{"product_id":"financial-risk-management-isbn-9780470481806","title":"Financial Risk Management","description":"Financial risk has become a focus of financial and nonfinancial firms, individuals, and policy makers. But the study of risk remains a relatively new discipline in finance and continues to be refined. The financial market crisis that began in 2007 has highlighted the challenges of managing financial risk. Now, in \u003ci\u003eFinancial Risk Management\u003c\/i\u003e, author Allan Malz addresses the essential issues surrounding this discipline, sharing his extensive career experiences as a risk researcher, risk manager, and central banker. The book includes standard risk measurement models as well as alternative models that address options, structured credit risks, and the real-world complexities or risk modeling, and provides the institutional and historical background on financial innovation, liquidity, leverage, and financial crises that is crucial to practitioners and students of finance for understanding the world today.  \u003cp\u003e\u003ci\u003eFinancial Risk Management\u003c\/i\u003e is equally suitable for firm risk managers, economists, and policy makers seeking grounding in the subject. This timely guide skillfully surveys the landscape of financial risk and the financial developments of recent decades that culminated in the crisis. The book provides a comprehensive overview of the different types of financial risk we face, as well as the techniques used to measure and manage them. Topics covered include:\u003c\/p\u003e \u003cul\u003e \u003cli\u003e \u003cdiv\u003eMarket risk, from Value-at-Risk (VaR) to risk models for options\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eCredit risk, from portfolio credit risk to structured credit products\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eModel risk and validation\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eRisk capital and stress testing\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eLiquidity risk, leverage, systemic risk, and the forms they take\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eFinancial crises, historical and current, their causes and characteristics\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eFinancial regulation and its evolution in the wake of the global crisis\u003c\/div\u003e \u003c\/li\u003e \u003cli\u003e \u003cdiv\u003eAnd much more\u003c\/div\u003e \u003c\/li\u003e \u003c\/ul\u003e \u003cp\u003eCombining the more model-oriented approach of risk management-as it has evolved over the past two decades-with an economist's approach to the same issues, \u003ci\u003eFinancial Risk Management\u003c\/i\u003e is the essential guide to the subject for today's complex world.\u003c\/p\u003e \u003cp\u003eList of Figures xvii\u003c\/p\u003e \u003cp\u003ePreface xxi\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 1 Financial Risk in a Crisis-Prone World 1\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e1.1 Some History: Why Is Risk a Separate Discipline Today? 1\u003c\/p\u003e \u003cp\u003e1.1.1 The Financial Industry Since the 1960s 2\u003c\/p\u003e \u003cp\u003e1.1.2 The “Shadow Banking System” 9\u003c\/p\u003e \u003cp\u003e1.1.3 Changes in Public Policy Toward the Financial System 15\u003c\/p\u003e \u003cp\u003e1.1.4 The Rise of Large Capital Pools 17\u003c\/p\u003e \u003cp\u003e1.1.5 Macroeconomic Developments Since the 1960s: From the Unraveling of Bretton Woods to the Great Moderation 20\u003c\/p\u003e \u003cp\u003e1.2 The Scope of Financial Risk 34\u003c\/p\u003e \u003cp\u003e1.2.1 Risk Management in Other Fields 34\u003c\/p\u003e \u003cp\u003eFurther Reading 41\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 2 Market Risk Basics 43\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e2.1 Arithmetic, Geometric, and Logarithmic Security Returns 44\u003c\/p\u003e \u003cp\u003e2.2 Risk and Securities Prices: The Standard Asset Pricing Model 49\u003c\/p\u003e \u003cp\u003e2.2.1 