORIES, APPLICATIONS, AND STATISTICAL METHODOLOGIES OF MARKET RISK

Understanding and investigating the impacts of market risk on the financial landscape is crucial in preventing crises. Written by a hedge fund specialist, the Handbook of Market Risk is the comprehensive guide to the subject of market risk.

Featuring a format that is accessible and convenient, the handbook employs numerous examples to underscore the application of the material in a real-world setting. The book starts by introducing the various methods to measure market risk while continuing to emphasize stress testing, liquidity, and interest rate implications. Covering topics intrinsic to understanding and applying market risk, the handbook features:

  • An introduction to financial markets

  • The historical perspective from market

  • events and diverse mathematics to the

  • value-at-risk

  • Return and volatility estimates

  • Diversification, portfolio risk, and

  • efficient frontier

  • The Capital Asset Pricing Model

  • and the Arbitrage Pricing Theory

  • The use of a fundamental

  • multi-factors model

  • Financial derivatives instruments

  • Fixed income and interest rate risk

  • Liquidity risk

  • Alternative investments

  • Stress testing and back testing

  • Banks and Basel II/III

The Handbook of Market Risk is a must-have resource for financial engineers, quantitative analysts, regulators, risk managers in investments banks, and large-scale consultancy groups advising banks on internal systems. The handbook is also an excellent text for academics teaching postgraduate courses on financial methodology.

Table of Contents

  1. Cover
  2. Title page
  3. Copyright page
  4. Dedication
  5. Foreword
  6. Acknowledgments
  7. About the Author
  8. Introduction
  9. Chapter One: Introduction to Financial Markets
    1. 1.1 The Money Market
    2. 1.2 The Capital Market
    3. 1.3 The Futures and Options Market
    4. 1.4 The Foreign Exchange Market
    5. 1.5 The Commodity Market
  10. Chapter Two: The Efficient Markets Theory
    1. 2.1 Assumptions behind a Perfectly Competitive Market
    2. 2.2 The Efficient Market Hypothesis
    3. 2.3 Critics of Efficient Markets Theory
    4. 2.4 Development of Behavioral Finance
    5. 2.5 Beating the Market: Fundamental versus Technical
  11. Chapter Three: Return and Volatility Estimates
    1. 3.1 Standard Deviation
    2. 3.2 Standard Deviation with a Moving Observation Window
    3. 3.3 Exponentially Weighted Moving Average (EWMA)
    4. 3.4 Double (Holt) Exponential Smoothing Model (DES)
    5. 3.5 Principal Component Analysis (PCA) Models
    6. 3.6 The VIX
    7. 3.7 Geometric Brownian Motion Process
    8. 3.8 GARCH
    9. 3.9 Estimator Using the Highest and Lowest
  12. Chapter Four: Diversification, Portfolios of Risky Assets, and the Efficient Frontier
    1. 4.1 Variance and Covariance
    2. 4.2 Two-Asset Portfolio: Expected Return and Risk
    3. 4.3 Correlation Coefficient
    4. 4.4 The Efficient Frontier
    5. 4.5 Correlation Regime Shifts and Correlation Estimates
    6. 4.6 Correlation Estimates
  13. Chapter Five: The Capital Asset Pricing Model and the Arbitrage Pricing Theory
    1. 5.1 Implications of the CAPM Assumptions
    2. 5.2 The Separation Theorem
    3. 5.3 Relationships Defined by the CAPM
    4. 5.4 Interpretation of Beta
    5. 5.5 Determining the Level of Diversification of a Portfolio
    6. 5.6 Investment Implications of the CAPM
    7. 5.7 Introduction to the Arbitrage Pricing Theory (APT)
  14. Chapter Six: Market Risk and Fundamental Multifactors Model
    1. 6.1 Why a Multifactors Model?
    2. 6.2 The Returns Model
    3. 6.3 Estimation Universe
    4. 6.4 Model Factors
    5. 6.5 The Risk Model
  15. Chapter Seven: Market Risk: A Historical Perspective from Market Events and Diverse Mathematics to the Value-at-Risk
    1. 7.1 A Brief History of Market Events
    2. 7.2 Toward the Development of the Value-at-Risk
    3. 7.3 Definition of the Value-at-Risk
    4. 7.4 VaR Calculation Models
  16. Chapter Eight: Financial Derivative Instruments
    1. 8.1 Introducing Financial Derivatives Instruments
    2. 8.2 Market Risk and Global Exposure
    3. 8.3 Options
  17. Chapter Nine: Fixed Income and Interest Rate Risk
    1. 9.1 Bond Valuation
    2. 9.2 The Yield Curve
    3. 9.3 Risk of Holding a Bond
  18. Chapter Ten: Liquidity Risk
    1. 10.1 Traditional Methods and Techniques to Measure Liquidity Risk
    2. 10.2 Liquidity at Risk
    3. 10.3 Other Liquidity Risk Metrics
    4. 10.4 Methods to Measure Liquidity Risk on the Liability Side
  19. Chapter Eleven: Alternatives Investment: Targeting Alpha, Idiosyncratic Risk
    1. 11.1 Passive Investing
    2. 11.2 Active Management
    3. 11.3 Main Alternative Strategies
    4. 11.4 Specific Hedge Fund Metrics
  20. Chapter Twelve: Stress Testing and Back Testing
    1. 12.1 Definition and Introduction to Stress Testing
    2. 12.2 Stress Test Approaches
    3. 12.3 Historical Stress Testing
    4. 12.4 Reverse Stress Test
    5. 12.5 Stress Testing Correlation and Volatility
    6. 12.6 Multivariate Stress Testing
    7. 12.7 What Is Back Testing?
    8. 12.8 Back Testing: A Rigorous Approach Is Required
  21. Chapter Thirteen: Banks and Basel II/III
    1. 13.1 A Brief History of Banking Regulations
    2. 13.2 The 1988 Basel Accord
    3. 13.3 Basel II
    4. 13.4 Example of the Calculation of the Capital Ratio
    5. 13.5 Basel III and the New Definition of Capital; The Introduction of Liquidity Ratios
  22. Chapter Fourteen: Conclusion
  23. Index
  24. Wiley Handbooks in Financial Engineering and Econometrics