tailieunhanh - Mathematics in Financial Risk Management

Market and banking supervisors and regulators are in the process of stepping up their monitoring of the ETF market. Work is underway nationally and internationally on assessing how recent innovations in this area can add to financial system risks, what incentives underpin them, and what potential flaws there might be in current risk practices. The interaction of ETF regulatory frameworks with recent innovations as well as the scope for regulatory arbitrage across regions and markets is also being examined. Imposing higher disclosure and reporting requirements as well as regulatory and other limits could help to alleviate the risks emerging in. | Mathematics in Financial Risk Management Ernst Eberlein Rudiger Frey Michael KalkbreneF Ludger Overbeck March 31 2007 Abstract The paper gives an overview of mathematical models and methods used in financial risk management the main area of application is credit risk. A brief introduction explains the mathematical issues arising in the risk management of a portfolio of loans. The paper continues with a formal overview of credit risk management models and discusses axiomatic approaches to risk measurement. We close with a section on dynamic credit risk models used in the pricing of credit derivatives. