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Rethinking Risk Measurement and Reporting - Volumes I and II
Incisive Media, Nov 2010, Pages: 990
Rethinking Risk Measurement and Reporting aims to increase the readers' awareness of model and parameter uncertainty when using mathematical models in financial risk management. This book, which is being published in two volumes, helps the reader to discern that model uncertainty must be accepted as an intrinsic part of risk measurement.
The 2007-9 crisis has exposed the issue of reliability in mathematical risk quantification and highlighted the importance of taking measurement uncertainty into account when measuring and reporting risk and the subsequent decision-making process. It is essential that risk managers rethink the way they measure and control risk in order to avoid another industry shattering crisis. Uncertainty of risk figures needs to be better understood and expert judgement needs to be absorbed into the fabric of risk management. Rethinking Risk Measurement and Reporting contains the leading techniques and tools that the risk management industry will need to make the step towards a more effective risk management framework.
Both volumes of Rethinking Risk Measurement and Reporting provide critical reviews of standard risk models used in practice, useful techniques to assess model uncertainty such as expert judgement and tools that allow you to analyze the impact of this uncertainty on the final result; typically a risk figure that is used in risk control, risk management or decision making. Emphasis is given to Bayesian methods, by which it is possible to analyze model uncertainty in a statistically sound and efficient way.
The two volumes present practical examples relating to risk types and, in addition, you the reader will gain an overall picture of a ‘complete’, improved risk management framework:
- An Introduction to Bayesian Analysis
- Expert Judgement
- Credit Risk
- Operational Risk
- Market Risk and Time Series Analysis
- Stress Testing and Risk Aggregation
- Asset Allocation
- Reporting, Decision Making and Regulation
Klaus Böcker brings together the most highly regarded practitioners and academics within risk management to provide a well-thought out, integrated approach for improving existing risk measurement, management and reporting. The first volume includes the PRMIA 2010 award winning paper as the chapter ‘Bayesian Risk Aggregation: Correlation Uncertainty and Expert Judgement’. The experience collected in both volumes is invaluable and makes this a must read for everyone who is working in the financial industry, particularly in risk management.
QUOTES
“This volume offers the reader an introduction to Bayesian analysis followed by the consideration of techniques for eliciting and weighting expert judgments. Incorporating seasoned judgment and a greater appreciation of what we do not and cannot know about the future will be a long and arduous journey, but as the Chinese philosopher Lao-tzu said: “A journey of a thousand miles begins with a single step.” Hopefully, this book represents a first step on this much needed transformation of the practice of risk management.”
David M. Rowe, Risk Advisory
“Rethinking Risk Measurement and Reporting is an important new collection of essays thst should have a significant impact on the practice of risk management in many fields. In particular, as the world tries to learn the lessons of the global financial crisis of 2007-9 this book should be required reading for both regulatory agencies and financial institutions.
Klaus Böcker has created a well-organised and balanced development, with chapters written by some outstanding thinkers and researchers. His ‘Introduction’ displays his own careful thought and makes a powerful case for adopting the tools of Bayesian analysis and expert judgement. The over-arching theme is uncertainty: uncertainty as the driver of risk, uncertainty and probability as the language of Bayesian statistics, and the role of expert judgement in quantifying and mitigating uncertainty.
Risk is a multidisciplinary field, and Rethinking Risk Measurement and Reporting will be of interest to statisticians, psychologists and mathematical modellers, as well as to risk professionals.”
Tony O'Hagan, University of Sheffield
“The current financial crisis is a wake up call for risk measurement methodology. This book takes up the gauntlet and presents a broad array of papers addressing issues from the realm of uncertainty and risk relevant for banking and finance. As to be expected, the Bayesian paradigm figures prominently. Risk managers from academia to practice will highly welcome this volume.”
Paul Embrechts, Director of RiskLab, ETH Zurich.
“The financial crisis has clearly shown the dangers of overreliance on pure quantitative models, and there is now a widespread awareness that algorithms must be carefully calibrated through expert judgement. Yet, the latter has weaknesses of its own, unless managed through appropriate techniques and schemes. Award-winner Klaus Böcker, following his path-breaking contributions on Bayesian analysis in risk aggregation, now provides a rigorous yet refreshing book on how risk should be conceived and dealt with in financial institutions: definitely a must-read for those looking for new ideas to revive the dented axioms of risk management.”
Andrea Resti, Bocconi University
“Of the many failings of risk management prior to the crisis of 2007-09, the neglect of parameter uncertainty is perhaps the least forgivable because this uncertainty could have been measured and recognized ex-ante and with available data. Practitioners will find in this book a variety of practicable approaches to rigorous estimation and robust treatment of parameter uncertainty and other forms of model risk.”
Michael Gordy
“Bayesian analysis allows us to consider uncertainty in a rich and subtle way. We are all used to essential unpredictability, but we can also use probability theory to express our doubts about appropriate values for parameters in our models. Then the Bayesian approach goes deeper: encouraging us to confront our ignorance about how the world works and how well our models might be able to mimic what is going on. This book brings together the best researchers into how these deep ideas can benefit financial risk management.”
David Spiegelhalter, Winton Professor of the Public Understanding of Risk, University of Cambridge
Also available
Rethinking Risk Measurement and Reporting: Volume I - Uncertainty, Bayesian Analysis and Expert Judgement
Rethinking Risk Measurement and Reporting: Volume II - Examples and Applications from Finance
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