The risk management models used by banks and insurance companies are designed for when financial markets behave smoothly and efficiently. However, large risks materialize very often, and financial markets periodically go through bubbles and crashes. This book provides a road map of the most popular models of risk management and shows how they can be adapted to "turbulent times". The subprime crisis has shown that the sophisticated risk management models used by banks and insurance companies had serious flaws. Some people even suggest thatthese models are completely useless. Others claim that the crisis was just anunpredictable accident that was largely amplified by the lack of expertise and even naivety of many investors. This book takes the middle view. It shows that these models have been designed for "tranquil times", when financial markets behavesmoothly and efficiently. However, we are living in more and more "turbulent times": large risks materialize much more often than predicted by "normal" models, financial models periodically go through bubbles and crashes. Moreover, financial risks result from the decisions of economic actors who can haveincentives to take excessive risks, especially when their remunerations are ill designed. The book provides a clear account of the fundamental hypotheses underlying the most popular models of risk management and show that these hypotheses are flawed. However it shows that simple models can still be useful, provided they are well understood and used with caution. INDICE: INTRODUCTION I RISK MANAGEMENT: WHAT MUST BE CHANGED 1 Lessons From recent Financial Crises 1.1 The Basic Goals of Risk Management 1.2 When RiskManagement Fails 1.3 What Should Be Done? 2 Living in Turbulent Times 2.1 Newand Larger Risks 2.2 Increased Management Accountability 2.3 Need for a Global Approach 3 The Need for a Proper Methodology 3.1 The Necessary Ingredients 3.2 Risk Mapping 3.3 Loss Control 3.4 Risk Allocation II WHAT IS BEHIND RISK MODELING 4 The Basic Tools of Risk Modeling 4.1 Assessing Probabilities: The Frequentist and Subjective Approaches 4.2 Bayesian updating 4.3 Estimating Loss Distributions 4.4 Combining Event Trees and Monte Carlo Methods 4.5 The Dangersof the Stationarity Assumption 5 Statistical Risk Measures 5.1 The Expectation or Mean 5.2 The Variance 5.3 Linear Correlation 5.4 Copulas 5.5 The Value atRisk 5.6 Mutualization and Diversification 5.7 The Dangers of Using Simple Risk Measures Appendix: Extreme Value Theory 6 Leverage and Ruin Theory 6.1 Leverage and Return on Equity 6.2 Economic Capital for a Bank 6.3 Economic Capitalfor an Insurance Company 6.4 The Limits of Ruin Theory III THE PERFECT MARKETS HYPOTHESIS AND ITS DANGERS 7 Risk Neutral Valuation 7.1 The Expected PresentValue Criterion 7.2 The Magic of Perfect Markets 7.3 Complete Markets and Absence of Arbitrage Opportunities 7.4 A Binomial Example 7.5 The Mirages of the Perfect Markets World 8 The Case of Incomplete Markets: Relating Risk Premiumsto Economic Fundamentals 8.1 Solving the St Petersburg Paradox 8.2 Certainty Equivalent 8.3 Markets for Exchanging Risks 8.4 The Limits of the Equilibrium Approach 9 Risk Management in a Normal World 9.1 The Mean-Variance Criterion 9.2 Portfolio Choice 9.3 The Diversification Principle 9.4 Efficient Portfoliosand the Sharpe Ratio 9.5 The Capital Asset Pricing Model (CAPM) 9.6 Futures Contracts and Hedging 9.7 Capital Allocation and RaRoc 9.8 The Dangers of Viewing the World as <"Normal>" Appendix 1: Portfolio Choice with Several Risky Assets Appendix 2: Deriving the CAPM Formula IV RISK MANAGEMENT AND SHAREHOLDER VALUE 10 Why Market Imperfections Matter for Shareholder Value 10.1 Standards Methods for Assessing Shareholder Value 10.2 Why is the Shareholder ValueFunction Likely to Be Non Linear: A Simple Example 10.3 Incentive Problems Generate Financial Frictions 11 The Shareholder Value Function 11.1 A Target Level of Cash 11.2 A Model for Optimizing Liquidity Management 11.3 Liquidity andShareholder Value Appendix 1: Stochastic Differential Calculus Appendix 2: Derivation of the Shareholders Value Function 12 Risk Management and the Shareholder Value Function 12.1 How Much Risk to Take? 12.2 Which Risks to Insure? 12.3 How Much Liquidity to Keep in Reserves? 12.4 How Much hedging to Perform? VWHAT TO DO IN PRACTICE? 13 The Different Steps of the Implementation 13.1 Estimating the Shareholder Value Function 13.2 A Unifying Metric for Risk Mapping: The Risk Value Mapping 13.3 The New Instruments of Risk Management 14 Learning from an Example 14.1 Presentation of Med Corp 14.2 Risk Analysis 14.3 Shareholder Value and RM for Med Corp 14.4 A Risk Transfer Policy for Med Corp 15 Conclusion: Some Simple Messages 15.1 Message # 1: Quantitative models are needed but they have to be used With precaution 15.2 Message # 2: Risk Management creates value for shareholders 15.3 Message # 3: Things to do in practice 15.4Message # 4: Key Ingredients for a successful RM approach Index
- ISBN: 978-0-19-977408-1
- Editorial: Oxford University
- Encuadernacion: Cartoné
- Páginas: 224
- Fecha Publicación: 08/09/2011
- Nº Volúmenes: 1
- Idioma: Inglés