The Analytics of Risk Model Validation (Quantitative Finance) PDF
Preview The Analytics of Risk Model Validation (Quantitative Finance)
The Analytics of Risk Model Validation Quantitative Finance Series Aims and Objectives • booksbasedontheworkoffinancialmarketpractitioners,andacademics • presentingcuttingedgeresearchtotheprofessional/practitionermarket • combiningintellectualrigourandpracticalapplication • coveringtheinteractionbetweenmathematicaltheoryandfinancialpractice • toimproveportfolioperformance,riskmanagementandtradingbookperformance • coveringquantitativetechniques Market Brokers/Traders; Actuaries; Consultants; Asset Managers; Fund Managers; Regulators; Central Bankers;TreasuryOfficials;TechnicalAnalysts;andAcademicsforMastersinFinanceandMBA market. SeriesTitles Return Distributions in Finance Derivative Instruments: Theory, Valuation, Analysis Managing Downside Risk in Financial Markets Economics for Financial Markets Performance Measurement in Finance Real R&D Options Advanced Trading Rules, Second Edition Advances in Portfolio Construction and Implementation Computational Finance Linear Factor Models in Finance Initial Public Offerings Funds of Hedge Funds Venture Capital in Europe Forecasting Volatility in the Financial Markets, Third Edition International Mergers and Acquisitions Activity Since 1990 Corporate Governance and Regulatory Impact on Mergers and Acquisitions Forecasting Expected Returns in the Financial Markets The Analytics of Risk Model Validation Series Editor Dr Stephen Satchell DrSatchellisaReaderinFinancialEconometricsatTrinityCollege,Cambridge;visitingProfessor at Birkbeck College, City University Business School and University of Technology, Sydney. He alsoworksinaconsultativecapacitytomanyfirms,andeditstheJournalofDerivativesandHedge Funds,TheJournalofFinancialForecasting,JournalofRiskModelValidationandtheJournalof AssetManagement. The Analytics of Risk Model Validation Edited by George Christodoulakis Manchester Business School, University of Manchester, UK Stephen Satchell Trinity College, Cambridge, UK AMSTERDAM•BOSTON•HEIDELBERG•LONDON•NEWYORK•OXFORD PARIS•SANDIEGO•SANFRANCISCO•SINGAPORE•SYDNEY•TOKYO AcademicPressisanimprintofElsevier AcademicPressisanimprintofElsevier 30CorporateDrive,Suite400,Burlington,MA01803,USA 84Theobald’sRoad,LondonWC1X8RR,UK 525BStreet,Suite1900,SanDiego,CA92101-4495,USA Firstedition2008 Copyright©2008ElsevierLtd.Allrightsreserved Nopartofthispublicationmaybereproduced,storedinaretrievalsystem ortransmittedinanyformorbyanymeanselectronic,mechanical,photocopying, recordingorotherwisewithoutthepriorwrittenpermissionofthepublisher PermissionsmaybesoughtdirectlyfromElsevier’sScience&TechnologyRights DepartmentinOxford,UK:phone(+44)(0)1865843830;fax(+44)(0)1865853333; email:permissions@elsevier.com.Alternativelyyoucansubmityourrequestonlineby visitingtheElsevierwebsiteathttp://elsevier.com/locate/permissions,andselecting ObtainingpermissiontouseElseviermaterial Notice Noresponsibilityisassumedbythepublisherforanyinjuryand/ordamagetopersons orpropertyasamatterofproductsliability,negligenceorotherwise,orfromanyuse oroperationofanymethods,products,instructionsorideascontainedinthematerial herein. BritishLibraryCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary LibraryofCongressCataloging-in-PublicationData AcatalogrecordforthisbookisavailablefromtheLibraryofCongress ISBN:978-0-7506-8158-2 ForinformationonallAcademicPresspublications visitourwebsiteatbooks.elsevier.com PrintedandboundinGreatBritain 08 09 10 11 10 9 8 7 6 5 4 3 2 1 Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org Contents About the editors vii About the contributors ix Preface xiii 1 Determinants of small business default 1 Sumit Agarwal, Souphala Chomsisengphet and Chunlin Liu 2 Validation of stress testing models 13 Joseph L. Breeden 3 The validity of credit risk model validation methods 27 George Christodoulakis and Stephen Satchell 4 A moments-based procedure for evaluating risk forecasting models 45 Kevin Dowd 5 Measuring concentration risk in credit portfolios 59 Klaus Duellmann 6 A simple method for regulators to cross-check operational risk loss models for banks 79 Wayne Holland and ManMohan S. Sodhi 7 Of the credibility of mapping and benchmarking