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The
Changing Concept of Financial Risk
-- Cornelis
A Los
The
recent rapid accumulation of anomalous empirical research
results has made clear that the classical definition of
financial risk based on asset classes only is ready for
an epistemological change. Currently, the definition of
financial risk suffers from three major deficiencies: (1)
financial risk is insufficiently measured by the conventional
second-order moments; (2) financial risk is assumed to be
stable and all distribution moments are assumed to be time-invariant;
and (3) pricing observations are assumed to exhibit only
serial dependencies, which can be removed by simple inverse
transformations, like the geometric Brownian motion, Markov,
ARIMA, or (G)ARCH models. But (1) higher-order moments are
acknowledged by experienced traders to be influential in
asset and derivative valuations; (2) distributions of returns
are observed to be nonstationary; and (3) difficult to observe
long-term dependencies have surprised many risk managers.
Based on accumulated empirical evidence, a new functional
definition of financial risk that takes account of asset
classes, time dependence and time horizons is required to
fully capture the concept as required in the empirical financial
markets.
©
2003 Cornelis A Los. Reprinted with permission.
Conditional
Value at Risk Optimization of a Credit Bond Portfolio: A
Practical Analysis
-- Albert
Mentink
Recently,
research has been published in which optimal portfolios
of credit bonds are determined that are less risky, while
having at least the same expected return, using the CreditMetrics
model. In this paper, we explore whether the "optimal"
bond portfolios are really an improvement by analyzing the
characteristics of the individual bonds in the optimal portfolio.
We find that a portfolio manager should be careful in carrying
out the trades as suggested by the optimal portfolio because
optimal portfolios are dominated by only one or two bonds.
Moreover, the composition of such an optimal portfolio is
very sensitive to small changes in the mean forward price
of its main constituents. However, the portfolio optimization
can be used in combination with some common sense restrictions
to produce portfolios that both have lower risk and higher
return than a fully diversified portfolio. We also improve
on the portfolio by replacing the dominant bond in the optimal
portfolio by similar bonds. As a risk measure we use the
Conditional Value at Risk, which at a given percentile equals
the expected value of the losses that exceed the Value at
Risk at that percentile. Conditional Value at Risk also
provides information about the losses larger than the Value
at Risk. Furthermore, the Conditional Value at Risk can
be optimized using linear programming.
©
2004 Albert Mentink (www.ssrn.com). Reprinted with permission.
Case
Study
Foreign
Exchange Risk Management at Unilever
--
Sharath
Jutur
©
2005 IUP. All Rights Reserved.
Research
Summary
Some
Important Issues Involving Real Options
The
paper introduces real options and talks about some of the
important issues that are usually neglected by the real
option analysts. Though a fair amount of research has been
carried out on this subject, there are still some areas
that are not well-understood by the people dealing with
this concept. This paper tries to clarify these concepts
and address the shortfalls.
©
2005 Sick, Gordon and Gamba, Andrea. All Rights Reserved.
IUP holds the copyright for the summary. |
