Quantitative financial risk management : theory and practice

Content: Preface xvii     About the Editors xix     SECTION ONE Supervisory Risk Management     CHAPTER 1 Measuring Systemic Risk: Structural Approaches 3 Raimund M. Kovacevic and Georg Ch. Pflug     Systemic Risk: Definitions 4     From Structural Models to Systemic Risk 6     Measuring Systemic Risk 10     Systemic Risk and Copula Models 15     Conclusions 20     References 20     CHAPTER 2 Supervisory Requirements and Expectations for Portfolio-Level Counterparty Credit Risk Measurement and Management 22 Michael Jacobs Jr., PhD, CFA     Introduction 22     Review of the Literature 25     Supervisory Requirements for CCR 26     Conceptual Issues in CCR: Risk versus Uncertainty 41     Conclusions 44     References 44     CHAPTER 3 Nonperforming Loans in the Bank Production Technology 46 Hirofumi Fukuyama and William L. Weber     Introduction 46     Selective Literature Review 47     Method 51     Empirical Application 57     Summary and Conclusion 65     Appendix 3.1 Bank Names and Type 66     References 67     SECTION TWO Risk Models and Measures     CHAPTER 4 A Practical Guide to Regime Switching in Financial Economics 73 Iain Clacher, Mark Freeman, David Hillier, Malcolm Kemp and Qi Zhang     A Brief Look at Markov Regime Switching in Academic Economics and Finance 74     Regime Switching and Interest Rate Processes 75     Regime Switching and Exchange Rates 76     Regime Switching, Stock Returns, and Asset Allocation 77     Single-Asset Markov Models 79     Two-State Estimation 82     Three-State Estimation 84     Markov Models for Multiple Assets 85     Practical Application of Regime Switching Models for Investment Purposes 87     Intuitive Appeal of Such Models 87     Implementation Challenges 89     Selecting the    Right" Model Structure 89     Calibrating the Selected Model Type to Suitable Data 90     Drawing the Right Conclusions from the Model 93     References 95     CHAPTER 5 Output Analysis and Stress Testing for Risk Constrained Portfolios 98 Jitka Dupa!cova and Milo   Kopa     Introduction 98     Worst-Case Analysis 107     Stress Testing via Contamination 110     Conclusions and New Problems 122     References 122     CHAPTER 6 Risk Measures and Management in the Energy Sector 126 Marida Bertocchi, Rosella Giacometti and Maria Teresa Vespucci     Introduction 126     Uncertainty Characterization via Scenarios 128     Measures of Risks 132     Case Studies 137     Summary 147     References 147     SECTION THREE Portfolio Management     CHAPTER 7 Portfolio Optimization: Theory and Practice 155 William T. Ziemba     Static Portfolio Theory 155     Importance of Means 163     Stochastic Programming Approach to Asset Liability Management 167     Siemens InnoALM Pension Fund Model 182     Dynamic Portfolio Theory and Practice: The Kelly Capital Growth Approach 194     Transactions Costs 199     Some Great Investors 201     Appendix 7.1: Estimating Utility Functions and Risk Aversion 206     References 208     CHAPTER 8 Portfolio Optimization and Transaction Costs 212 Renata Mansini, Wlodzimierz Ogryczak and M. Grazia Speranza     Introduction 212     Literature Review on Transaction Costs 215     An LP Computable Risk Measure: The Semi-MAD 221     Modeling Transaction Costs 223     Non-Unique Minimum Risk Portfolio 232     Experimental Analysis 234     Conclusions 237     Appendix 238     References 239     CHAPTER 9 Statistical Properties and Tests of Efficient Frontier Portfolios 242 C J Adcock     Introduction 242     Notation and Setup 245     Distribution of Portfolio Weights 247     Empirical Study 255     Discussion and Concluding Remarks 267     References 268     SECTION FOUR Credit Risk Modelling     CHAPTER 10 Stress Testing for Portfolio Credit Risk: Supervisory Expectations and Practices 273 Michael Jacobs Jr.     Introduction and Motivation 273     Conceptual Issues in Stress Testing: Risk versus Uncertainty 276     The Function of Stress Testing 277     Supervisory Requirements and Expectations 280     Empirical Methodology: A Simple ST Example 281     Conclusion and Future Directions 291     References 293     CHAPTER 11 A Critique of Credit Risk Models with Evidence from Mid-Cap Firms 296 David E. Allen, Robert J. Powell and Abhay K. Singh     Introduction 296     Summary of Credit Model Methodologies 297     Our Empirical Methodology 302     Critique 303     Conclusions 310     References 310     CHAPTER 12 Predicting Credit Ratings Using a Robust Multicriteria Approach 312 Constantin Zopounidis     Introduction 312     Credit Scoring and Rating 315     Multicriteria Methodology 319     Empirical Analysis 325     Conclusions and Future Perspectives 330     References 331     SECTION FIVE Financial Markets     CHAPTER 13 Parameter Analysis of the VPIN (Volume-Synchronized Probability of Informed Trading) Metric 337 Jung Heon Song, Kesheng Wu and Horst D. Simon     Introduction 337     Definition of VPIN 341     Computational Cost 346     Optimization of FPR 348     Uncertainty Quantification (UQ) 353     Conclusion 360     References 362     CHAPTER 14 Covariance Specification Tests for Multivariate GARCH Models 364 Gregory Koutmos     Introduction 364     Covariance Specification Tests 365     Application of Covariance Specification Tests 367     Empirical Findings and Discussion 368     Conclusion 370     References 370     CHAPTER 15 Accounting Information in the Prediction of Securities Class Actions 372 Vassiliki Balla     Introduction 372     Literature Review 375     Methodology 376     Data 378     Results 387     Conclusions 394     References 395     About the Contributors 399     Glossary 413     Index 421