credit risk estimates for internal rating systems 91 Vichett Oung 8 Analytic models of the ROC curve: Applications to credit rating model validation 113 Stephen Satchell and Wei Xia 9 The validation of the equity portfolio risk models 135 Stephen Satchell 10 Dynamic risk analysis and risk model evaluation 149 Günter Schwarz and Christoph Kessler 11 Validation of internal rating systems and PD estimates 169 Dirk Tasche Index 197 This page intentionally left blank About the editors Dr George Christodoulakis is an expert in quantitative finance, focusing on financial theory and the econometrics of credit and market risk. His research work has been published in international refereed journals such as Econometric Reviews, the European Journal of Operational Research and the Annals of Finance and he is a frequent speaker atinternationalconferences.DrChristodoulakishasbeenamemberofthefacultyatCass Business School City University and the University of Exeter, an Advisor to the Bank of Greece and is now appointed at Manchester Business School, University of Manchester. He holds two masters degrees and a doctorate from the University of London. Dr Stephen Satchell is a Fellow of Trinity College, Reader in Financial Econometrics at theUniversityofCambridgeandVisitingProfessoratBirkbeckCollege,CityUniversityof Technology,atSydney,Australia.Heprovidesconsultancyforarangeofcityinstitutions in the broad area of quantitative finance. He has published papers in many journals and has a particular interest for risk. This page intentionally left blank About the contributors SumitAgarwalisafinancialeconomistintheresearchdepartmentattheFederalReserve Bank of Chicago. His research interests include issues relating to household finance, as wellascorporatefinance,financialinstitutionsandcapitalmarkets.Hisresearchhasbeen publishedinsuchacademicjournalsastheJournalofMoney,CreditandBanking,Journal of Financial Intermediation, Journal of Housing Economics and Real Estate Economics. He has also edited a book titled Household Credit Usage: Personal Debt and Mortgages (with Ambrose, B.). Prior to joining the Chicago Fed in July 2006, Agarwal was Senior Vice President and Credit Risk Management Executive in the Small Business Risk Solutions Group of Bank of America. He also served as an Adjunct Professor in the finance department at the George Washington University. Agarwal received a PhD from the University of Wisconsin-Milwaukee. Joseph L. Breeden earned a PhD in physics in 1991 from the University of Illinois. His thesis work involved real-world applications of chaos theory and genetic algorithms. In the mid-1990s, he was a member of the Santa Fe Institute. DrBreedenhasspentthepast12yearsdesigninganddeployingforecastingsystemsfor retail loan portfolios. At Strategic Analytics, which he co-founded in 1999, Dr Breeden leads the design of advanced analytic solutions including the invention of Dual-time Dynamics. Dr Breeden has worked on portfolio forecasting, stress testing, economic capital and optimization in the US, Europe, South America and Southeast Asia both, during normal conditions and economic crises. Souphala Chomsisengphet is Senior Financial Economist in the Risk Analysis Division at the Office of the Comptroller of the Currency (OCC), where she is responsible for evaluatingnationalcharteredbanks’developmentandvalidationofcreditriskmodelsfor underwriting, pricing, risk management and capital allocation. In addition, she conducts empiricalresearchonconsumerbehavioralfinance,financialinstitutionsandriskmanage- ment.HerrecentpublicationsincludearticlesintheJournalofUrbanEconomics,Journal ofHousingEconomics,JournalofFinancialIntermediation,RealEstateEconomics,and Journal of Credit Risk. Prior to joining the OCC, Chomsisengphet was an economist in the Office of Policy Analysis and Research at the Office of Federal Housing Enterprise Oversight (OFHEO). She earned a PhD in Economics from the University of Wisconsin-Milwaukee. KevinDowdiscurrentlyProfessorofFinancialRiskManagementatNottinghamUniver- sity Business School, where he works in the Centre for Risk and Insurance Studies. His research interests are in financial, macro and monetary economics, political economy,
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