Correlation Risk Modeling and Management: An Applied Guide including the Basel III Correlation Framework - With Interactive Models in Excel / VBA [NOOK Book]

Overview

A thorough guide to correlation risk and its growing importance in global financial markets

Ideal for anyone studying for CFA, PRMIA, CAIA, or other certifications, Correlation Risk Modeling and Management is the first rigorous guide to the topic of correlation risk. A relatively overlooked type of risk until it caused major unexpected losses during the financial crisis of 2007 through 2009, correlation risk has become a major focus of the risk management departments in major ...

See more details below
Correlation Risk Modeling and Management: An Applied Guide including the Basel III Correlation Framework - With Interactive Models in Excel / VBA

Available on NOOK devices and apps  
  • NOOK Devices
  • Samsung Galaxy Tab 4 NOOK 7.0
  • Samsung Galaxy Tab 4 NOOK 10.1
  • NOOK HD Tablet
  • NOOK HD+ Tablet
  • NOOK eReaders
  • NOOK Color
  • NOOK Tablet
  • Tablet/Phone
  • NOOK for Windows 8 Tablet
  • NOOK for iOS
  • NOOK for Android
  • NOOK Kids for iPad
  • PC/Mac
  • NOOK for Windows 8
  • NOOK for PC
  • NOOK for Mac
  • NOOK for Web

Want a NOOK? Explore Now

NOOK Book (eBook)
$86.49
BN.com price
(Save 42%)$151.00 List Price
Note: This NOOK Book can be purchased in bulk. Please email us for more information.

Overview

A thorough guide to correlation risk and its growing importance in global financial markets

Ideal for anyone studying for CFA, PRMIA, CAIA, or other certifications, Correlation Risk Modeling and Management is the first rigorous guide to the topic of correlation risk. A relatively overlooked type of risk until it caused major unexpected losses during the financial crisis of 2007 through 2009, correlation risk has become a major focus of the risk management departments in major financial institutions, particularly since Basel III specifically addressed correlation risk with new regulations. This offers a rigorous explanation of the topic, revealing new and updated approaches to modelling and risk managing correlation risk.

  • Offers comprehensive coverage of a topic of increasing importance in the financial world
  • Includes the Basel III correlation framework
  • Features interactive models in Excel/VBA, an accompanying website with further materials, and problems and questions at the end of each chapter
Read More Show Less

Product Details

  • ISBN-13: 9781118796894
  • Publisher: Wiley
  • Publication date: 12/19/2013
  • Series: Wiley Finance
  • Sold by: Barnes & Noble
  • Format: eBook
  • Edition number: 1
  • Pages: 350
  • File size: 5 MB

Meet the Author

GUNTER MEISSNER, PH.D., heads Dersoft (www.dersoft.com), the software company behind TradeSmart, a software package that derives futures, options, and swaps prices and risk parameters. In addition, he runs a hedge fund (www. cassandracm.com), and is Adjunct Professor of Mathematical Finance at NYU.

Dr. Meissner joined Deutsche Bank in 1990, where he traded interest rate futures, swaps, and options in Frankfurt and New York. He became Head of Product Development in 1994, responsible for originating algorithms for new derivatives products. In 1995/1996 Dr. Meissner became Head of Options at Deutsche Bank Tokyo. From 1997 to 2007, he was Professor of Finance at Hawaii Pacific University. From 2008 to 2013 he was Director of the Master in Financial Engineering program at the Shidler College of Business at the University of Hawaii. The author of numerous published papers on derivatives in international journals, Dr. Meissner also is a frequent speaker at international conferences and seminars and the author of four other books, including The Definitive Guide to CDOs: Application, Pricing, and Risk Management.

Read More Show Less

Table of Contents

Preface xiii

Acknowledgments xvii

About the Author xix

CHAPTER 1
Some Correlation Basics: Properties, Motivation, Terminology 1

1.1 What Are Financial Correlations? 1

1.2 What Is Financial Correlation Risk? 2

1.3 Motivation: Correlations and Correlation Risk Are Everywhere in Finance 5

1.4 How Does Correlation Risk Fit into the Broader Picture of Risks in Finance? 24

1.5 A Word on Terminology 33

1.6 Summary 34

Appendix 1A: Dependence and Correlation 35

Dependence 35

Correlation 36

Independence and Uncorrelatedness 37

Appendix 1B: On Percentage and Logarithmic Changes 38

Practice Questions and Problems 39

References and Suggested Readings 40

CHAPTER 2
Empirical Properties of Correlation: How Do Correlations Behave in the Real World? 43

