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¡cová and Miloš 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
