Elements of Financial Risk Management (6)
风险管理操作及相关体系
4
Controlling Risks 风险的控制
Methods to control the risks 控制风险的方法
– Eliminate or avoid - decide not to pursue a specific activity 消除或避免—决定不进行某一行为 — – Transfer - another party assumes the risk - e.g., loan participation 转移—另一方承担风险—如联合贷款 – Reduce - mitigation techniques such as hedging 降低—采用化解方法，如对冲 – Retain - keep and monitor the risk 保留—保持并监测风险
16
Comprehensive Internal Controls 全面内控管理
Key elements of internal controls: 内控管理的主要因素：
– Adequate segregation of duties 恰当的职责分工 – Independent testing - e.g. audit 独立检测—如审计 独立检测— – Appropriate to the type and level of risks 与风险种类、水平相一致 – Clear lines of authority and responsibility 权责清晰 – Appropriate reporting lines 报告渠道畅通
Unit 20 Financial Management
Unit 20 Financial Managementthe Brief History of Financial Management FieldIntroductionFinancial managers have the primary responsibility for acquiring funds (cash) needed by a firm and for directing these funds into projects that will maximize the value of the firm for its owners. The field of financial management is an exciting and challenging one. Any business has important financial concerns and its success or failure depends in a large part on the quality of its financial decisions. Every key decision made by a firm's managers has important financial implications. Managers daily face questions like the following.The Finance Function财务职能Introduction引论Financial managers have the primary responsibility for acquiring funds (cash) needed by a firm and for directing these funds into projects that will maximize the value of the firm for its owners. 财务经理的基本职责是获得公司所需要的资金并把资金投入到能使所有者财富最大化的项目中去。
企业财务管理基础知识英文版
The income statement includes items such as operating income, operating costs, taxes and surcharges, period expenses, operating profit, and total profit. Through these data, the profitability and operating efficiency of the enterprise can be understood.
Fundamentals of Enterprise Financial Management
CATALOGUE
目录
Overview of Enterprise Financial ManagementFinancial statements and analysisCapital budgeting and investment decision makingFundraising and Capital Structure ManagementWorking capital management
Financial ratio analysis: By calculating various financial ratios, such as current ratio, quick ratio, inventory turnover ratio, accounts receivable turnover ratio, etc., evaluate a company's debt paying ability, operating ability, and profitability.
中英文外文文献翻译中小企业财务风险管理研究
本科毕业设计（论文）中英文对照翻译(此文档为word格式,下载后您可任意修改编辑!)作者：Bernard G期刊：International Journal of Information Business and Management 第5卷，第3期，pp：41-51.原文The research of financial Risk Management in SMESBernard GINTRUDUCTIONSmall and medium sized enterprises (SME) differ from large corporations among other aspects first of all in their size. Theirimportance in the economy however is large . SME sector of India is considered as the backbone of economy contributing to 45% of the industrial output, 40% of India’s exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. With approximately 30 million SMEs in India, 12 million people expected to join the workforce in next 3 years and the sector growing at a rate of 8% per year, Government of India is taking different measures so as to increase their competitiveness in the international market. There are several factors that have contributed towards the growth of Indian SMEs. Few of these include; funding of SMEs by local and foreign investors, the new technology that is used in the market is assisting SMEs add considerable value to their business, various trade directories and trade portals help facilitate trade between buyer and supplier and thus reducing the barrier to trade With this huge potential, backed up by strong government support; Indian SMEs continue to post their growth stories. Despite of this strong growth, there is huge potential amongst Indian SMEs that still remains untapped. Once this untapped potential becomes the source for growth of these units, there would be no stopping to India posting a GDP higher than that of US and China and becoming the world’s economic powerhouse. RESEARCH QUESTIONRisk and economic activity are inseparable. Every business decisionand entrepreneurial act is connected with risk. This applies also to business of small and medium sized enterprises as they are also facing several and often the same risks as bigger companies. In a real business environment with market imperfections they need to manage those risks in order to secure their business continuity and add additional value by avoiding or reducing transaction costs and cost of financial distress or bankruptcy. However, risk management is a challenge for most SME. In contrast to larger companies they often lack the necessary resources, with regard to manpower, databases and specialty of knowledge to perform a standardized and structured risk management. The result is that many smaller companies do not perform sufficient analysis to identify their risk. This aspect is exacerbated due to a lack in literature about methods for risk management in SME, as stated by Henschel: The two challenging aspects with regard to risk management in SME are therefore: 1. SME differ from large corporations in many characteristics 2. The existing research lacks