Defining Risk: States, Security Payoffs, and Preferences 50\u003c\/p\u003e \u003cp\u003e2.2.2 Optimal Portfolio Selection 54\u003c\/p\u003e \u003cp\u003e2.2.3 Equilibrium Asset Prices and Returns 56\u003c\/p\u003e \u003cp\u003e2.2.4 Risk-Neutral Probabilities 61\u003c\/p\u003e \u003cp\u003e2.3 The Standard Asset Distribution Model 63\u003c\/p\u003e \u003cp\u003e2.3.1 Random Walks and Wiener Processes 64\u003c\/p\u003e \u003cp\u003e2.3.2 Geometric Brownian Motion 71\u003c\/p\u003e \u003cp\u003e2.3.3 Asset Return Volatility 74\u003c\/p\u003e \u003cp\u003e2.4 Portfolio Risk in the Standard Model 75\u003c\/p\u003e \u003cp\u003e2.4.1 Beta and Market Risk 76\u003c\/p\u003e \u003cp\u003e2.4.2 Diversification 82\u003c\/p\u003e \u003cp\u003e2.4.3 Efficiency 85\u003c\/p\u003e \u003cp\u003e2.5 Benchmark Interest Rates 88\u003c\/p\u003e \u003cp\u003eFurther Reading 91\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 3 Value-at-Risk 93\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e3.1 Definition of Value-at-Risk 94\u003c\/p\u003e \u003cp\u003e3.1.1 The User-Defined Parameters 97\u003c\/p\u003e \u003cp\u003e3.1.2 Steps in Computing VaR 98\u003c\/p\u003e \u003cp\u003e3.2 Volatility Estimation 99\u003c\/p\u003e \u003cp\u003e3.2.1 Short-Term Conditional Volatility Estimation 99\u003c\/p\u003e \u003cp\u003e3.2.2 The EWMA Model 104\u003c\/p\u003e \u003cp\u003e3.2.3 The GARCH Model 106\u003c\/p\u003e \u003cp\u003e3.3 Modes of Computation 108\u003c\/p\u003e \u003cp\u003e3.3.1 Parametric 108\u003c\/p\u003e \u003cp\u003e3.3.2 Monte Carlo Simulation 109\u003c\/p\u003e \u003cp\u003e3.3.3 Historical Simulation 111\u003c\/p\u003e \u003cp\u003e3.4 Short Positions 113\u003c\/p\u003e \u003cp\u003e3.5 Expected Shortfall 114\u003c\/p\u003e \u003cp\u003eFurther Reading 116\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 4 Nonlinear Risks and the Treatment of Bonds and Options 119\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e4.1 Nonlinear Risk Measurement and Options 121\u003c\/p\u003e \u003cp\u003e4.1.1 Nonlinearity and VaR 123\u003c\/p\u003e \u003cp\u003e4.1.2 Simulation for Nonlinear Exposures 126\u003c\/p\u003e \u003cp\u003e4.1.3 Delta-Gamma for Options 127\u003c\/p\u003e \u003cp\u003e4.1.4 The Delta-Gamma Approach for General Exposures 134\u003c\/p\u003e \u003cp\u003e4.2 Yield Curve Risk 136\u003c\/p\u003e \u003cp\u003e4.2.1 The Term Structure of Interest Rates 138\u003c\/p\u003e \u003cp\u003e4.2.2 Estimating Yield Curves 141\u003c\/p\u003e \u003cp\u003e4.2.3 Coupon Bonds 144\u003c\/p\u003e \u003cp\u003e4.3 VaR for Default-Free Fixed Income Securities Using the Duration and Convexity Mapping 148\u003c\/p\u003e \u003cp\u003e4.3.1 Duration 149\u003c\/p\u003e \u003cp\u003e4.3.2 Interest-Rate Volatility and Bond Price Volatility 150\u003c\/p\u003e \u003cp\u003e4.3.3 Duration-Only VaR 152\u003c\/p\u003e \u003cp\u003e4.3.4 Convexity 154\u003c\/p\u003e \u003cp\u003e4.3.5 VaR Using Duration and Convexity 155\u003c\/p\u003e \u003cp\u003eFurther Reading 156\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 5 Portfolio VaR for Market Risk 159\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e5.1 The Covariance and Correlation Matrices 160\u003c\/p\u003e \u003cp\u003e5.2 Mapping and Treatment of Bonds and Options 162\u003c\/p\u003e \u003cp\u003e5.3 Delta-Normal VaR 163\u003c\/p\u003e \u003cp\u003e5.3.1 The Delta-Normal Approach for a Single Position Exposed to a Single Risk Factor 164\u003c\/p\u003e \u003cp\u003e5.3.2 The Delta-Normal Approach for a Single Position Exposed to Several Risk Factors 166\u003c\/p\u003e \u003cp\u003e5.3.3 The Delta-Normal Approach for a Portfolio of Securities 168\u003c\/p\u003e \u003cp\u003e5.4 Portfolio VAR via Monte Carlo simulation 174\u003c\/p\u003e \u003cp\u003e5.5 Option Vega Risk 175\u003c\/p\u003e \u003cp\u003e5.5.1 Vega Risk and the Black-Scholes Anomalies 176\u003c\/p\u003e \u003cp\u003e5.5.2 The Option Implied Volatility Surface 180\u003c\/p\u003e \u003cp\u003e5.5.3 Measuring Vega Risk 