Contents

Preface

About the Editors

SECTION ONE

Supervisory Risk Management

CHAPTER 1

Measuring Systemic Risk: Structural Approaches

Raimund M. Kovacevic and Georg Ch. Pflug

Systemic Risk: Definitions

From Structural Models to Systemic Risk

Measuring Systemic Risk

Systemic Risk and Copula Models

Conclusions

References

CHAPTER 2

Supervisory Requirements and Expectations for Portfolio-Level Counterparty Credit Risk Measurement and Management

Michael Jacobs Jr., PhD, CFA

Introduction

Review of the Literature

Supervisory Requirements for CCR

Conceptual Issues in CCR: Risk versus Uncertainty

Conclusions

References

CHAPTER 3

Nonperforming Loans in the Bank Production Technology

Hirofumi Fukuyama and William L. Weber

Introduction

Selective Literature Review

Method

Empirical Application

Summary and Conclusion

Appendix 3.1 Bank Names and Type

References

SECTION TWO

Risk Models and Measures

CHAPTER 4

A Practical Guide to Regime Switching in Financial Economics

Iain Clacher, Mark Freeman, David Hillier, Malcolm Kemp and Qi Zhang

A Brief Look at Markov Regime Switching in Academic Economics and Finance

Regime Switching and Interest Rate Processes

Regime Switching and Exchange Rates

Regime Switching, Stock Returns, and Asset Allocation

Single-Asset Markov Models

Two-State Estimation

Three-State Estimation

Markov Models for Multiple Assets

Practical Application of Regime Switching Models for Investment Purposes

Intuitive Appeal of Such Models

Implementation Challenges

Selecting the “Right” Model Structure

Calibrating the Selected Model Type to Suitable Data

Drawing the Right Conclusions from the Model

References

CHAPTER 5

Output Analysis and Stress Testing for Risk Constrained Portfolios

Jitka Dupačová and Miloš Kopa

Introduction

Worst-Case Analysis

Stress Testing via Contamination

Conclusions and New Problems

References

CHAPTER 6

Risk Measures and Management in the Energy Sector

Marida Bertocchi, Rosella Giacometti and Maria Teresa Vespucci

Introduction

Uncertainty Characterization via Scenarios

Measures of Risks

Case Studies

Summary

References

SECTION THREE

Portfolio Management

CHAPTER 7

Portfolio Optimization: Theory and Practice

William T. Ziemba

Static Portfolio Theory

Importance of Means

Stochastic Programming Approach to Asset Liability Management

Siemens InnoALM Pension Fund Model

Dynamic Portfolio Theory and Practice: The Kelly Capital Growth Approach

Transactions Costs

Some Great Investors

Appendix 7.1: Estimating Utility Functions and Risk Aversion

References

CHAPTER 8

Portfolio Optimization and Transaction Costs

Renata Mansini, Wlodzimierz Ogryczak and M. Grazia Speranza

Introduction

Literature Review on Transaction Costs

An LP Computable Risk Measure: The Semi-MAD

Modeling Transaction Costs

Non-Unique Minimum Risk Portfolio

Experimental Analysis

Conclusions

Appendix

References

CHAPTER 9

Statistical Properties and Tests of Efficient Frontier Portfolios

C J Adcock

Introduction

Notation and Setup

Distribution of Portfolio Weights

Empirical Study

Discussion and Concluding Remarks

References

SECTION FOUR

Credit Risk Modelling

CHAPTER 10

Stress Testing for Portfolio Credit Risk: Supervisory Expectations and Practices

Michael Jacobs Jr.

Introduction and Motivation

Conceptual Issues in Stress Testing: Risk versus Uncertainty

The Function of Stress Testing

Supervisory Requirements and Expectations

Empirical Methodology: A Simple ST Example

Conclusion and Future Directions

References

CHAPTER 11

A Critique of Credit Risk Models with Evidence from Mid-Cap Firms

David E. Allen, Robert J. Powell and Abhay K. Singh

Introduction

Summary of Credit Model Methodologies

Our Empirical Methodology

Critique

Conclusions

References

CHAPTER 12

Predicting Credit Ratings Using a Robust Multicriteria Approach

Constantin Zopounidis

Introduction

Credit Scoring and Rating

Multicriteria Methodology

Empirical Analysis

Conclusions and Future Perspectives

References

SECTION FIVE

Financial Markets

CHAPTER 13

Parameter Analysis of the VPIN (Volume-Synchronized Probability of Informed Trading) Metric

Jung Heon Song, Kesheng Wu and Horst D. Simon

Introduction

Definition of VPIN

Computational Cost

Optimization of FPR

Uncertainty Quantification (UQ)

Conclusion

References

CHAPTER 14

Covariance Specification Tests for Multivariate GARCH Models

Gregory Koutmos

Introduction

Covariance Specification Tests

Application of Covariance Specification Tests

Empirical Findings and Discussion

Conclusion

References

CHAPTER 15

Accounting Information in the Prediction of Securities Class Actions

Vassiliki Balla

Introduction

Literature Review

Methodology

Data

Results

Conclusions

References

About the Contributors

Glossary

Index