a focus on risk management in SME The following research question will be central to this work: 1.how can SME manage their internal financial risk? 2.Which aspects, based on their characteristics, have to be taken into account for this? 3.Which mean fulfils the requirements and can be applied to SME? LITERA TURE REVIEWIn contrast to larger corporations, in SME one of the owners is oftenpart of the management team. His intuition and experience are important for managing the company. Therefore, in small companies, the (owner-) manager is often responsible for many different tasks and important decisions. Most SME do not have the necessary resources to employ specialists on every position in the company. They focus on their core business and have generalists for the administrative functions. Behr and Guttler find that SME on average have equity ratios lower than 20%. The different characteristics of management, position on procurement and capital markets and the legal framework need to be taken into account when applying management instruments like risk management. Therefore the risk management techniques of larger corporations cannot easily be applied to SME. In practice it can therefore be observed that although SME are not facing less risks and uncertainties than large companies, their risk management differs from the practices in larger companies. The latter have the resources to employ a risk manager and a professional, structured and standardized risk management system. In contrast to that, risk management in SME differs in the degree of implementation and the techniques applied. Jonen & Simgen-Weber With regard to firm size and the use of risk management. Beyer, Hachmeister & Lampenius observe in a study from 2010 that increasing firm size among SME enhances the use of risk management. This observation matches with the opinion of nearly 10% of SME, which are of the opinion, that risk management is onlyreasonable in larger corporations. Beyer, Hachmeister & Lampenius find that most of the surveyed SME identify risks with help of statistics, checklists, creativity and scenario analyses. reveals similar findings and state that most companies rely on key figure systems for identifying and evaluating the urgency of business risks. That small firms face higher costs of hedging than larger corporations. This fact is reducing the benefits from hedging and therefore he advises to evaluate the usage of hedging for each firm individually. The lacking expertise to decide about hedges in SME is also identified by Eckbo, According to his findings, smaller companies often lack the understanding and management capacities needed to use those instruments. METHODOLOGY USE OF FINANCIAL ANAL YSIS IN SME RISK MANAGEMENT How financial analysis can be used in SME risk management? Development of financial risk overview for SME The following sections show the development of the financial risk overview. After presenting the framework, the different ratios will be discussed to finally present a selection of suitable ratios and choose appropriate comparison data. Framework for financial risk overviewThe idea is to use a set of ratios in an overview as the basis for the financial risk management.This provides even more information than the analysis of historicaldata and allows reacting fast on critical developments and managing the identified risks. However not only the internal data can be used for the risk management. In addition to that also the information available in the papers can be used. Some of them state average values for the defaulted or bankrupt companies one year prior bankruptcy -and few papers also for a longer time horizon. Those values can be used as a comparison value to evaluate the risk situation of the company. For this an appropriate set of ratios has to be chosen. The ratios, which will be included in the overview and analysis sheet, should fulfill two main requirements. First of all they should match the main financial risks of the company in order to deliver significant information and not miss an important risk factor. Secondly the ratios need to be relevant in two different ways. On the one hand they should be applicable independently of other ratios. This means that they also deliver useful information when not used in a regression, as it is applied in many of the papers. On the other hand to be appropriate to use them, the ratios need to show a different development for healthy companies than for those under financial distress. The difference between the values of the two groups should be large enough to see into which the observed company belongs. Evaluation of ratios for financial risk overview When choosing ratios from the different categories, it needs to be evaluated which ones are the most appropriate ones. For this some comparison values are needed inorder to see whether the ratios show different values and developments for the two groups of companies. The most convenient source for the comparison values are the research papers as their values are based on large samples of annual reports and by providing average values outweigh outliers in the data. Altman shows a table with the values for 8 different ratios for the five years prior bankruptcy of which