Author Meissner, Gunter
Title Correlation Risk Modeling and Management : An Applied Guide Including the Basel III Correlation Framework - with Interactive Models in Excel / VBA
Imprint New York : John Wiley & Sons, Incorporated, 2014
©2014
book jacket
Edition 1st ed
Descript 1 online resource (352 pages)
text txt rdacontent
computer c rdamedia
online resource cr rdacarrier
Series Wiley Finance Ser
Wiley Finance Ser
Note Correlation Risk Modeling and Management: An Applied Guide Including the Basel III Correlation Framework-with Interactive Correlation Models in Excel®/VBA -- Contents -- Preface -- Acknowledgments -- About the Author -- Chapter 1: Some Correlation Basics: Properties, Motivation, Terminology -- 1.1 What Are Financial Correlations? -- 1.2 What Is Financial Correlation Risk? -- 1.3 Motivation: Correlations and Correlation Risk Are Everywhere in Finance -- 1.3.1 Investments and Correlation -- 1.3.2 Trading and Correlation -- 1.3.3 Risk Management and Correlation -- 1.3.4 The Global Financial Crisis of 2007 to 2009 and Correlation -- 1.3.5 Regulation and Correlation -- 1.4 How Does Correlation Risk Fit into the Broader Picture of Risks in Finance? -- 1.4.1 Correlation Risk and Market Risk -- 1.4.2 Correlation Risk and Credit Risk -- 1.4.3 Correlation Risk and Systemic Risk -- 1.4.4 Correlation Risk and Concentration Risk -- 1.5 A Word on Terminology -- 1.6 Summary -- Appendix 1A: Dependence and Correlation -- Dependence -- Correlation -- Independence and Uncorrelatedness -- Appendix 1B: On Percentage and Logarithmic Changes -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 2: Empirical Properties of Correlation: How Do Correlations Behave in the Real World? -- 2.1 How Do Equity Correlations Behave in a Recession, Normal Economic Period, or Strong Expansion? -- 2.2 Do Equity Correlations Exhibit Mean Reversion? -- 2.2.1 How Can We Quantify Mean Reversion? -- 2.3 Do Equity Correlations Exhibit Autocorrelation? -- 2.4 How Are Equity Correlations Distributed? -- 2.5 Is Equity Correlation Volatility an Indicator for Future Recessions? -- 2.6 Properties of Bond Correlations and Default Probability Correlations -- 2.7 Summary -- Practice Questions and Problems -- References and Suggested Readings
Chapter 3: Statistical Correlation Models-Can We Apply Them to Finance? -- 3.1 A Word on Financial Models -- 3.1.1 The Financial Model Itself -- 3.1.2 The Calibration of the Model -- 3.1.3 Mindfulness about Models -- 3.2 Statistical Correlation Measures -- 3.2.1 The Pearson Correlation Approach and Its Limitations for Finance -- 3.2.2 Spearman's Rank Correlation -- 3.2.3 Kendall's T -- 3.3 Should We Apply Spearman's Rank Correlation and Kendall's T in Finance? -- 3.4 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 4: Financial Correlation Modeling-Bottom-Up Approaches -- 4.1 Correlating Brownian Motions (Heston 1993) -- 4.1.1 Applications of the Heston Model -- 4.2 The Binomial CorrelationMeasure -- 4.2.1 Application of the Binomial Correlation Measure -- 4.3 Copula Correlations -- 4.3.1 The Gaussian Copula -- 4.3.2 Simulating the Correlated Default Time for Multiple Assets -- 4.3.3 Finding the Correlated Default Time in a Continuous Time Framework Using Survival Probabilities -- 4.3.4 Copula Applications -- 4.3.5 Limitations of the Gaussian Copula -- 4.4 Contagion Correlation Models -- 4.5 Summary -- Appendix 4A: Cholesky Decomposition -- Example: Cholesky Decomposition for Three Assets -- Appendix 4B: A Short Proof of the Gaussian Default Time Copula -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 5: Valuing CDOs with the Gaussian Copula-What Went Wrong? -- 5.1 CDO Basics-What Is a CDO? Why CDOs? Types of CDOs -- 5.1.1 What Is a CDO? -- 5.1.2 Why CDOs? -- 5.1.3 Types of CDOs -- 5.2 Valuing CDOs -- 5.2.1 Deriving the Default Probability for Each Asset in a CDO -- 5.2.2 Deriving the Default Correlation of the Assets in a CDO -- 5.2.3 Recovery Rate -- 5.3 Conclusion: The Gaussian Copula and CDOs-What Went Wrong? -- 5.3.1 Complexity of CDOs
5.3.2 The Gaussian Copula Model to Value CDOs -- 5.4 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 6: The One-Factor Gaussian Copula (OFGC) Model-Too Simplistic? -- 6.1 The Original One-Factor Gaussian Copula (OFGC) Model -- 6.2 Valuing Tranches of a CDO with the OFGC -- 6.2.1 Randomness in the OFGC Model -- 6.3 The Correlation Concept in the OFGC Model -- 6.3.1 The Loss Distribution of the OFGC Model -- 6.3.2 The Tranche Spread-Correlation Relationship -- 6.4 The Relationship between the OFGC and the Standard Copula -- 6.5 Extensions of the OFGC -- 6.5.1 Further Extensions of the OFGC Model: Hybrid CID-Contagion Modeling -- 6.6 Conclusion-Is the OFGC Too Simplistic to Evaluate Credit Risk in Portfolios? -- 6.6.1 Benefits of the