Financial Risk Management

Applications in Market, Credit, Asset and Liability Management and Firmwide Risk

AvJimmy Skoglund,Wei Chen

Inbunden, Engelska, 2015

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Beskrivning

A global banking risk management guide geared toward the practitioner Financial Risk Management presents an in-depth look at banking risk on a global scale, including comprehensive examination of the U.S. Comprehensive Capital Analysis and Review, and the European Banking Authority stress tests. Written by the leaders of global banking risk products and management at SAS, this book provides the most up-to-date information and expert insight into real risk management. The discussion begins with an overview of methods for computing and managing a variety of risk, then moves into a review of the economic foundation of modern risk management and the growing importance of model risk management. Market risk, portfolio credit risk, counterparty credit risk, liquidity risk, profitability analysis, stress testing, and others are dissected and examined, arming you with the strategies you need to construct a robust risk management system. The book takes readers through a journey from basic market risk analysis to major recent advances in all financial risk disciplines seen in the banking industry. The quantitative methodologies are developed with ample business case discussions and examples illustrating how they are used in practice. Chapters devoted to firmwide risk and stress testing cross reference the different methodologies developed for the specific risk areas and explain how they work together at firmwide level. Since risk regulations have driven a lot of the recent practices, the book also relates to the current global regulations in the financial risk areas.Risk management is one of the fastest growing segments of the banking industry, fueled by banks' fundamental intermediary role in the global economy and the industry's profit-driven increase in risk-seeking behavior. This book is the product of the authors' experience in developing and implementing risk analytics in banks around the globe, giving you a comprehensive, quantitative-oriented risk management guide specifically for the practitioner. Compute and manage market, credit, asset, and liability riskPerform macroeconomic stress testing and act on the resultsGet up to date on regulatory practices and model risk managementExamine the structure and construction of financial risk systemsDelve into funds transfer pricing, profitability analysis, and moreQuantitative capability is increasing with lightning speed, both methodologically and technologically. Risk professionals must keep pace with the changes, and exploit every tool at their disposal. Financial Risk Management is the practitioner's guide to anticipating, mitigating, and preventing risk in the modern banking industry.

Produktinformation

Utgivningsdatum:2015-11-06
Mått:191 x 262 x 45 mm
Vikt:1 157 g
Format:Inbunden
Språk:Engelska
Serie:Wiley Finance
Antal sidor:576
Förlag:John Wiley & Sons Inc
ISBN:9781119135517

Utforska kategorier

Finansiering inom Ekonomi och Ledarskap
Projektledning inom Ekonomi och Ledarskap
Redovisning inom Ekonomi och Ledarskap

Mer om författaren

JIMMY SKOGLUND is principal product manager of global risk products at SAS. He has more than fifteen years of market experience developing and implementing risk methodo ogies, and his articles have appeared in such publications as the Journal of Risk, Journal of Banking and Finance, and Journal of Risk Management in Financial Institutions. Jimmy holds a PhD from the Stockholm Schooof Economics. WEI CHEN is director of stress testing solutions at SAS. He has more than fifteen years experience in risk analytics and technology in banking and insurance, and he is an associate editor of the Journal of Risk Model Validation. His publications have appeared in severa journals including Journal of Risk and Journal of Risk Model Validation. Wei holds a PhD from the University of Iowa.