183\u003c\/p\u003e \u003cp\u003eFurther Reading 190\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 6 Credit and Counterparty Risk 191\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e6.1 Defining Credit Risk 192\u003c\/p\u003e \u003cp\u003e6.2 Credit-Risky Securities 193\u003c\/p\u003e \u003cp\u003e6.2.1 The Economic Balance Sheet of the Firm 193\u003c\/p\u003e \u003cp\u003e6.2.2 Capital Structure 194\u003c\/p\u003e \u003cp\u003e6.2.3 Security, Collateral, and Priority 195\u003c\/p\u003e \u003cp\u003e6.2.4 Credit Derivatives 196\u003c\/p\u003e \u003cp\u003e6.3 Transaction Cost Problems in Credit Contracts 196\u003c\/p\u003e \u003cp\u003e6.4 Default and Recovery: Analytic Concepts 199\u003c\/p\u003e \u003cp\u003e6.4.1 Default 199\u003c\/p\u003e \u003cp\u003e6.4.2 Probability of Default 200\u003c\/p\u003e \u003cp\u003e6.4.3 Credit Exposure 201\u003c\/p\u003e \u003cp\u003e6.4.4 Loss Given Default 201\u003c\/p\u003e \u003cp\u003e6.4.5 Expected Loss 202\u003c\/p\u003e \u003cp\u003e6.4.6 Credit Risk and Market Risk 204\u003c\/p\u003e \u003cp\u003e6.5 Assessing creditworthiness 204\u003c\/p\u003e \u003cp\u003e6.5.1 Credit Ratings and Rating Migration 204\u003c\/p\u003e \u003cp\u003e6.5.2 Internal Ratings 207\u003c\/p\u003e \u003cp\u003e6.5.3 Credit Risk Models 207\u003c\/p\u003e \u003cp\u003e6.6 Counterparty Risk 207\u003c\/p\u003e \u003cp\u003e6.6.1 Netting and Clearinghouses 209\u003c\/p\u003e \u003cp\u003e6.6.2 Measuring Counterparty Risk for Derivatives Positions 209\u003c\/p\u003e \u003cp\u003e6.6.3 Double Default Risk 211\u003c\/p\u003e \u003cp\u003e6.6.4 Custodial Risk 211\u003c\/p\u003e \u003cp\u003e6.6.5 Mitigation of Counterparty Risk 212\u003c\/p\u003e \u003cp\u003e6.7 The Merton model 213\u003c\/p\u003e \u003cp\u003e6.8 Credit Factor Models 222\u003c\/p\u003e \u003cp\u003e6.9 Credit Risk Measures 226\u003c\/p\u003e \u003cp\u003e6.9.1 Expected and Unexpected Loss 228\u003c\/p\u003e \u003cp\u003e6.9.2 Jump-to-Default Risk 229\u003c\/p\u003e \u003cp\u003eFurther Reading 229\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 7 Spread Risk and Default Intensity Models 231\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e7.1 Credit Spreads 231\u003c\/p\u003e \u003cp\u003e7.1.1 Spread Mark-to-Market 233\u003c\/p\u003e \u003cp\u003e7.2 Default Curve Analytics 235\u003c\/p\u003e \u003cp\u003e7.2.1 The Hazard Rate 237\u003c\/p\u003e \u003cp\u003e7.2.2 Default Time Distribution Function 239\u003c\/p\u003e \u003cp\u003e7.2.3 Default Time Density Function 239\u003c\/p\u003e \u003cp\u003e7.2.4 Conditional Default Probability 240\u003c\/p\u003e \u003cp\u003e7.3 Risk-Neutral Estimates of Default Probabilities 241\u003c\/p\u003e \u003cp\u003e7.3.1 Basic Analytics of Risk-Neutral Default Rates 242\u003c\/p\u003e \u003cp\u003e7.3.2 Time Scaling of Default Probabilities 245\u003c\/p\u003e \u003cp\u003e7.3.3 Credit Default Swaps 246\u003c\/p\u003e \u003cp\u003e7.3.4 Building Default Probability Curves 250\u003c\/p\u003e \u003cp\u003e7.3.5 The Slope of Default Probability Curves 259\u003c\/p\u003e \u003cp\u003e7.4 Spread Risk 261\u003c\/p\u003e \u003cp\u003e7.4.1 Mark-to-Market of a CDS 261\u003c\/p\u003e \u003cp\u003e7.4.2 Spread Volatility 262\u003c\/p\u003e \u003cp\u003eFurther Reading 264\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 8 Portfolio Credit Risk 265\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e8.1 Default Correlation 266\u003c\/p\u003e \u003cp\u003e8.1.1 Defining Default Correlation 266\u003c\/p\u003e \u003cp\u003e8.1.2 The Order of Magnitude of Default Correlation 270\u003c\/p\u003e \u003cp\u003e8.2 Credit Portfolio Risk Measurement 270\u003c\/p\u003e \u003cp\u003e8.2.1 Granularity and Portfolio Credit Value-at-Risk 270\u003c\/p\u003e \u003cp\u003e8.3 Default Distributions and Credit VaR with the Single-Factor Model 275\u003c\/p\u003e \u003cp\u003e8.3.1 Conditional Default Distributions 275\u003c\/p\u003e \u003cp\u003e8.3.2 Asset and Default Correlation 279\u003c\/p\u003e \u003cp\u003e8.3.3 Credit VaR