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| Risk Analysis Techniques |
Download pdf guide about Risk Analysis Techniques
Table of Contents:
- Introduction
- VaR Assumptions
- Delta-Normal Methodology
- Delta-Gamma Methodology
- Historical Simulation
- Stress Testing
- Monte Carlo Simulation
- Raroc
- Model Risk
- Implementation Strategy
- Warning Signs
- Conclusion
- Other Sources
- Answers to Sample Exam Questions
- Answers to Risktek Risk Olympics™ Questions
The purpose of this class is to provide an idiosyncratic review of the techniques for risk analysis that a risk management professional should be familiar with. This document contains a large number of references and you should spend some time tracking a few of them down, particularly in areas where you feel less comfortable with your own experience or the class content. There is no guarantee that the information presented here is either correct or what the examiners will be questioning you on.
Let’s assume that our overall goal is to create a quantitative measure of risk that can be applied to the business unit we are responsible for. Sitting on our hands doing nothing is not an option. We need a measure of risk that can be applied at all levels of an organization either to an isolated business unit or in aggregate to make decisions about the level of risk being assumed in those business units and whether it is justified by the potential returns.
A sensible objective is to conform to (no more than) industry best practice at a reasonable cost. The standard industry approaches set out below are a starting point. I will defer most of the debate as to why and whither VaR to the end of the session.
This class material can be organized into three areas: the syllabus topics, some additional practical topics I think you will find of interest, and sample exam questions and answers.
Let’s begin with the syllabus. The structure of the syllabus follows Thomas Wilson’s chapter in the Handbook of Risk Management and Analysis2. Duffie and Pan provide another good review3. While the sheer volume of material can be overwhelming the Risk Metrics™ technical document and the quarterly Risk Metrics monitors4 are excellent and well worth whatever time you can spend with them. For a gentler read try Linsmeier and Pearson5, or, if you have an expense account, Gumerlock, Litterman et al6.
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