Innehållsförteckning

Preface xiAcknowledgments xviiCHAPTER 1 Introduction 1Banks and Risk Management 1Evolution of Bank Capital Regulation 4Creating Value from Risk Management 9Financial Risk Systems 10Risk Analytics 11Risk Infrastructure 13Risk Technology 15Model Risk Management 17PART ONE Market RiskCHAPTER 2 Market Risk with the Normal Distribution 23Linear Portfolios 24Basic Model 24Risk Measures 28Risk Contributions 31Estimating the Covariance Matrix of Risk Factors 39Distribution of Risk Measures 40Probabilistic Stress Testing 41Quadratic Portfolios 43Quadratic Portfolio Representation 44Quadratic Portfolio Distribution 50Calculation of Risk Measures for the Quadratic Portfolio 51Simulation-Based Valuation 53Example of Barrier Stock Options and Position Nonlinearity 54Simulation from the Multivariate Normal Distribution 56Risk Factor Dimension Reduction 60Incorporating Model Estimation Error in the Simulation Scheme 65Variance Reduction by Importance Sampling 66Reducing Pricing Time 69CHAPTER 3 Advanced Market Risk Analysis 75Risk Measures, Risk Contributions, and Risk Information 75VaR Interval Estimation 76Coherent Measures of Risk 79Simulation-Based Risk Contributions 80Risk Information Measures 88Risk Distortion Measures 93Modeling the Stylized Facts of Financial Time Series 97Univariate Time Series 97Multivariate Time Series 110Model Validation and Backtesting 122A Multivariate Model of Risk Factor Returns 127Time Scaling VaR and VaR with Trading 134Time Aggregation of VaR with Constant Portfolios 134Time Aggregation of VaR with Trading 135Market Liquidity Risk 136Closeout Time with No Liquidity Cost 137A Note on General Market Illiquidity Models 140Scenario Analysis and Stress Testing 142Portfolio Sensitivity Analysis 143Systematic Portfolio Stress Tests 143Hypothetical Scenario from Reverse Stress Testing 147Integration of Stress and Model Analysis 154Portfolio Optimization 155Portfolio Mean Risk Optimization 156Cash Flow Replication 161Developments in the Market Risk Internal Models Capital Regulation 165PART TWO Credit RiskCHAPTER 4 Portfolio Credit Risk 171Issuer Credit Risk in Wholesale Exposures and Trading Book 174Market Pricing of Corporate Bonds 174Merton’s Structural Model for Corporate Bond Pricing 178The Multivariate Merton Model 185Applied Portfolio Migration and Default Risk Models 187Economic Capital for a Portfolio of Traded Bonds 230Credit Models for the Banking Book 235The Binomial Loss Model 236Credit Transition Score Models 242Simulation of State Transitions and Markov Iteration 254Mortgage Portfolio Risk Analysis: An Illustration 258Point in Time and Through the Cycle Models—with Applications to Regulatory Stress Testing 277An Economic Capital Model for Loan Portfolios 285The Poisson Mixture Model and CreditRisk+ 289Firmwide Portfolio Credit Risk and Credit Risk Dependence 296Joint Codependency with Different Models 297Indirect and Direct Codependency in Credit Risk Models 298Credit Risk Stress Testing 299Stress Testing with Multifactor Model 301Stress Testing with Macroeconomic Credit Score Model 303Features of New Generation Portfolio Credit Risk Models 309Multi-Horizon Models for Banking Book 309Modeling the Recovery Process for Banking Book Portfolios 310Earnings and Loss Rather than Just Loss 311Loan-Level Models 314Granularity of Credit Factors 314Hedging Credit Risk 315Single-Name Credit Default Swaps 315Credit Default Swaps on Portfolio Indices 320Basket Credit Default Swaps 321Regulatory Capital for Credit Risk 324Regulatory Risk Components 326Risk Mitigation and Regulatory Capital 327Appendix 328CHAPTER 5 Counterparty Credit Risk 333Counterparty Pricing and Exposure 335Market Standard Pricing Metrics 335Assessment of Counterparty Default Probability 343Exposure Simulation Framework for CVA 346Market Correlations, Wrong-Way Risk, and Counterparty Pricing 360Collateralized Exposures 364CVA Risks 382Portfolios of Derivatives 384Netting 384Marginal and Incremental Portfolio Trades 386Recent Counterparty Credit Risk Developments 392OIS Discounting for Derivatives 392Advanced CVA Calculations and CVA Greeks 393Funding Value Adjustments 394Counterparty Credit Risk Regulation 395Basel Counterparty Default Risk Charges 395Enhanced Requirements on Counterparty Default Risk Charges 396New Basel III Capital Requirements for Counterparty Credit Risk 397Mitigating Regulatory Costs 399PART THREE Asset and Liability ManagementCHAPTER 6 Liquidity Risk Management with Cash Flow Models 403Measurement of Liquidity Risk 407Liquidity Exposure with General Liquidity Hedging Capacity 408Liquidity Exposure with Cash Hedging Capacity 411Components of the Liquidity Measure 412Liquidity Exposure 414Balance Sheet Cash Flows and Facilities 417Off–Balance-Sheet Derivative Flows 427Combining the Risk and Finance View 428Hedging the Liquidity Exposure 428Ranking-Based Liquidity Hedging Strategy 432Optimal Liquidity Hedging Strategy 433Structural Liquidity Planning 441Mitigating Balance Sheet Vulnerability with Contractual Cash Flows 442Choosing the Optimal Liquidity Hedging Portfolio 445Components of the Liquidity Hedging Program 449Cash Liquidity Risk and Liquidity Risk Measures 450Cash Liquidity at Risk 450Portfolio Cash Liquidity Exposure 451Allocating Cash Liquidity Risk 453Regulation for Liquidity Risk 455Liquidity Coverage Ratio 455Net Stable Funding Ratio 458Regulatory Liquidity Monitoring Tools 459CHAPTER 7 Funds Transfer Pricing and Profitability of Cash Flows 463Basic Funds Transfer Pricing Concept 465Example of FTP for a Mortgage and a Loan 466Risk-Based Funds Transfer Pricing 468Credit Risk and Capital 468Embedded Optionality 470Liquidity Risk 477Funds Transfer Rate and Risk Adjusted Returns 481Example of Mortgage Risk Adjusted Returns 481Profitability Measures and Decompositions 482Balance Sheet Breakdown with Funds Transfer Instruments 482Application to Net Interest Income and Economic Value View 483Banking Book Fair Value with Funds Transfer Rates 486Example of Fair Values with FTP 486A Note on the Scope of Funds Transfer Pricing 486Regulation and Profitability Analysis 487PART FOUR Firmwide RiskCHAPTER 8 Firmwide Risk Aggregation 493Correlated Aggregation and Firmwide Risk Levels 494Linear Risk Aggregation 495Copula Aggregation 497Example of Copula Aggregation 497Mixed Copula Aggregation 498Example of Mixed Copula Aggregation 499Capital Allocation in Risk Aggregation 501Example of Mixed Copula Capital Allocation 502Measuring Concentration and Diversification 503Risk Aggregation and Regulation 503CHAPTER 9 Firmwide Scenario Analysis and Stress Testing 507Firmwide Scenario Model Approaches 509Silo Approach 509Firmwide Risk Model Approach 510Multiple Model Approaches 512Firmwide Risk Capital Measures 512Risk Measures and Stress Scenarios 512A Risk Reserve Approach—A Practical Illustration 514Regulatory Stress Scenario Approach 516Bank-Specific Approach: A Total Balance Sheet View 517Bank-Specific Approach: More on Scenarios and Models 520Systemic View: Financial System Analysis and Financial Contagion 523The Future of Firmwide Stress Testing 524References 527Index 543