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The Present, Future and Imperfect of Financial Risk Management

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  • Carol Alexandra

    ()
    (ICMA Centre, University of Reading)

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    Abstract

    Current research on financial risk management applications of econometrics centres on the accurate assessment of individual market and credit risks with relatively little theoretical or applied econometric research on other types of risk, aggregation risk, data incompleteness and optimal risk control. We argue that consideration of the model risk arising from crude aggregation rules and inadequate data could lead to a new class of reduced form Bayesian risk assessment models. Logically, these models should be set within a common factor framework that allows proper risk aggregation methods to be developed. We explain how such a framework could also provide the essential links between risk control, risk assessments and the optimal allocation of resources.

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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2003-12.pdf
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    Bibliographic Info

    Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2003-12.

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    Length: 25 pages
    Date of creation: Sep 2003
    Date of revision: Feb 2004
    Publication status: Published in Journal of Financial Econometrics 2005, 3:1, 3-25
    Handle: RePEc:rdg:icmadp:icma-dp2003-12

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    Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
    Phone: +44 (0) 118 378 8226
    Fax: +44 (0) 118 975 0236
    Web page: http://www.henley.reading.ac.uk/
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    Related research

    Keywords: Financial risk assessment; risk control; RAROC; economic capital; regulatory capital; optimal allocation of resources;

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    References

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    1. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
    2. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
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    5. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Tak Siu & Howell Tong & Hailiang Yang, 2004. "On Bayesian Value at Risk: From Linear to Non-Linear Portfolios," Asia-Pacific Financial Markets, Springer, vol. 11(2), pages 161-184, June.
    7. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    8. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers 132, Bank of England.
    9. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April.
    10. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    11. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.).
    12. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
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