Wiley – 2011, 448 pages ISBN 0470977612A guide to the validation and risk management of quantitative models used for pricing and hedging Whereas the majority of quantitative finance books focus on mathematics and risk management books focus on regulatory aspects, this book addresses the elements missed by this literature the risks of the models themselves. This book starts from regulatory issues, but translates them into practical suggestions to reduce the likelihood of model losses, basing model risk and validation on market experience and on a wide range of real-world examples, with a high level of detail and precise operative indications.Contents: Part I Theory and Practice of Model Risk Management Understanding Model Risk What Is Model Risk? The Value Approach The Price Approach A Quant Story of the Crisis A Synthetic View on Model Risk Foundations of Modelling and the Reality of Markets The Classic Framework Uncertainty and Illiquidity Accounting for Modellers Fair Value The Liquidity Bubble and the Accountancy Boards The Hidden Model Assumptions in ‘vanilla’ Derivatives What Regulators Said After the Crisis Basel New Principles: The Management Process Basel New Principles: The Model, The Market and The Product Basel New Principles: Operative Recommendations Model Validation and Risk Management: Practical Steps A Scheme for Model Validation Special Points in Model Risk Management The Importance of Understanding Models Model Validation and Model Comparison: Case Studies The Practical Steps of Model Comparison First Example: The Models The Credit Default Swap Structural First-Passage Models Reduced-Form Intensity Models Structural vs Intensity: Information First Example: The Payoff. Gap Risk in a Leveraged Note The Initial Assessment First Test: Calibration to Liquid Relevant Products Second Test: a Minimum Level of Realism The Core Risk in the Product Structural Models: Negligible Gap Risk Reduced-Form Models: Maximum Gap Risk A Deeper Analysis: Market Consensus and Historical Evidence What to Add to the Calibration Set Performing Market Intelligence The Lion and the Turtle. Incompleteness in Practice Reality Check: Historical Evidence and Lack of it Building a Parametric Family of Models Understanding Model Implications Managing Model Uncertainty: Reserves, Limits, Revisions Model Comparison: Examples from Equity and Rates Comparing Local and Stochastic Volatility Models in Pricing Equity Compound and Barrier Options Comparing Short Rate and Market Models in Pricing Interest Rate Bermudan Options Stress Testing and the Mistakes of the Crisis Learning Stress Test from the Crisis The Meaning of Stress Testing Portfolio Stress Testing Model Stress Testing The Credit Market and the ‘Formula that Killed Wall Street’ The CDO Payoff The Copula Applying the Copula to CDOs The Market Quotation Standard Portfolio Stress Testing and the Correlation Mistake From Flat Correlation Towards a Realistic Approach A Correlation Parameterization to Stress the Market Skew Payoff Stress and the Liquidity Mistake Detecting the Problem: Losses Concentrated in Time The Problem in Practice A Solution. From Copulas to Real Models Conclusions Testing with Historical Scenarios and the Concentration Mistake The Mapping Methods for Bespoke Portfolios The Lehman Test Historical Scenarios to Test Mapping Methods The Limits of Mapping and the Management of Model Risk Conclusions Preparing for Model Change. Rates and Funding in the New Era Explaining the Puzzle in the Interest Rates Market and Models The Death of a Market Model: August Finding the New Market Model The Classic Risk-free Market Model A Market Model with Stable Default Risk A Market with Volatile Credit Risk Conclusions Rethinking the Value of Money: The Effect of Liquidity in Pricing The Setting Standard DVA: Is Something Missing? Standard DVA plus Liquidity: Is Something Duplicated? Solving the Puzzle Risky Funding for the Borrower Risky Funding for the Lender and the Conditions for Market Agreement Positive Recovery Extension Two Ways of Looking at the Problem: Default Risk or Funding Benefit? The Accountant vs the Salesman Which Direction for Future Pricing? Part II Snakes in The Grass: Where Model Risk Hides Hedging Model Risk and Hedging Hedging and Model Validation: What is Explained by P&L Explain? The Sceptical View The Fundamentalist View and Black and Scholes Back to Reality Remarks: Recalibration, Hedges and Model Instability Conclusions: from Black and Scholes to Real Hedging From Theory to Practice: Real Hedging Stochastic Volatility Models: SABR Test Hedging Behaviour Leaving Nothing Out Real Hedging for Local Volatility Models Conclusions: the Reality of Hedging Strategies Approximations Validate and Monitor the Risk of Approximations The Swaption Approximation in the Libor Market Model The Three Technical Problems in Interest Rate Modelling The Libor Market Model and the Swaption Market Pricing Swaptions