Using the Single-Factor Model 281\u003c\/p\u003e \u003cp\u003e8.4 Using Simulation and Copulas to Estimate Portfolio Credit Risk 284\u003c\/p\u003e \u003cp\u003e8.4.1 Simulating Single-Credit Risk 286\u003c\/p\u003e \u003cp\u003e8.4.2 Simulating Joint Defaults with a Copula 288\u003c\/p\u003e \u003cp\u003eFurther Reading 295\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 9 Structured Credit Risk 297\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e9.1 Structured Credit Basics 297\u003c\/p\u003e \u003cp\u003e9.1.1 Capital Structure and Credit Losses in a Securitization 301\u003c\/p\u003e \u003cp\u003e9.1.2 Waterfall 305\u003c\/p\u003e \u003cp\u003e9.1.3 Issuance Process 307\u003c\/p\u003e \u003cp\u003e9.2 Credit Scenario Analysis of a Securitization 309\u003c\/p\u003e \u003cp\u003e9.2.1 Tracking the Interim Cash Flows 309\u003c\/p\u003e \u003cp\u003e9.2.2 Tracking the Final-Year Cash Flows 314\u003c\/p\u003e \u003cp\u003e9.3 Measuring Structured Credit Risk via Simulation 318\u003c\/p\u003e \u003cp\u003e9.3.1 The Simulation Procedure and the Role of Correlation 318\u003c\/p\u003e \u003cp\u003e9.3.2 Means of the Distributions 323\u003c\/p\u003e \u003cp\u003e9.3.3 Distribution of Losses and Credit VaR 327\u003c\/p\u003e \u003cp\u003e9.3.4 Default Sensitivities of the Tranches 333\u003c\/p\u003e \u003cp\u003e9.3.5 Summary of Tranche Risks 336\u003c\/p\u003e \u003cp\u003e9.4 Standard Tranches and Implied Credit Correlation 337\u003c\/p\u003e \u003cp\u003e9.4.1 Credit Index Default Swaps and Standard Tranches 338\u003c\/p\u003e \u003cp\u003e9.4.2 Implied Correlation 340\u003c\/p\u003e \u003cp\u003e9.4.3 Summary of Default Correlation Concepts 341\u003c\/p\u003e \u003cp\u003e9.5 Issuer and Investor Motivations for Structured Credit 342\u003c\/p\u003e \u003cp\u003e9.5.1 Incentives of Issuers 343\u003c\/p\u003e \u003cp\u003e9.5.2 Incentives of Investors 345\u003c\/p\u003e \u003cp\u003eFurther Reading 346\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 10 Alternatives to the Standard Market Risk Model 349\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e10.1 Real-World Asset Price Behavior 349\u003c\/p\u003e \u003cp\u003e10.2 Alternative Modeling Approaches 363\u003c\/p\u003e \u003cp\u003e10.2.1 Jump-Diffusion Models 363\u003c\/p\u003e \u003cp\u003e10.2.2 Extreme Value Theory 365\u003c\/p\u003e \u003cp\u003e10.3 The Evidence on Non-Normality in Derivatives Prices 372\u003c\/p\u003e \u003cp\u003e10.3.1 Option-Based Risk-Neutral Distributions 372\u003c\/p\u003e \u003cp\u003e10.3.2 Risk-Neutral Asset Price Probability Distributions 380\u003c\/p\u003e \u003cp\u003e10.3.3 Implied Correlations 387\u003c\/p\u003e \u003cp\u003eFurther Reading 390\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 11 Assessing the Quality of Risk Measures 393\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e11.1 Model Risk 393\u003c\/p\u003e \u003cp\u003e11.1.1 Valuation Risk 395\u003c\/p\u003e \u003cp\u003e11.1.2 Variability of VaR Estimates 395\u003c\/p\u003e \u003cp\u003e11.1.3 Mapping Issues 397\u003c\/p\u003e \u003cp\u003e11.1.4 Case Study: The 2005 Credit Correlation Episode 399\u003c\/p\u003e \u003cp\u003e11.1.5 Case Study: Subprime Default Models 405\u003c\/p\u003e \u003cp\u003e11.2 Backtesting of VaR 407\u003c\/p\u003e \u003cp\u003e11.3 Coherence of VaR Estimates 414\u003c\/p\u003e \u003cp\u003eFurther Reading 419\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 12 Liquidity and Leverage 421\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e12.1 Funding Liquidity Risk 422\u003c\/p\u003e \u003cp\u003e12.1.1 Maturity Transformation 422\u003c\/p\u003e \u003cp\u003e12.1.2 Liquidity Transformation 423\u003c\/p\u003e \u003cp\u003e12.1.3 Bank Liquidity 425\u003c\/p\u003e \u003cp\u003e12.1.4 Structured Credit and Off-Balance-Sheet Funding 429\u003c\/p\u003e \u003cp\u003e12.1.5 Funding Liquidity of Other Intermediaries 432\u003c\/p\u003e \u003cp\u003e12.1.6 Systematic Funding Liquidity Risk 434\u003c\/p\u003e \u003cp\u003e12.2 