Measuring Market Risk

397 Pages·2002·2.69 MB·English

by  Kevin Dowd

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Measuring Market Risk
Kevin Dowd
JOHN WILEY & SONS, LTD

Measuring Market Risk
Measuring Market Risk
Kevin Dowd
JOHN WILEY & SONS, LTD
Published2002 JohnWiley&SonsLtd,
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LibraryofCongressCataloging-in-PublicationData
Dowd,Kevin.
Measuringmarketrisk/KevinDowd.
p. cm.—(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN0-471-52174-4(alk.paper)
1.Financialfutures. 2.Riskmanagement. I.Title. II.Series.
HG6024.3.D683 2002
332.63(cid:2)2042—dc21 2002071367
BritishLibraryCataloguinginPublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
ISBN0-471-52174-4
Typesetin10/12ptTimesbyTechBooks,NewDelhi,India
PrintedandboundinGreatBritainbyTJInternational,Padstow,Cornwall,UK
Thisbookisprintedonacid-freepaperresponsiblymanufacturedfromsustainableforestry
inwhichatleasttwotreesareplantedforeachoneusedforpaperproduction.
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Contents
Preface xi
Acknowledgements xxi
1 TheRiskMeasurementRevolution 1
1.1 ContributoryFactors 1
1.1.1 AVolatileEnvironment 1
1.1.2 GrowthinTradingActivity 2
1.1.3 AdvancesinInformationTechnology 3
1.2 RiskMeasurementBeforeVaR 3
1.2.1 GapAnalysis 3
1.2.2 DurationAnalysis 4
1.2.3 ScenarioAnalysis 5
1.2.4 PortfolioTheory 5
1.2.5 DerivativesRiskMeasures 7
1.3 ValueatRisk 8
1.3.1 TheOriginandDevelopmentofVaR 8
1.3.2 AttractionsofVaR 10
1.3.3 CriticismsofVaR 11
1.4 RecommendedReading 13
2 MeasuresofFinancialRisk 15
2.1 TheMean–VarianceFrameworkForMeasuringFinancialRisk 15
2.1.1 TheNormalityAssumption 15
2.1.2 LimitationsoftheNormalityAssumption 17
2.1.3 TraditionalApproachestoFinancialRiskMeasurement 20
2.1.3.1 PortfolioTheory 20
2.1.3.2 DurationApproachestoFixed-income
RiskMeasurement 21
2.2 ValueatRisk 21
2.2.1 VaRBasics 21
2.2.2 ChoiceofVaRParameters 27
vi Contents
2.2.3 LimitationsofVaRasaRiskMeasure 28
2.2.3.1 VaRUninformativeofTailLosses 28
2.2.3.2 VaRCanCreatePerverseIncentiveStructures 28
2.2.3.3 VaRCanDiscourageDiversification 29
2.2.3.4 VaRNotSub-additive 30
2.3 ExpectedTailLoss 31
2.3.1 CoherentRiskMeasures 31
2.3.2 TheExpectedTailLoss 32
2.4 Conclusions 36
2.5 RecommendedReading 36
3 BasicIssuesinMeasuringMarketRisk 37
3.1 Data 37
3.1.1 Profit/LossData 37
3.1.2 Loss/ProfitData 38
3.1.3 ArithmeticReturnsData 38
3.1.4 GeometricReturnsData 38
3.2 EstimatingHistoricalSimulationVaR 39
3.3 EstimatingParametricVaR 40
3.3.1 EstimatingVaRwithNormallyDistributedProfits/Losses 40
3.3.2 EstimatingVaRwithNormallyDistributedArithmeticReturns 42
3.3.3 EstimatingLognormalVaR 42
3.4 EstimatingExpectedTailLoss 43
3.5 Summary 46
Appendix:MappingPositionstoRiskFactors 47
A3.1 SelectingCoreInstrumentsorFactors 48
A3.1.1 SelectingCoreInstruments 48
A3.1.2 SelectingCoreFactors 49
A3.2 MappingPositionsandVaREstimation 49
A3.2.1 TheBasicBuildingBlocks 50
A3.2.1.1 BasicFXPositions 50
A3.2.1.2 BasicEquityPositions 50
A3.2.1.3 Zero-couponBonds 52
A3.2.1.4 BasicForwards/Futures 54
A3.2.2 MoreComplexPositions 55
A3.3 RecommendedReading 56
4 Non-parametricVaRandETL 57
4.1 CompilingHistoricalSimulationData 57
4.2 EstimationofHistoricalSimulationVaRandETL 58
4.2.1 BasicHistoricalSimulation 58
4.2.2 HistoricalSimulationUsingNon-parametricDensityEstimation 59
4.2.3 EstimatingCurvesandSurfacesforVaRandETL 61
4.3 EstimatingConfidenceIntervalsforHistoricalSimulationVaRandETL 62
4.3.1 AQuantileStandardErrorApproachtotheEstimationof
ConfidenceIntervalsforHSVaRandETL 62