2.1 How Do Equity Correlations Behave in a Recession, Normal Economic Period, or Strong Expansion? 43

2.2 Do Equity Correlations Exhibit Mean Reversion? 46

2.3 Do Equity Correlations Exhibit Autocorrelation? 50

2.4 How Are Equity Correlations Distributed? 51

2.5 Is Equity Correlation Volatility an Indicator for Future Recessions? 52

2.6 Properties of Bond Correlations and Default Probability Correlations 53

2.7 Summary 54

Practice Questions and Problems 55

References and Suggested Readings 55

CHAPTER 3
Statistical Correlation Models—Can We Apply Them to Finance? 57

3.1 AWord on Financial Models 57

3.2 Statistical Correlation Measures 60

3.3 Should We Apply Spearman’s Rank Correlation and Kendall’s t in Finance? 65

3.4 Summary 66

Practice Questions and Problems 67

References and Suggested Readings 68

CHAPTER 4
Financial Correlation Modeling—Bottom-Up Approaches 69

4.1 Correlating Brownian Motions (Heston 1993) 69

4.2 The Binomial CorrelationMeasure 72

4.3 Copula Correlations 74

4.4 Contagion Correlation Models 88

4.5 Summary 90

Appendix 4A: Cholesky Decomposition 91

Example: Cholesky Decomposition for Three Assets 92

Appendix 4B: A Short Proof of the Gaussian Default

Time Copula 93

Practice Questions and Problems 93

References and Suggested Readings 94

CHAPTER 5
Valuing CDOs with the Gaussian Copula—What Went Wrong? 101

5.1 CDO Basics—What Is a CDO? Why CDOs? Types of CDOs 101

5.2 Valuing CDOs 105

5.3 Conclusion: The Gaussian Copula and CDOs—What Went Wrong? 113

5.4 Summary 115

Practice Questions and Problems 116

References and Suggested Readings 117

CHAPTER 6
The One-Factor Gaussian Copula (OFGC) Model—Too Simplistic? 119

6.1 The Original One-Factor Gaussian Copula (OFGC) Model 121

6.2 Valuing Tranches of a CDO with the OFGC 122

6.3 The Correlation Concept in the OFGC Model 128

6.4 The Relationship between the OFGC and the Standard Copula 131

6.5 Extensions of the OFGC 132

6.6 Conclusion—Is the OFGC Too Simplistic to Evaluate Credit Risk in Portfolios? 135

6.7 Summary 138

Practice Questions and Problems 139

References and Suggested Readings 140

CHAPTER 7
Financial Correlation Models—Top-Down Approaches 143

7.1 Vasicek’s 1987 One-Factor Gaussian Copula (OFGC) Model Revisited 144

7.2 Markov Chain Models 146

7.2.1 Inducing Correlation via Transition Rate Volatilities 146

7.3 Contagion Default Modeling in Top-Down Models 150

7.4 Summary 153

Practice Questions and Problems 154

References and Suggested Readings 154

CHAPTER 8
Stochastic Correlation Models 157

8.1 What Is a Stochastic Process? 157

8.2 Sampling Correlation from a Distribution (Hull and White 2010) 159

8.3 Dynamic Conditional Correlations (DCCs) (Engle 2002) 160

8.4 Stochastic Correlation—Standard Models 162

8.5 Extending the Heston Model with Stochastic Correlation (Buraschi et al. 2010; Da Fonseca et al. 2008) 168

8.6 Stochastic Correlation, Stochastic Volatility, and Asset Modeling (Lu and Meissner 2012) 172

8.7 Conclusion: Should We Model Financial Correlations with a Stochastic Process? 176

8.8 Summary 177

Practice Questions and Problems 177

References and Suggested Readings 178

CHAPTER 9
Quantifying Market Correlation Risk 181

9.1 The Correlation Risk Parameters Cora and Gora 182

9.2 Examples of Cora in Financial Practice 184

9.3 Cora and Gora in Investments 187

9.4 Cora in Market Risk Management 189

9.5 Gora in Market Risk Management 197

9.6 Summary 198

Practice Questions and Problems 199

References and Suggested Readings 200

CHAPTER 10
Quantifying Credit Correlation Risk 201

10.1 Credit Correlation Risk in a CDS 203

10.2 Pricing CDSs, Including Reference Entity–Counterparty Credit Correlation 205

10.3 Pricing CDSs, Including the Credit Correlation of All Three Entities 215

10.4 Correlation Risk in a Collateralized Debt Obligation (CDO) 227

10.5 Summary 231

Practice Questions and Problems 232

References and Suggested Readings 233

CHAPTER 11
Hedging Correlation Risk 235

11.1 What Is Hedging? 235

11.2 Why Is Hedging Financial Correlations Challenging? 238

11.3 Two Examples to Hedge Correlation Risk 239

11.4 When to Use Options and When to Use Futures to Hedge 247