Markets for Collateral 437\u003c\/p\u003e \u003cp\u003e12.2.1 Structure of Markets for Collateral 438\u003c\/p\u003e \u003cp\u003e12.2.2 Economic Function of Markets for Collateral 441\u003c\/p\u003e \u003cp\u003e12.2.3 Prime Brokerage and Hedge Funds 443\u003c\/p\u003e \u003cp\u003e12.2.4 Risks in Markets for Collateral 445\u003c\/p\u003e \u003cp\u003e12.3 Leverage and Forms of Credit in Contemporary Finance 448\u003c\/p\u003e \u003cp\u003e12.3.1 Defining and Measuring Leverage 448\u003c\/p\u003e \u003cp\u003e12.3.2 Margin Loans and Leverage 454\u003c\/p\u003e \u003cp\u003e12.3.3 Short Positions 455\u003c\/p\u003e \u003cp\u003e12.3.4 Derivatives 456\u003c\/p\u003e \u003cp\u003e12.3.5 Structured Credit 460\u003c\/p\u003e \u003cp\u003e12.3.6 Asset Volatility and Leverage 460\u003c\/p\u003e \u003cp\u003e12.4 Transactions Liquidity Risk 461\u003c\/p\u003e \u003cp\u003e12.4.1 Causes of Transactions Liquidity Risk 461\u003c\/p\u003e \u003cp\u003e12.4.2 Characteristics of Market Liquidity 463\u003c\/p\u003e \u003cp\u003e12.5 Liquidity Risk Measurement 464\u003c\/p\u003e \u003cp\u003e12.5.1 Measuring Funding Liquidity Risk 464\u003c\/p\u003e \u003cp\u003e12.5.2 Measuring Transactions Liquidity Risk 466\u003c\/p\u003e \u003cp\u003e12.6 Liquidity and Systemic Risk 469\u003c\/p\u003e \u003cp\u003e12.6.1 Funding Liquidity and Solvency 469\u003c\/p\u003e \u003cp\u003e12.6.2 Funding and Market Liquidity 471\u003c\/p\u003e \u003cp\u003e12.6.3 Systemic Risk and the “Plumbing” 471\u003c\/p\u003e \u003cp\u003e12.6.4 “Interconnectedness” 473\u003c\/p\u003e \u003cp\u003eFurther Reading 474\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 13 Risk Control and Mitigation 477\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e13.1 Defining Risk Capital 478\u003c\/p\u003e \u003cp\u003e13.2 Risk Contributions 480\u003c\/p\u003e \u003cp\u003e13.2.1 Risk Contributions in a Long-Only Portfolio 481\u003c\/p\u003e \u003cp\u003e13.2.2 Risk Contributions Using Delta Equivalents 485\u003c\/p\u003e \u003cp\u003e13.2.3 Risk Capital Measurement for Quantitative Strategies 490\u003c\/p\u003e \u003cp\u003e13.3 Stress Testing 499\u003c\/p\u003e \u003cp\u003e13.3.1 An Example of Stress Testing 501\u003c\/p\u003e \u003cp\u003e13.3.2 Types of Stress Tests 504\u003c\/p\u003e \u003cp\u003e13.4 Sizing Positions 506\u003c\/p\u003e \u003cp\u003e13.4.1 Diversification 506\u003c\/p\u003e \u003cp\u003e13.4.2 Optimization and Implied Views 507\u003c\/p\u003e \u003cp\u003e13.5 Risk Reporting 509\u003c\/p\u003e \u003cp\u003e13.6 Hedging and Basis Risk 512\u003c\/p\u003e \u003cp\u003eFurther Reading 516\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 14 Financial Crises 517\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e14.1 Panics, Runs, and Crashes 519\u003c\/p\u003e \u003cp\u003e14.1.1 Monetary and Credit Contraction 519\u003c\/p\u003e \u003cp\u003e14.1.2 Panics 528\u003c\/p\u003e \u003cp\u003e14.1.3 Rising Insolvencies 535\u003c\/p\u003e \u003cp\u003e14.1.4 Impairment of Market Functioning 537\u003c\/p\u003e \u003cp\u003e14.2 Self-Reinforcing Mechanisms 539\u003c\/p\u003e \u003cp\u003e14.2.1 Net Worth and Asset Price Declines 540\u003c\/p\u003e \u003cp\u003e14.2.2 Collateral Devaluation 542\u003c\/p\u003e \u003cp\u003e14.2.3 Risk Triggers 543\u003c\/p\u003e \u003cp\u003e14.2.4 Accounting Triggers 547\u003c\/p\u003e \u003cp\u003e14.3 Behavior of Asset Prices During Crises 548\u003c\/p\u003e \u003cp\u003e14.3.1 Credit Spreads 549\u003c\/p\u003e \u003cp\u003e14.3.2 Extreme Volatility 551\u003c\/p\u003e \u003cp\u003e14.3.3 Correlations 556\u003c\/p\u003e \u003cp\u003e14.4 Causes of Financial Crises 562\u003c\/p\u003e \u003cp\u003e14.4.1 Debt, International Payments, and Crises 563\u003c\/p\u003e \u003cp\u003e14.4.2 Interest Rates and Credit Expansion 570\u003c\/p\u003e \u003cp\u003e14.4.3 Procyclicality: Financial Causes of Crises 575\u003c\/p\u003e \u003cp\u003e14.4.4 Models of Bubbles and Crashes 578\u003c\/p\u003e \u003cp\u003e14.5 Anticipating Financial