he uses 5, while Porporato & Sandin use 13 ratios in their model and Ohlson bases his evaluation on 9 figures and ratios [10]. Khong, Ong & Y ap and Cerovac & Ivicic also show the difference in ratios between the two groups, however only directly before bankruptcy and not as a development over time [9]. Therefore this information is not as valuable as the others ([4][15]).In summary, the main internal financial risks in a SME should be covered by financial structure, liquidity and profitability ratios, which are the main categories of ratios applied in the research papers.Financial structureA ratio used in many of the papers is the total debt to total assets ratio, analyzing the financial structure of the company. Next to the papers of Altman, Ohlson and Porporato & Sandin also Khong, Ong & Y ap and Cerovac & Ivicic show comparison values for this ratio. Those demonstrate a huge difference in size between the bankrupt andnon-bankrupt groups.Therefore the information of total debt/total assets is more reliable and should rather be used for the overview. The other ratios analyzing the financial structure are only used in one of the papers and except for one the reference data only covers the last year before bankruptcy. Therefore a time trend cannot be detected and their relevance cannot be approved.译文中小企业财务风险管理研究博纳德引言除了其他方面，中小型企业(SME)与大型企业的不同之处首先在于他们的规模不同，但是，他们在国民经济中同样具有重要的作用。
财务风险管理外文翻译英文文献
财务风险管理中英文资料翻译Financial Risk ManagementAlthough financial risk has increased significantly in recent years, risk and risk management are not contemporary issues. The result of increasingly global markets is that risk may originate with events thousands of miles away that have nothing to do with the domestic market. Information is available instantaneously, which means that change, and subsequent market reactions, occur very quickly. The economic climate and markets can be affected very quickly by changes in exchange rates, interest rates, and commodity prices. Counterparties can rapidly become problematic. As a result, it is important to ensure financial risks areidentified and managed appropriately.Preparation is a key component of risk management.What Is Risk?Risk provides the basis for opportunity. The terms risk and exposure have subtle differences in their meaning. Risk refers to the probability of loss,while exposure is the possibility of loss, although they are often used interchangeably. Risk arises as a result of exposure.Exposure to financial markets affects most organizations, either directly or indirectly. When an organization has financial market exposure, there is a possibility of loss but also an opportunity for gain or profit. Financial market exposure may provide strategic or competitive benefits.Risk is the likelihood of losses resulting from events such as changes in market prices. Events with a low probability of occurring, but that may result in a high loss, are particularly troublesome because they are often not anticipated. Put another way, risk is the probable variability of returns.Since it is not always possible or desirable to eliminate risk, understanding it is an important step in determining how to manage it. Identifying exposures and risks forms the basis for an appropriate financial risk management strategy.How Does Financial Risk?Financial risk arises through countless transactions of a financial nature,including sales and purchases, investments and loans, and various other businessactivities. It can arise as a result of legal transactions, new projects, mergers andacquisitions, debt financing, the energy component of costs, or through the activitiesof management, stakeholders, competitors, foreign governments, or weather. When financial prices change dramatically, it can increase costs, reduce revenues,orotherwise adversely impact the profitability of an organization. Financial fluctuationsmay make it more difficult to plan and budget, price goods and services, and allocatecapital.There are three main sources of financialrisk:1. Financial risks arising from an organization ' s expionsmuraerktoetcphrai cnegse,ssuch as interest rates, exchange rates, and commodityprices.2. Financial risks arising from the actions of, and transactions with, other organizations such as vendors, customers, and counterparties in derivatives transactions3. Financial risks resulting from internal actions or failures of the organization,particularly people, processes, andsystemsWhat Is Financial Risk Management?Financial risk management is a process to deal with the uncertaintiesresultingfrom financial markets. It involves assessing the financial risks facing an organizationand developing management strategies consistent with internal priorities and policies.Addressing financial risks proactively may provide an organization with a competitiveadvantage.It also ensures that management,operational staff, stakeholders, and theboard of directors are in agreement on key issues ofrisk.Managing financial risk necessitates making organizational decisions about risksthat are acceptable versus those that are not. The passive strategy of taking no actionis the acceptance of all risks bydefault.Organizations manage financial risk using a variety of strategies andproducts. Itis important