Advanced ERM Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
This presentation is based on a part of an academic course on Advanced Enterprise Risk Management (Advanced ERM) titled ‘Risk measures and Measuring, managing and mitigating market, credit and operational risk’ and covers topics such as: mathematical underpins, market risk, credit risk, operational risk and managing market, credit and operational risk. It also includes appendices covering: VaR coherence and VaR vs TVaR, GARCH models, Maximum Likelihood Estimation (MLE), principal components analysis (PCA) and hazard rates and fitting operational risk loss distributions

Slides

1 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
2 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
3 Model evolution characteristics
4 Whatever we do requires
5 Terminology
6 Defining value and applicable axioms
7 What if no suitable market in asset or liability?
8 Worth noting implication on loss definition
9 Assumed future behaviour of assets and liabilities
10 More generally
11 Most this course can realistically do
12 Case study / scenario
13 Selection of risk measures
14 Advantages and disadvantages of VaR
15 TVaR has certain technical advantages over VaR
16 Mathematical definitions of VaR and TVaR
17 VaR estimation
18 VaR closely linked to capital requirements
19 VaR and expected/unexpected loss
20 Other risk measures, e.g.
21 Marginal risk, e.g. marginal VaR (MVaR)
22 The Gaussian case
23 Incremental risk, e.g. incremental VaR (IVaR)
24 Risk budgeting
25 Statistical techniques for estimating risk measures
26 Parametric approach
27 Issues
28 Incomplete or out-of-date data
29 Non-linear exposures
30 Call option price
31 Heteroscedasticity
32 Non-parametric approach: order statistics
33 Standard errors in non-parametric approach
34 Empirical studies of VaR estimates
35 Back testing
36 Basel back testing rules for banks
37 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
38 Market risk
39 Typical approaches (1)
40 Typical approaches (2)
41 New directions for market risk: IRC
42 New directions for market risk: Stress VaR
43 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
44 Credit risk
45 Market developments
46 Implications of new credit markets
47 Credit portfolio risk models
48 Ratings-based models
49 Ratings-based models: components
50 Latent variables
51 Example
52 Pros and cons of ratings based models
53 Equity-based credit portfolio risk models
54 Equity and debt as options on asset value
55 Implementing an equity-based credit risk model
56 Implementing the model statistically
57 Default trigger
58 Strengths and weaknesses of equity-based models
59 Mixture models (1)
60 Mixture models (2)
61 Implementation issues for either type of model
62 Broader issues
63 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
64 Operational Risk
65 Agency problems, monitoring and control
66 More controls or more control?
67 An illustrative game theoretic model of fraud
68 Equilibria
69 Characteristics of intermittent fraud equilibrium
70 Managing operational risk in practice
71 Benchmarking processes and losses versus others
72 Sharing data
73 Capital for Operational Risk
74 Insurance as a substitute for capital
75 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
76 Managing market, credit and operational risk
77 Any action to reduce one risk can increase another
78 Quantifying risk transformation risks
79 Main 'market' hedging instruments
80 Dynamic hedging (1)
81 Dynamic hedging (2)
82 Risk/reward analysis and asset/exposure allocation
83 Session 2: Agenda covered
84 Session 2: Risk measures and Measuring, managing and mitigating market, credit and operational risk
85 Appendix A: VaR coherence and VaR vs TVaR
86 Axiomatic approach: coherence
87 Characterisation of coherent risk measures
88 VaR is coherent for Gaussian distributions
89 Arguments favouring TVaR based on coherence
90 More generic arguments favouring TVaR
91 Which takes into account loss in the event of default?
92 Different stakeholder perspectives (1)
93 Different stakeholder perspectives (2)
94 Treatment of illiquidity (1)
95 Treatment of illiquidity (2)
96 Treatment of illiquidity (3)
97 Stress testing methodologies
98 Appendix B: GARCH models
99 Properties of GARCH models
100 RiskMetrics approach
101 RiskMetrics specification
102 Appendix C: Maximum Likelihood Estimation
103 Log likelihood
104 Desirable properties of ML estimator
105 Likelihood ratio tests
106 Binomial back testing
107 Introducing a restriction
108 Appendix D: Principal components analysis
109 Principal components - explanation or noise?
110 Smaller eigenvalues/principal components
111 Appendix E: Hazard rates and fitting loss distributions
112 Hazard rates
113 Simple example of a hazard rate
114 Hazard rates that vary through time
115 Simulating independent failure times
116 Incorporating dependence in failure times
117 Fitting loss distributions
118 E.g. Gamma distribution
119 Important Information

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