Crises 583\u003c\/p\u003e \u003cp\u003e14.5.1 Identifying Financial Fragility 583\u003c\/p\u003e \u003cp\u003e14.5.2 Macroeconomic Predictors of Financial Crises 585\u003c\/p\u003e \u003cp\u003e14.5.3 Asset-Price Predictors of Financial Crises 585\u003c\/p\u003e \u003cp\u003eFurther Reading 591\u003c\/p\u003e \u003cp\u003e\u003cb\u003eChapter 15 Financial Regulation 597\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e15.1 Scope and Structure of Regulation 598\u003c\/p\u003e \u003cp\u003e15.1.1 The Rationale of Regulation 598\u003c\/p\u003e \u003cp\u003e15.1.2 Regulatory Authorities 601\u003c\/p\u003e \u003cp\u003e15.2 Methods of Regulation 605\u003c\/p\u003e \u003cp\u003e15.2.1 Deposit Insurance 606\u003c\/p\u003e \u003cp\u003e15.2.2 Capital Standards 608\u003c\/p\u003e \u003cp\u003e15.2.3 Bank Examinations and Resolution 619\u003c\/p\u003e \u003cp\u003e15.3 Public Policy Toward Financial Crises 621\u003c\/p\u003e \u003cp\u003e15.3.1 Financial Stability Policies 621\u003c\/p\u003e \u003cp\u003e15.3.2 Lender of Last Resort 628\u003c\/p\u003e \u003cp\u003e15.4 Pitfalls in Regulation 635\u003c\/p\u003e \u003cp\u003e15.4.1 Moral Hazard and Risk Shifting 636\u003c\/p\u003e \u003cp\u003e15.4.2 Regulatory Evasion 643\u003c\/p\u003e \u003cp\u003e15.4.3 Unintended Consequences 645\u003c\/p\u003e \u003cp\u003eFurther Reading 647\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAppendix A Technical Notes 653\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eA.1 Binomial Distribution 653\u003c\/p\u003e \u003cp\u003eA.2 Quantiles and Quantile Transformations 654\u003c\/p\u003e \u003cp\u003eA.3 Normal and Lognormal Distributions 656\u003c\/p\u003e \u003cp\u003eA.3.1 Relationship between Asset Price Levels and Returns 656\u003c\/p\u003e \u003cp\u003eA.3.2 The Black-Scholes Distribution Function 657\u003c\/p\u003e \u003cp\u003eA.4 Hypothesis Testing 661\u003c\/p\u003e \u003cp\u003eA.5 Monte Carlo Simulation 662\u003c\/p\u003e \u003cp\u003eA.5.1 Fooled by Nonrandomness: Random Variable Generation 663\u003c\/p\u003e \u003cp\u003eA.5.2 Generating Nonuniform Random Variates 664\u003c\/p\u003e \u003cp\u003eA.6 Homogeneous Functions 664\u003c\/p\u003e \u003cp\u003eFurther Reading 666\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAppendix B Abbreviations 667\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003eAppendix C References 671\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003eIndex 701\u003c\/p\u003e  \u003cb\u003ePraise for \u003ci\u003eFinancial Risk Management\u003c\/i\u003e\u003c\/b\u003e  \u003cp\u003e\"The need for sensible and realistic risk management becomes more obvious daily, and achieving it requires familiarity with both quantitative economic models and regulatory policy. Allan Malz's wide experience on Wall Street and at the Fed provides him with the perfect background for writing this important and uniquely comprehensive book.\"\u003cbr\u003e —\u003cb\u003eEmanuel Derman\u003c\/b\u003e, Professor of Professional Practice, Columbia University's Industrial Engineering and Operations Research Department; author of \u003ci\u003eMy Life as a Quant: Reflections on Physics and Finance\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\"Finance is all about risk and reward. Investors are pretty good at measuring reward—at least after the fact—but many, including more than a few of the most 'sophisticated' are not very good at assessing risk before the fact, which is when of course it matters! There is a better way. Allan Malz provides the road map that investors need to understand the risks they take with the investment decisions they make. Malz has a unique perspective: as an academic, a central banker, and a risk manager—he has been there and done that. His book should be required reading for investors and practitioners alike.