Title Details

Preface by Denis Kessler

Introduction

General presentation

Contents of the book

Acknowledgements

General references

1 Risk management: definition and historical development

1.1 History of risk management

1.2 Milestones in financial risk management

1.3 Current definition of corporate risk management

1.4 Conclusion

References

2 Theoretical determinants of risk management in non-financial firms

2.1 Value of risk management

2.1.1 Expected default costs

2.1.2 Risk premium to stakeholders

2.1.3 Expected tax payments

2.2 Comparative advantages in risk taking

2.3 Risk management and capital structure

2.4 Risk management and managerial incentives

2.5 Conclusion

References

3 Risk management and investment financing

3.1 Basic model

3.2 Illustration with the standard debt contract

3.3 Model with two random variables

3.4 Conclusion

References

Appendix 1: Value of 

Appendix 2: Standard debt contract

4 Significant determinants of risk management of non-financial firms

4.1 Rationale for the research

4.2 Significant determinants

4.2.1 Target variable or dependent variable

4.2.2 Main determinants and their measurement

4.2.3 Results of estimations

4.3 Governance and endogeneity of debt

4.3.1 Model

4.3.2 Statistical analysis

4.3.3 Empirical results

4.4 Conclusion

References

Appendix: Construction of the Tax-save variable

5 Value at risk

5.1 Example of VaR

5.2 Numerical method

5.3 Parametric method

5.4 Taking into consideration time periods

5.5 Confidence interval of the VaR

5.6 CVaR

5.7 Conclusion

References

6 Choice of portfolio and VaR constraint

6.1 Optimal benchmark portfolio of the firm

6.2 Optimal portfolio of a constrained manager

6.3 Conclusion

References

7 VaR in portfolios of assets and options

7.1 VaR as a risk measure

7.2 Models without derivatives

7.2.1 CAPM

7.2.2 Multifactor model

7.3 VaR with options

7.4 Black and Scholes model and risk management

7.5 Delta-Gamma VaR

7.6 VaR of a general portfolio

7.7 Application

7.8 Conclusion

References

8 CVaR or conditional VaR

8.1 Motivation for CVaR and coherence in risk measure

8.2 Notation and VaR

8.3 Definition of CVaR

8.4 Another way to derive CVaR with a return distribution

8.5 Example with a Student t-distribution and other examples

8.6 Conclusion: CVaR in Basel regulation

References

9 Regulation of bank risk and use of VaR

9.1 Basel Accords

9.2 Market risk regulation of 1996

9.3 Specific risks

9.4 Total required capital

9.5 Tests

9.6 Comparison between standard and internal methods with interest rate risk

9.6.1 Standard and internal methods

9.6.2 Comparison of the two methods

9.7 Conclusion

References

10 Optimal financial contracts and incentives under moral hazard

10.1 Optimal financial contracts and moral hazard

10.2 Theoretical model

10.3 Empirical application to air accident risk

10.4 Conclusion

References

Appendix: Synthesis of forms of financial contracts

11 Venture capital risk with optimal financing structure

11.1 Some statistics about venture capital

11.2 Role of venture capital firms

11.3 Venture capital firms and added value

11.4 Role of convertible debt

11.5 Information asymmetry and venture capital

11.6 Conclusion

References

12 Bank credit: scoring of individual risks

12.1 Theoretical model

12.2 Empirical analysis

12.3 Credit line and loan default

12.4 Conclusion

References

13 Portfolio management of credit risk

13.1 CreditMetrics

13.2 Review of chapters 2 and 3 of CreditMetrics

13.2.1 Chapter 2 of CreditMetrics

13.2.2 Chapter 3 of CreditMetrics

13.3 KMV Approach

13.4 Calculation of correlations

13.5 Conclusion

References

14 Quantification of banks’ operational risk

14.1 Context and presentation of operational risk

14.1.1 Basel Accord and regulation of operational risk

14.1.2 Examples

14.2 Measurement of regulatory capital

14.2.1 Basic approach

14.2.2 Standardized approach

14.2.3 Advanced measurement approach (AMA)

14.3 Calculation of regulatory capital for losses of over $1 million (LDA)

14.3.1 Scaling model in LDA models

14.3.2 Adding business cycles

14.4 Conclusion

References

15 Liquidity risk

15.1 Theoretical modelling of CDSs

15.2 Bond yield spread’s default portion

15.3 Empirical measurement of yield spreads’ default portion

15.4 Non-default portion of yield spreads

15.5 Illiquidity index

15.6 Illiquidity premium

15.7 Data

15.7.1 TRACE database

15.7.2 Markit database

15.8 Principal component analysis of liquidity risk

15.9 Empirical analysis of credit cycles

15.10 Regime detection model

15.11 Detection of default and liquidity regimes

15.12 Conclusion

References

16 LTCM

16.1 Brief history of the fund

16.2 Risk management, VaR and required capital

16.3 Portfolio optimization and leverage effect

16.4 Conclusion

References

17 Structured finance and financial crisis of 2007-2009

17.1 Structured finance

17.2 Poor risk management linked to the structured finance market

17.2.1 Lack of incentive contracts in the presence of information asymmetry

17.2.2 Poor evaluation of structured products by rating agencies

17.2.3 Poor pricing of complex financial products

17.2.4 Poor regulation of structured finance

17.3 Lessons to retain for risk management

References

Appendix: How to create an AAA CDO tranche from BBB loans

18 Risk management and corporate governance

18.1 Enron and corporate governance

18.2 Financial crisis and corporate governance

18.3 New 2002 governance rules

18.4 Risk management and governance

18.5 Administrative competence of board members

18.6 New regulation for financial institutions

18.7 Economic analysis of governance effect

18.7.1 Testable hypothesis

18.7.2 Data and variables

18.7.3 Model

18.7.4 Empirical results

18.8 Conclusion

References

Appendix: Governance of Canadian federal financial institutions

19 Risk management and industrial organization

19.1 Entry, production and hedging

19.2 Commitment to hedging

19.3 Conclusion

References

20 Real implications of corporate risk management

20.1 Real implications of corporate risk management: A review

20.2 Methodology

20.2.1 Instrumental variable

20.2.2 Essential heterogeneity models

20.3 U.S. oil producers

20.3.1 Sample construction

20.3.2 Descriptive statistics

20.3.3 Oil hedging activity

20.3.4 Univariate tests

20.4 Multivariate results

20.4.1 Firm value

20.4.2 Firm riskiness and firm accounting performance

20.5 Concluding remarks

References

Appendix: Estimated MTEs

21 Exercises

Exercise 1: Portfolio choice and the notion of value at risk (VaR)

Exercise 2: Backtesting of VaR models

Exercise 3: Calculation of VaR with different distributions and accuracy of VaR

Exercise 4: VaR for an equity portfolio with options

Exercise 5: CVaR – Conditional value at risk

Conclusion

General references

Index