to understand how these products and strategies work to reduceriskwithin the context of the organization toleran'ces arinskdobjectives.Strategies for risk management often involve derivatives. Derivatives are traded widely among financial institutions and on organized exchanges. The value of derivatives contracts, such as futures, forwards, options, and swaps, is derived from the price of the underlying asset. Derivatives trade on interest rates, exchange rates, commodities, equity and fixed income securities, credit, and even weather.The products and strategies used by market participants to manage financial risk are the same ones used by speculators to increase leverage and risk. Although it can be argued that widespread use of derivatives increases risk, the existence of derivatives enables those who wish to reduce risk to pass it along to those who seek risk and its associated opportunities.The ability to estimate the likelihood of a financial loss is highly desirable.However, standard theories of probability often fail in the analysis of financial markets. Risks usually do not exist in isolation, and the interactions of several exposures may have to be considered in developing an understanding of how financial risk arises. Sometimes, these interactions are difficult to forecast, since they ultimately depend on human behavior.The process of financial risk management is an ongoing one. Strategies need to be implemented and refined as the market and requirements change. Refinements may reflect changing expectations about market rates, changes to the business environment, or changing international political conditions, for example. In general, the process can be summarized as follows: 1、Identify and prioritize key financial risks.2、Determine an appropriate level of risk tolerance.3、Implement risk management strategy in accordance with policy.4、Measure, report, monitor, and refine as needed.DiversificationFor many years, the riskiness of an asset was assessedbased only on the variability of its returns. In contrast, modern portfolio theory considers not only an asset ' s riskiness, but also its contributiotno the overall riskiness of the portfolio towhich it is added. Organizations may have an opportunity to reduce risk as aresult of risk diversification.In portfolio management terms, the addition of individual components to a portfolio provides opportunities for diversification, within limits. A diversified portfolio contains assets whose returns are dissimilar, in other words, weakly or negatively correlated with one another. It is useful to think of the exposures of an organization as a portfolio and consider the impact of changes or additions on the potential risk of the total.Diversification is an important tool in managing financial risks. Diversification among counterparties may reduce the risk that unexpected events adversely impact the organization through defaults. Diversification among investment assetsreduces the magnitude of loss if one issuer fails.Diversification of customers, suppliers, and financing sources reduces the possibility that an organization will have its business adversely affected by changes outside management' csontrol. Although the risk of loss still exists, diversification may reduce the opportunity for large adverse outcomes.Risk Management ProcessThe process of financial risk management comprises strategies that enable an organization to manage the risks associated with financial markets. Risk management is a dynamic process that should evolve with an organization and its business. It involves and impacts many parts of an organization including treasury, sales, marketing, legal, tax, commodity, and corporate finance.The risk management process involves both internal and external analysis. The first part of the process involves identifying and prioritizing the financialrisks facing an organization and understanding their relevance. It may be necessary to examine the organization and its products, management, customers, suppliers, competitors, pricing, industry trends, balance sheet structure, and position in the industry. It is also necessary to consider stakeholders and their objectives and tolerance for risk.Once a clear understanding of the risks emerges, appropriate strategies canbe implemented in conjunction with risk management policy. For example, it might be possible to change where and how business is done, thereby reducing the organization ' s exposure and risk. Alternatively, exisetixnpgosures may be managed with derivatives. Another strategy for managing risk is to accept allrisks and the possibility of losses.There are three broad alternatives for managing risk:1.Do nothing and actively, or passively by default, accept all risks.2.Hedge a portion of exposures by determining which exposures can and should be hedged.3.Hedge all exposures possible.Measurement and reporting of risks provides decision makers with information to execute decisions and monitor outcomes, both before and after strategies are taken to mitigate them. Since the risk management process is ongoing, reportingand feedback can be used to refine the system by modifying or improving strategies.An active decision-making process is an important component of