Understanding and Deriving the Approximation Testing the Approximation Approximations for CMS and the Shape of the Term Structure The CMS Payoff Understanding Convexity Adjustments The Market Approximation for Convexity Adjustments A General LMM Approximation Comparing and Testing the Approximations Testing Approximations Against Exact. Dupire’s Idea Perfect Positive Correlation Perfect Negative Correlation Exercises on Risk in Computational Methods Approximation Integration Monte Carlo Extrapolations Using the Market to Complete Information: Asymptotic Smile The Indetermination in the Asymptotic Smile Pricing CMS with a Smile: Extrapolating to Infinity Using CMS Information to Transform Extrapolation into Interpolation and Fix the Indetermination Using Mathematics to Complete Information: Correlation Skew The Expected Tranched Loss Properties for Interpolation Properties for Turning Extrapolation into Interpolation Correlations The Technical Difficulties in Computing Correlations Correlations in Interest Rate Modelling Cross-currency Correlations Stochastic Volatility Correlations Fundamental Errors in Modelling Correlations The Zero-correlation Error The -Correlation Error Calibration Calibrating to Caps/Swaptions and Pricing Bermudans Calibrating Caplets Understanding the Term Structure of Volatility Different Parameterizations The Evolution of the Term Structure of Volatility The Effect on Early-Exercise Derivatives Reducing Our Indetermination in Pricing Bermudans: Liquid European Swaptions The Evolution of the Forward Smiles When the Payoff isWrong The Link Between Model Errors and Payoff Errors The Right Payoff at Default: The Impact of the Closeout Convention How Much Will be Paid at Closeout, Really? What the Market Says and What the ISDA Says A Quantitative Analysis of the Closeout A Summary of the Findings and Some Conclusions on Payoff Uncertainty Mathematical Errors in the Payoff of Index Options Too Much Left Out Too Much Left In Empirical Results with the Armageddon Formula Payoff Errors and Armageddon Probability Model Arbitrage Introduction Capital Structure Arbitrage The Credit Model The Equity Model From Barrier Options to Equity Pricing Capital-structure Arbitrage and Uncertainty The Cap-Swaption Arbitrage Conclusion: Can We Use No-Arbitrage Models to Make Arbitrage? Appendix Random Variables Generating Variables from Uniform Draws Copulas Normal and Lognormal Stochastic Processes The Law of Iterated Expectation Diffusions, Brownian Motions and Martingales Poisson Process Time-dependent Intensity Useful Results from Quantitative Finance Black and Scholes () and Black () Change of Numeraire
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Prmia Publications – 2005, 1301 pages
ISBN: 0976609703, 9780976609704
As its title implies, this book is the Handbook for the Professional Risk Manager. It is for those professionals who seek to demonstrate their skills in the field of financial risk management and for those looking simply for an excellent reference source. With contributions from nearly 40 leading authors,...
John Wiley & Sons, 2008. — 494 p. — (Market Risk Analysis, Vol. IV).
Value at Risk and Other Risk Metrics.
An Overview of Market Risk Assessment.
Risk Measurement in Banks.
Risk Measurement in Portfolio Management.
Risk Measurement in Large Corporations.
Downside and Quantile Risk Metrics.
Semi-Standard Deviation and Second Order Lower.
Wiley, 2012. — 2100 p. — ISBN: 1118006739, 9781118006733
3 Volume Set.
An essential reference dedicated to a wide array of financial models, issues in financial modeling, and mathematical and statistical tools for financial modeling
The need for serious coverage of financial modeling has never been greater, especially with the size, diversity, and efficiency of modern capital...
Palgrave Macmillan, 2015. — 368 p. — ISBN: 1137354070, 9781137354075
Quantitative Trading with R offers readers a winning strategy for devising expertly-crafted and workable trading models using the R open-source programming language. Based on the author's own experience as a professor and high-frequency trader, this book provides a step-by-step approach to understanding...
Wiley, 2008. – 1033 p. – ISBN: 047017921X, 9780470179215
If you’re seeking solutions to advanced and even esoteric problems, Advanced Analytical Models goes beyond theoretical discussions of modeling by facilitating a thorough understanding of concepts and their real-world applications—including the use of embedded functions and algorithms. This reliable resource will equip you...
Academic Press, 2009. — 864 p. — ISBN: 0123747651. Robert Nisbet, Pacific Capital Bank Corporation, Santa Barbara, CA, USA John Elder, Elder Research, Inc. and the University of Virginia, Charlottesville, USA Gary Miner, StatSoft, Inc. , Tulsa, OK, USA Description The Handbook of Statistical Analysis and Data Mining Applications is a comprehensive professional reference book that...