\"\u003cbr\u003e —\u003cb\u003eRichard Clarida\u003c\/b\u003e, C. Lowell Harriss Professor of Economics, Columbia University\u003c\/p\u003e \u003cp\u003e\"It is almost cliché now to point out that the practice of risk management is as much art as it is science. For those new to the field, however, while there are excellent guides to the science and models of risk, there are none that connect the models to the markets, the economy, the banking system, and the history of all of these. Allan Malz's new book does this, providing a perspective that is critical to managing risk in the post-financial crisis world.\"\u003cbr\u003e —\u003cb\u003eChristopher Finger\u003c\/b\u003e, Executive Director, MSCI Inc.\u003c\/p\u003e \u003cp\u003e\"Allan Malz has done a wonderful job of surveying the challenges that face those who labor in the vineyard of financial risk management. He brings a wealth of experience and insight to this work. The first chapter, which tackles the history of financial market innovation and risks, is a tour de force and may well be worth the price of the book itself.\"\u003cbr\u003e —\u003cb\u003eGalen Burghardt\u003c\/b\u003e, Director of Research, Newedge USA; coauthor of \u003ci\u003eManaged Futures for Institutional Investors: Analysis and Portfolio Construction\u003c\/i\u003e\u003c\/p\u003e \u003cp\u003e\"This book provides a wealth of information on the theory and practice of risk management. In clearly written chapters, Malz progresses from simple asset pricing theory to complex derivatives including credit derivatives and CDO tranches. Institutional and historical description is rich and plentiful with a broad discussion of the financial crisis and new regulatory issues.\"\u003cbr\u003e —\u003cb\u003eRobert Engle\u003c\/b\u003e, 2003 Nobel Laureate in Economics and Michael Armellino Professor of Finance, Stern School of Business, New York University\u003c\/p\u003e  \u003cp\u003e\u003cb\u003eALLAN M. MALZ\u003c\/b\u003e is a Senior Analytical Advisor in the Markets Group at the Federal Reserve Bank of New York, where he has also worked on implementation of the Fed's emergency liquidity programs to address the financial crisis. Before rejoining the Fed, he was chief risk officer at several multi-strategy hedge fund management firms. Previously, Malz was head of research at RiskMetrics Group, which he joined on its spinoff from J.P. Morgan. Malz spent his earlier career at the New York Fed as a researcher and foreign exchange trader. His research, which includes forecasting financial crises, risk measurement for options, and estimation of risk-neutral probability distributions, has been published in a number of industry and academic journals. Malz holds a PhD in economics from Columbia University, where he also teaches a graduate course in financial risk management.    \u003c\/p\u003e\u003cp\u003eFinancial risk has become a focus of financial and nonfinancial firms, individuals, and policy makers. But the study of risk remains a relatively new discipline in finance and continues to be refined. The financial market crisis that began in 2007 has highlighted the challenges of managing financial risk. Now, in \u003ci\u003eFinancial Risk Management\u003c\/i\u003e, author Allan Malz addresses the essential issues surrounding this discipline, sharing his extensive career experiences as a risk researcher, risk manager, and central banker. The book includes standard risk measurement models as well as alternative models that address options, structured credit risks, and the real-world complexities of risk modeling, and provides the institutional and historical background on financial innovation, liquidity, leverage, and financial crises that is crucial to practitioners and students of finance for understanding the world today. \u003c\/p\u003e\u003cp\u003e\u003ci\u003eFinancial Risk Management\u003c\/i\u003e is equally suitable for firm risk managers, economists, and policy makers seeking grounding in the subject. This timely guide skillfully surveys the landscape of financial risk and the financial developments of recent decades that culminated in the crisis. The book provides a comprehensive overview