risk management.Decisions about potential loss and risk reduction provide a forum for discussion of important issues and the varying perspectives of stakeholders.Factors that Impact Financial Rates and PricesFinancial rates and prices are affected by a number of factors. It is essential to understand the factors that impact markets because those factors, in turn, impact the potential risk of an organization.Factors that Affect Interest RatesInterest rates are a key component in many market prices and an important economic barometer. They are comprised of the real rate plus a component for expected inflation, since inflation reduces the purchasing power of a lender ' s assets .The greater the term to maturity, the greater the uncertainty. Interest rates are also reflective of supply and demand for funds and credit risk.Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of capital. Most companies and governments require debt financing for expansion and capital projects. When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in otherfinancial markets, so their impact is far-reaching.Other components to the interest rate may include a risk premium to reflect the creditworthiness of a borrower. For example, the threat of political or sovereign risk can cause interest rates to rise, sometimes substantially, as investors demand additional compensation for the increased risk of default.Factors that influence the level of market interest rates include: 1、Expected levels of inflation 2、General economic conditions 3、Monetary policy and the stance of the central bank 4、Foreign exchange market activity 5、Foreign investor demand for debt securities 6、Levels of sovereign debt outstanding 7、Financial and political stabilityYield CurveThe yield curve is a graphical representation of yields for a range of terms to maturity. For example, a yield curve might illustrate yields for maturity from one day (overnight) to 30-year terms. Typically, the rates are zero coupon government rates.Since current interest rates reflect expectations, the yield curve providesuseful 's expectations oinf tfeurteusret rates. Implied interest rates for forward-starting terms can be calculated using the information in the yieldcurve. For example, using rates for one- and two-year maturities, the expected one-year interestrate beginning in one year The shape of the yield curve is widely analyzed and monitored by marketparticipants. As a gauge of expectations, it is often considered to be a predictor of future economic activity and may provide signals of a pending change in economic fundamentals.The yield curve normally slopes upward with a positive slope, aslenders/investors demand higher rates from borrowers for longer lending terms. Since the chance of a borrower default increases with term to maturity, lenders demand to be compensated accordingly.Interest rates that make up the yield curve are also affected by the expected rate of inflation. Investors demand at least the expected rate of inflation from borrowers, in addition to lending and risk components. If investors expect future inflation to be higher, they will demand greater premiums for longer terms to compensatefor this uncertainty. As a result, the longer the term, the higher the interest rate (all else being equal), resulting in an upward-sloping yield curve.Occasionally, the demand for short-term funds increases substantially, and short-term interest rates may rise above the level of longer term interest rates. This results in an inversion of the yield curve and a downward slope to its appearance. The high cost of short-term funds detracts from gains that would otherwise be obtained through investment and expansion and make the economy vulnerable to slowdown or recession. Eventually, rising interest rates slow the demand for both short-term and long-term funds. A decline in all rates and a return to a normal curve may occur as a result of the slowdown.information about the markets time can be determined.Source: Karen A. Horcher, 2005.“ What Is Financial RiskManagement?”. Essentialsof Financial Risk Management, John Wiley & Sons, Inc.pp.1-22.财务风险管理尽管近年来金融风险大大增加，但风险和风险管理不是当代的主要问题。
FINANCIALMANAGEMENT
FINANCIALMANAGEMENT Financial ManagementIntroductionFinancial management plays a vital role in every organization, regardless of its size or industry. It involves the planning, organizing, controlling, and monitoring of financial resources to achieve the goals and objectives of the organization. Effective financial management helps in maximizing profits, minimizing costs, and ensuring the overall financial health of the organization.Importance of Financial ManagementFinancial management is crucial for several reasons. First, it helps in ensuring the availability of funds when needed. By accurately analyzing and predicting future cash flows, financial managers can determine the amount of funds required for various activities within the organization. This includes managing working capital, capital budgeting, and evaluating investment opportunities.Second, financial management assists in making informed business decisions. By providing financial information and analysis, managers can evaluate different alternatives and choose the most appropriate course