By Kevin Dowd
This publication presents an creation to price in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring industry Risk (John Wiley & Sons 2002).
An creation to industry probability Measurement contains assurance of:
- Parametric and non-parametric hazard estimation
- Numerical tools
- Liquidity hazards
- Risk Decomposition and Budgeting
- Stress trying out
- Model chance
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Additional resources for An Introduction to Market Risk Measurement (The Wiley Finance Series)
Note: Produced using the ‘normalvarplot3D’ function. 7 Under the 1996 Amendment to the Basle Accord, institutions judged to have sound risk management practices are allowed the option of having their capital requirements determined by their own VaR estimates. This is known as the ‘internal models’ approach to regulatory capital requirements. The effective daily capital requirement is the maximum of the previous day’s VaR and k times the average of the daily VaR over the last 60 days, where k is a multiplier in the range between 3 and 4.
One factor that determines the length of the holding period is the liquidity of the markets in which the institution operates: other things being equal, the holding period appropriate in any given market is, ideally, the length of time it takes to ensure orderly liquidation of positions in that market. However, other factors favour a short holding period: r The assumption that the portfolio does not change over the holding period is more easily defended if we have a shorter holding period. r A short holding period is preferable for model validation or backtesting purposes: reliable validation requires a large data set, and a large data set requires a short holding period.
Unfortunately, once we are signed up to normality, we are stuck with it: we have a framework that cannot (again, honourable exceptions aside) be relied upon to give us good answers in the presence of major departures from normality, such as skewness or fat tails. 2 Duration Approaches to Fixed-income Risk Measurement Another traditional method is the duration approach to ﬁxed-income risk measurement. This method gives us approximation rules that help us to determine how bond prices will change in the face of speciﬁed changes in bond yields or interest rates.