By Kevin Dowd
This booklet offers an creation to price in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring industry Risk (John Wiley & Sons 2002).
An creation to industry threat Measurement comprises assurance of:
- Parametric and non-parametric threat estimation
- Numerical tools
- Liquidity hazards
- Risk Decomposition and Budgeting
- Stress checking out
- Model possibility
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Extra resources for An introduction to market risk measurement
139) or Yoshiba and Yamai (2001, p. 8). 5) y is some small change in yield. , Fabozzi (2000, p. 66)). ) and, as such, they are useful, though limited, tools in the risk measurer’s armoury. , changes in bond price) to probabilities. If we are to use duration measures for risk measurement purposes in this sense, our best option is to derive the standard deviation of holding-period return and then feed that into a normal risk framework. 8) If we want a risk measure, the easiest step is to assume that bond prices are approximately normal and we can then work out the probabilities of speciﬁed gains or losses, and so forth.
Note: Produced using the ‘normalvarplot2D hp’ function. how the same VaR varies as we change the conﬁdence level and keep other parameters constant. In this particular case, the VaR not only rises with the conﬁdence level, but also rises at an increasing rate — a point that risk managers might care to note. We should also remember that the VaR is contingent on the choice of holding period as well, and so we should consider how the VaR varies with the holding period. 8, which plots the VaR at the 95% conﬁdence level against a holding period that varies from 1 day to 100 days.
The application of this multiplier is sometimes justiﬁed as providing insurance against model risk, non-normal market moves, and similar factors. 8 However, in the initial implementation of this approach, banks are allowed to proxy the 10-day VaR by multiplying the 1-day VaR by the square root of 10. , that the model covers non-linear Greek factors, and so forth). Finally, there are also certain additional 7 For good accounts of the current regulatory capital requirements, see Crouhy et al. (1998; 2001, ch.