of action. Financial management techniques such as cost analysis, breakeven analysis, and financial ratios help in assessing the financial viability and profitability of different projects or products.Third, financial management helps in mitigating financial risks. Every business faces various financial risks such as credit risk, market risk, and interest rate risk. Financial managers employ several risk management techniques such as hedging, diversification, and insurance to minimize the impact of these risks on the organization.Key Components of Financial ManagementFinancial management comprises several key components that work together to ensure effective management of resources. These components include:1. Financial Planning: Financial planning involves setting financial goals and developing strategies to achieve them. It includes forecasting sales, estimating expenses, and creating a budget that aligns with organizational objectives.2. Financial Analysis: Financial analysis involves the interpretation and evaluation of financial statements to assess the financial performance of the organization. It includes analyzing key financial ratios, such as liquidity ratios, profitability ratios, and leverage ratios.3. Capital Budgeting: Capital budgeting involves analyzing and evaluating investment opportunities to determine which projects or assets are most financially viable. This is crucial for allocating resources efficiently and ensuring optimal return on investment.4. Cash Flow Management: Cash flow management is about monitoring and controlling the inflow and outflow of cash within the organization. It involves managing working capital, maintaining appropriate cash reserves, and managing cash flows to ensure smooth operations.5. Risk Management: Risk management involves identifying, assessing, and mitigating financial risks that may impact the organization. Financial managers employ various risk management techniques such as insurance, hedging, and diversification to protect the organization from potential financial losses.6. Financial Reporting: Financial reporting involves preparing and presenting financial statements and reports to stakeholders, including shareholders, creditors, and regulatory authorities. These reports provide an overview of the financial position and performance of the organization, ensuring transparency and accountability.ConclusionFinancial management is a critical function in any organization, providing the necessary tools and techniques to manage financial resources effectively. By implementing sound financial management practices, organizations can improve profitability, minimize costs, and ensure long-term financial sustainability. Financial planning, analysis, capital budgeting, cash flow management, risk management, and financial reporting are the key components that contribute to successful financial management. It is essential for organizations to have competent financial managers who can navigate the complexities of the financial landscape and make informed decisions to drive growth and success.。
金融风险管理1-Risk Management
1.1.1 Example
Define ∆P as the profit or loss for the portfolio over a fixed horizon, say the coming month. This must be measured in a risk currency, such as the dollar. This is also the product of the initial investment value P and the future rate of return Rp. The latter is a random variable, which should be described using its probability density function. Using historical data over a long period, for example, the risk manager produces Figure 1.1.
CHAPTER 1 Risk Management
Introduction
Financial risk management is the process by which financial risks are identified, assessed, measured, and managed in order to create economic value.
1.1.2 Absolute versus Relative Risk
Absolute risk is measured in terms of shortfall relative to the initial value of the investment, or perhaps an investment in cash. Using the standard deviation as the risk measure, absolute risk in dollar term is σ(∆P)= σ(∆P/P) × P= σ(Rp) × P (1.1) Relative risk is measured relative to a benchmark index B. The deviation is e =Rp−RB, which is also known as the tracking error. In dollar terms, this is e × P. The risk is σ(e)P =[σ(Rp−RB)] × P = ω × P (1.2) where ω is called tracking error volatility (TEV).
第1章_金融风险概述
Financial Risk Management
第一节 金融风险
一
Financial Risk Management
金融风险的定义
★风险的基本含义 种种定义——
◆风险是事件未来可能结果的不确定性（可能 是收益，可能是损失或损害）。 ◆风险是遭受损失或损害的可能性（可用损失 的概率表示）。 ◆风险是遭受损失的不确定性。
第四节 金融风险的经济效应
微观经济效应 宏观经济效应
本 节 主 要 知 识 点
1 2
Financial Risk Management
第四节 金融风险的经济效应
Financial Risk Management
第一节 金融风险
5、金融风险的不可保性 在金融活动中，有一方发生了损失，必然有 另一方或几方会获得与损失方对应的收益。因 此，金融风险是一种不可保的风险，不能通过 保险公司的投保进行转移或分散（国外有存款 保险制度）。
Financial Risk Management
第一节 金融风险
当然，真正的风险是损失。 三者之间的关系—— 风险因素引发风险事件，风险事件导致损失。 风险因素是造成损失的内在原因，而风险事 件则是造成损失的外在原因。或者说，风险因 素的破坏性是通过风险事件起作用的。 因此，风险因素、风险事件、损失这三者既 有区别，又有联系。它们反映了风险的不同侧 面，共同刻划出了风险的特征。
Financial Risk Management
第一节 金融风险
风险是否等于不确定性—— Knight的观点 Knight 在《风险、不确定性 与利润》（1921）中，不承认 风险=不确定性，提出风险是有 概率分布的随机性，而不确定性 是不可能有概率分布的随机性。 虽然，Knight的观点并未被普 遍接受，但是推动了对风险的进 一步研究。
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Visualising Non-normality Using QQ Plots
• If the data were normally distributed, then the scatterplot should conform to the 45-degree line.
