Risk Management and Capital Adequacy

576 Pages·2003·7.65 MB·English

by  Reto Gallati

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RISK MANAGEMENT
AND CAPITAL
ADEQUACY
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RISK MANAGEMENT
AND CAPITAL
ADEQUACY
RETO R. GALLATI
McGraw-Hill
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DOI: 10.1036/0071425586
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When I was young, people called me a gambler. As the
scale of my operations increased I became known as a
speculator. Now I am called a banker. But I have been
doing the same thing all the time.
—Sir Ernest Cassell
Banker to Edward VII
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To my parents with love and gratitude
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A C K N O W L E D G M E N T S
The suggestion that I write a book about risk came from the late Fischer
Black, while I was working at Goldman Sachs. The vastness of the project
is daunting. The topic touches on the most profound depths of statistics,
mathematics, psychology, and economics. I would like to thank the editors
and reviewers and those who provided comments, especially M.R. Carey
and Jean Eske, who carefully read the entire manuscript and provided
valuable comments, corrections, and advice.
I end with a note of thanks to my family, my friends, and my faculty
colleagues at Sloan, who inspired much of the enthusiasm that went into
the creation of this book and endured me with patience.
RETO R. GALLATI
Cambridge, Massachusetts
February 2003
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C O N T E N T S
ACKNOWLEDGMENTS viii
INTRODUCTION xvii
Chapter 1
Risk Management: AMaturing Discipline 1
1.1 Background 1
1.2 Risks: AView of the Past Decades 5
1.3 Definition of Risk 7
1.4 Related Terms and Differentiation 8
1.5 Degree of Risk 10
1.6 Risk Management: AMultilayered Term 11
1.6.1 Background 11
1.6.2 History of Modern Risk Management 11
1.6.3 Related Approaches 13
1.6.4 Approach and Risk Maps 22
1.7 Systemic Risk 22
1.7.1 Definition 22
1.7.2 Causes of Systemic Risk 26
1.7.3 Factors That Support Systemic Risk 26
1.7.4 Regulatory Mechanisms for Risk Management 27
1.8 Summary 28
1.9 Notes 30
Chapter 2
Market Risk 33
2.1 Background 33
2.2 Definition of Market Risk 34
2.3 Conceptual Approaches for Modeling Market Risk 37
2.4 Modern Portfolio Theory 39
2.4.1 The Capital Asset Pricing Model 41
2.4.2 The Security Market Line 43
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