By Kevin Dowd
This e-book presents an advent to worth in danger (VaR) and anticipated tail loss (ETL) estimation and is a student-oriented model of Measuring industry Risk (John Wiley & Sons 2002).
An advent to marketplace hazard Measurement comprises assurance of:
- Parametric and non-parametric possibility estimation
- Numerical equipment
- Liquidity dangers
- Risk Decomposition and Budgeting
- Stress trying out
- Model hazard
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Extra resources for An introduction to market risk measurement
3 See Ingersoll (1987, p. 139) or Yoshiba and Yamai (2001, p. 8). 5) y is some small change in yield. , Fabozzi (2000, p. 66)). ) and, as such, they are useful, though limited, tools in the risk measurer’s armoury. , changes in bond price) to probabilities. If we are to use duration measures for risk measurement purposes in this sense, our best option is to derive the standard deviation of holding-period return and then feed that into a normal risk framework. 8) If we want a risk measure, the easiest step is to assume that bond prices are approximately normal and we can then work out the probabilities of speciﬁed gains or losses, and so forth.
As Hoppe put it, ‘believing a spuriously precise estimate of risk is worse than admitting the irreducible unreliability of one’s estimate. False certainty is more dangerous than acknowledged ignorance’ (Hoppe (1998, p. 50)). Taleb put the same point a different way: ‘You’re worse off relying on misleading information than on not having any information at all. If you give a pilot an altimeter that is sometimes defective he will crash the plane. Give him nothing and he will look out the window’ (Taleb (1997a, p.
2 Choice of VaR Parameters The use of VaR involves two arbitrarily chosen parameters — the holding period and the conﬁdence level. How do we choose these parameters? , one quarter) and BIS capital adequacy rules stipulate that banks should operate with a holding period of two weeks (or 10 business days). 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.