Preface

Intended Readers

This book is intended for three types of readers with an interest in financial risk management: first, graduate and PhD students specializing in finance and economics; second, market practitioners with a quantitative undergraduate or graduate degree; third, advanced undergraduates majoring in economics, engineering, finance, or another quantitative field.
I have taught the less technical parts of the book in a fourth-year undergraduate finance elective course and an MBA elective on financial risk management. I covered the more technical material in a PhD course on options and risk management and in technical training courses on market risk designed for market practitioners.
In terms of prerequisites, ideally the reader should have taken as a minimum a course on investments including options, a course on statistics, and a course on linear algebra.

Software

A number of empirical exercises are listed at the end of each chapter. Excel spreadsheets with the data underlying the exercises can be found on the web site accompanying the book.
The web site also contains Excel files with answers to all the exercises. This way, virtually every technique discussed in the main text of the book is implemented in Excel using actual asset return data. The material on the web site is an essential part of the book.
Any suggestions regarding improvements to the book are most welcome. Please e-mail these suggestions to [email protected]. Instructors who have adopted the book in their courses are welcome to e-mail me for a set of Power-Point slides of the material in the book.

New in the Second Edition

The second edition of the book has five new chapters and much new material in existing chapters. The new chapters are as follows:
•Chapter 2 contains a comparison of static versus dynamic risk measures in light of the 2007–2009 financial crisis and the 1987 stock market crash.
•Chapter 3 provides an brief review of basic probability and statistics and gives a short introduction to time series econometrics.
•Chapter 5 is devoted to daily volatility models based on intraday data.
•Chapter 8 introduces nonnormal multivariate models including copula models.
•Chapter 12 gives a brief introduction to key ideas in the management of credit risk.

Organization of the Book

The new edition is organized into four parts:
• Part I provides various background material including empirical facts (Chapter 1), standard risk measures (Chapter 2), and basic statistical methods (Chapter 3).
• Part II develops a univariate risk model that allows for dynamic volatility (Chapter 4), incorporates intraday data (Chapter 5), and allows for nonnormal shocks to returns (Chapter 6).
• Part III gives a framework for multivariate risk modeling including dynamic correlations (Chapter 7), copulas (Chapter 8), and model simulation using Monte Carlo methods (Chapter 9).
• Part IV is devoted to option valuation (Chapter 10), option risk management (Chapter 11), credit risk management (Chapter 12), and finally backtesting and stress testing (Chapter 13).
For more information see the companion site at http://www.elsevierdirect.com/companions/9780123744487
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