OFGC Model -- 6.6.2 Limitations of the OFGC Model -- 6.7 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 7: Financial Correlation Models-Top-Down Approaches -- 7.1 Vasicek's 1987 One-Factor Gaussian Copula (OFGC) Model Revisited -- 7.2 Markov Chain Models -- 7.2.1 Inducing Correlation via Transition Rate Volatilities -- 7.2.2 Inducing Correlation via Stochastic Time Change -- 7.3 Contagion Default Modeling in Top-Down Models -- 7.4 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 8: Stochastic Correlation Models -- 8.1 What Is a Stochastic Process? -- 8.2 Sampling Correlation from a Distribution (Hull and White 2010) -- 8.3 Dynamic Conditional Correlations (DCCs) (Engle 2002) -- 8.4 Stochastic Correlation-Standard Models -- 8.4.1 The Geometric Brownian Motion (GBM) -- 8.4.2 The Vasicek 1977 Model -- 8.4.3 The Bounded Jacobi Process -- 8.5 Extending the Heston Model with Stochastic Correlation (Buraschi et al. 2010 -- Da Fonseca et al. 2008)
8.5.1 Critical Appraisal of the Buraschi et al. (2010) and Da Fonseca et al. (2008) Model -- 8.6 Stochastic Correlation, Stochastic Volatility, and Asset Modeling (Lu and Meissner 2012) -- 8.6.1 Asset Modeling -- 8.7 Conclusion: Should We Model Financial Correlations with a Stochastic Process? -- 8.8 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 9: Quantifying Market Correlation Risk -- 9.1 The Correlation Risk Parameters Cora and Gora -- 9.2 Examples of Cora in Financial Practice -- 9.2.1 Option Vanna -- 9.2.2 Option Cora and Gora -- 9.3 Cora and Gora in Investments -- 9.4 Cora in Market Risk Management -- 9.4.1 Gap-Cora -- 9.5 Gora in Market Risk Management -- 9.6 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 10: Quantifying Credit Correlation Risk -- 10.1 Credit Correlation Risk in a CDS -- 10.2 Pricing CDSs, Including Reference Entity-Counterparty Credit Correlation -- 10.2.1 The Model -- 10.3 Pricing CDSs, Including the Credit Correlation of All Three Entities -- 10.3.1 The Model -- 10.3.2 Cora for CDSs -- 10.3.3 Gora for CDSs -- 10.4 Correlation Risk in a Collateralized Debt Obligation (CDO) -- 10.4.1 Types of Risk in a CDO -- 10.4.2 Cora of a CDO -- 10.4.3 Gora of a CDO -- 10.5 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 11: Hedging Correlation Risk -- 11.1 What Is Hedging? -- 11.2 Why Is Hedging Financial Correlations Challenging? -- 11.3 Two Examples to Hedge Correlation Risk -- 11.3.1 Hedging CDS Counterparty Risk with a Correlation-Dependent Option -- 11.3.2 Hedging VaR Correlation Risk with a Correlation Swap -- 11.4 When to Use Options and When to Use Futures to Hedge -- 11.5 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 12: Correlation and Basel II and III
12.1 What Are the Basel I, II, and III Accords? Why Do Most Sovereigns Implement The Accords? -- 12.2 Basel II and III's Credit Value at Risk (CVaR) Approach -- 12.2.1 Properties of Equation (12.7) -- 12.3 Basel II's Required Capital (RC) for Credit Risk -- 12.3.1 The Default Probability-Default Correlation Relationship -- 12.4 Credit Value Adjustment (CVA) Approach without Wrong-Way Risk (WWR) in The Basel Accord -- 12.5 Credit Value Adjustment (CVA) with Wrong-Way Risk in the Basel Accord -- 12.5.1 How Do Basel II and III Quantify Wrong-Way Risk? -- 12.6 How Do the Basel Accords Treat Double Defaults? -- 12.6.1 Substitution Approach -- 12.6.2 Double Default Approach -- 12.7 Debt Value Adjustment (DVA): If Something Sounds Too Good to Be True . . . -- 12.8 Funding Value Adjustment (FVA) -- 12.9 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Chapter 13: The Future of Correlation Modeling -- 13.1 Numerical Finance: Solving Financial Problems Numerically with the Help of Graphical Processing Units (GPUs) -- 13.1.1 GPU Technology -- 13.1.2 A GPU Model for Valuing Portfolio Counterparty Risk -- 13.1.3 Benefits of GPUs -- 13.1.4 Limitations of GPUs -- 13.2 New Developments in Artificial Intelligence and Financial Modeling -- 13.2.1 Neural Networks -- 13.2.2 Fuzzy Logic -- 13.2.3 Genetic Algorithms -- 13.2.4 Chaos Theory -- 13.2.5 Bayesian Probabilities -- 13.3 Summary -- Practice Questions and Problems -- References and Suggested Readings -- Glossary -- Index
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
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Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2020. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries
Link Print version: Meissner, Gunter Correlation Risk Modeling and Management : An Applied Guide Including the Basel III Correlation Framework - with Interactive Models in Excel / VBA New York : John Wiley & Sons, Incorporated,c2014 9781118796900
Subject Financial institutions -- Risk management -- Econometric models
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