11.5 Summary 248

Practice Questions and Problems 249

References and Suggested Readings 249

CHAPTER 12
Correlation and Basel II and III 251

12.1 What Are the Basel I, II, and III Accords? Why Do Most Sovereigns Implement The Accords? 251

12.2 Basel II and III’s Credit Value at Risk (CVaR) Approach 252

12.3 Basel II’s Required Capital (RC) for Credit Risk 258

12.4 Credit Value Adjustment (CVA) Approach without Wrong-Way Risk (WWR) in The Basel Accord 261

12.5 Credit Value Adjustment (CVA) with Wrong-Way Risk in the Basel Accord 264

12.6 How Do the Basel Accords Treat Double Defaults? 269

12.7 Debt Value Adjustment (DVA): If Something Sounds Too Good to Be True . . . 274

12.8 Funding Value Adjustment (FVA) 276

12.9 Summary 278

Practice Questions and Problems 280

References and Suggested Readings 280

CHAPTER 13
The Future of Correlation Modeling 283

13.1 Numerical Finance: Solving Financial Problems Numerically with the Help of Graphical Processing Units (GPUs) 283

13.2 New Developments in Artificial Intelligence and Financial Modeling 287

13.3 Summary 298

Practice Questions and Problems 300

References and Suggested Readings 300

Glossary 303

Index 315

Read More Show Less

Customer Reviews

Be the first to write a review
( 0 )
Rating Distribution

5 Star

(0)

4 Star

(0)

3 Star

(0)

2 Star

(0)

1 Star

(0)

Your Rating:

Your Name: Create a Pen Name or

Barnes & Noble.com Review Rules

Our reader reviews allow you to share your comments on titles you liked, or didn't, with others. By submitting an online review, you are representing to Barnes & Noble.com that all information contained in your review is original and accurate in all respects, and that the submission of such content by you and the posting of such content by Barnes & Noble.com does not and will not violate the rights of any third party. Please follow the rules below to help ensure that your review can be posted.

Reviews by Our Customers Under the Age of 13

We highly value and respect everyone's opinion concerning the titles we offer. However, we cannot allow persons under the age of 13 to have accounts at BN.com or to post customer reviews. Please see our Terms of Use for more details.

What to exclude from your review:

Please do not write about reviews, commentary, or information posted on the product page. If you see any errors in the information on the product page, please send us an email.

Reviews should not contain any of the following:

  • - HTML tags, profanity, obscenities, vulgarities, or comments that defame anyone
  • - Time-sensitive information such as tour dates, signings, lectures, etc.
  • - Single-word reviews. Other people will read your review to discover why you liked or didn't like the title. Be descriptive.
  • - Comments focusing on the author or that may ruin the ending for others
  • - Phone numbers, addresses, URLs
  • - Pricing and availability information or alternative ordering information
  • - Advertisements or commercial solicitation

Reminder:

  • - By submitting a review, you grant to Barnes & Noble.com and its sublicensees the royalty-free, perpetual, irrevocable right and license to use the review in accordance with the Barnes & Noble.com Terms of Use.
  • - Barnes & Noble.com reserves the right not to post any review -- particularly those that do not follow the terms and conditions of these Rules. Barnes & Noble.com also reserves the right to remove any review at any time without notice.
  • - See Terms of Use for other conditions and disclaimers.
Search for Products You'd Like to Recommend

Recommend other products that relate to your review. Just search for them below and share!

Create a Pen Name

Your Pen Name is your unique identity on BN.com. It will appear on the reviews you write and other website activities. Your Pen Name cannot be edited, changed or deleted once submitted.

 
Your Pen Name can be any combination of alphanumeric characters (plus - and _), and must be at least two characters long.

Continue Anonymously

    If you find inappropriate content, please report it to Barnes & Noble
    Why is this product inappropriate?
    Comments (optional)