of the different types of financial risk, as well as the techniques used to measure and manage them. Topics covered include: \u003c\/p\u003e\u003cul\u003e \u003cli\u003eMarket risk, from Value-at-Risk (VaR) to risk models for options\u003c\/li\u003e \u003cli\u003eCredit risk, from portfolio credit risk to structured credit products\u003c\/li\u003e \u003cli\u003eModel risk and validation\u003c\/li\u003e \u003cli\u003eRisk capital and stress testing\u003c\/li\u003e \u003cli\u003eLiquidity risk, leverage, systemic risk, and the forms they take\u003c\/li\u003e \u003cli\u003eFinancial crises, historical and current, and their causes and characteristics\u003c\/li\u003e \u003cli\u003eFinancial regulation and its evolution in the wake of the global crisis\u003c\/li\u003e \u003cli\u003eAnd much more\u003c\/li\u003e \u003c\/ul\u003e \u003cp\u003eCombining the model-oriented approach of risk management—as it has evolved over the past two decades—with an economist's approach to the same issues, \u003ci\u003eFinancial Risk Management\u003c\/i\u003e is the essential guide to the subject for today's complex world.   \u003c\/p\u003e\u003cp\u003eFinancial risk has become a focus of financial and nonfinancial firms, individuals, and policy makers. But the study of risk remains a relatively new discipline in finance and continues to be refined. The financial market crisis that began in 2007 has highlighted the challenges of managing financial risk. Now, in \u003ci\u003eFinancial Risk Management\u003c\/i\u003e, author Allan Malz addresses the essential issues surrounding this discipline, sharing his extensive career experiences as a risk researcher, risk manager, and central banker. The book includes standard risk measurement models as well as alternative models that address options, structured credit risks, and the real-world complexities of risk modeling, and provides the institutional and historical background on financial innovation, liquidity, leverage, and financial crises that is crucial to practitioners and students of finance for understanding the world today. \u003c\/p\u003e\u003cp\u003e\u003ci\u003eFinancial Risk Management\u003c\/i\u003e is equally suitable for firm risk managers, economists, and policy makers seeking grounding in the subject. This timely guide skillfully surveys the landscape of financial risk and the financial developments of recent decades that culminated in the crisis. The book provides a comprehensive overview of the different types of financial risk, as well as the techniques used to measure and manage them. Topics covered include: \u003c\/p\u003e\u003cul\u003e \u003cli\u003eMarket risk, from Value-at-Risk (VaR) to risk models for options\u003c\/li\u003e \u003cli\u003eCredit risk, from portfolio credit risk to structured credit products\u003c\/li\u003e \u003cli\u003eModel risk and validation\u003c\/li\u003e \u003cli\u003eRisk capital and stress testing\u003c\/li\u003e \u003cli\u003eLiquidity risk, leverage, systemic risk, and the forms they take\u003c\/li\u003e \u003cli\u003eFinancial crises, historical and current, and their causes and characteristics\u003c\/li\u003e \u003cli\u003eFinancial regulation and its evolution in the wake of the global crisis\u003c\/li\u003e \u003cli\u003eAnd much more\u003c\/li\u003e \u003c\/ul\u003e \u003cp\u003eCombining the model-oriented approach of risk management—as it has evolved over the past two decades—with an economist's approach to the same issues, \u003ci\u003eFinancial Risk Management\u003c\/i\u003e is the essential guide to the subject for today's complex world.\u003c\/p\u003e","brand":"Wiley","offers":[{"title":"Default Title","offer_id":47989211889893,"sku":"NP9780470481806","price":95.0,"currency_code":"USD","in_stock":false}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/1842\/7735\/files\/9780470481806.jpg?v=1761783227","url":"https:\/\/k12savings.com\/products\/financial-risk-management-isbn-9780470481806","provider":"K12savings","version":"1.0","type":"link"}