Figure 6.2: QQ Plot of Daily S&P 500 Returns
• 1) Sort all standardized returns in ascending order and call them zi • 2) Calculate the empirical probability of getting a value below the value i as (i-.5)/T • 3) Calculate the standard normal quantiles as • 4) Finally draw scatter plot
Learning Objectives
• We extend the Student’s t distribution to a more flexible asymmetric version. • We consider extreme value theory for modeling the tail of the conditional distribution • For each of these methods we will consider the Value-at-Risk and the expected shortfall formulas
Filtered Historical Simulation Approach
• Assume we have estimated a GARCH-type model of our portfolio variance. • Although we are comfortable with our variance model, we are not comfortable making a specific distributional assumption about the standardized returns, such as a Normal or a ~ t d distribution. • Instead we would like the past returns data to tell us about the distribution directly without making further assumptions.
Return
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20% 15% 10% 5% 0% -6.00
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Standardized Return
Learning Objectives
• We introduce the quantile-quantile (QQ) plot, which is a graphical tool better at describing tails of distributions than the histogram. • We define the Filtered Historical Simulation approach which combines GARCH with historical simulation. • We introduce the simple Cornish-Fisher approximation to VaR in non-normal distributions. • We consider the standardized Student’s t distribution and discuss the estimation of it.
Filtered Historical Simulation Approach
• To fix ideas, consider again the simple example of a GARCH(1,1) model • where • Given a sequence of past returns, we can estimate the GARCH model. • Next we calculate past standardized returns from the observed returns and from the estimated standard deviations as
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0 -8 -7 -6 -5 -4 -3 -2 -1 -2 0 1 2 3 4 5 6 7 8
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Normal Quantile
Filtered Historical Simulation Approach
• We have seen the pros and cons of both databased and model-based approaches. • The Filtered Historical Simulation (FHS) attempts to combine the best of the model-based with the best of the model-free approaches in a very intuitive fashion. • FHS combines model-based methods of variance with model-free method of distribution in the following fashion.
• Yesterday’s portfolio value would be
• The log return can now be defined as
Visualising• Allowing for a dynamic variance model we can say
Filtered Historical Simulation Approach
• We will refer to the set of standardized returns as
• To calculate the 1-day VaR using the percentile of the database of standardized residuals
• Expected shortfall (ES) for the 1-day horizon is • The ES is calculated from the historical shocks via
Filtered Historical Simulation Approach
• where the indicator function 1(*) returns a 1 if the argument is true and zero if not • FHS can generate large losses in the forecast period even without having observed a large loss in the recorded past returns
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Return Quantile
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Normal Quantile
Figure 6.2: QQ Plot of Daily S&P 500 GARCH Shocks
8 6
GARCH Shock Quantile
Non-Normal Distributions
Elements of Financial Risk Management Chapter 6 Peter Christoffersen
Overview
• Third part of the Stepwise Distribution Modeling (SDM) approach: accounting for conditional nonnormality in portfolio returns. • Returns are conditionally normal if the dynamically standardized returns are normally distributed. • Fig.6.1 illustrates how histograms from standardized returns typically do not conform to normal density • The top panel shows the histogram of the raw returns superimposed on the normal distribution and the bottom panel shows the histogram of the standardized returns superimposed on the normal distribution
• FHS deserves serious consideration by any risk management team
The Cornish-Fisher Approximation to VaR
• We consider a simple alternative way of calculating Value at Risk, which has certain advantages: • First, it allows for skewness and excess kurtosis. • Second, it is easily calculated from the empirical skewness and excess kurtosis estimates from the standardized returns. • Third, it can be viewed as an approximation to the VaR from a wide range of conditionally nonnormal distributions.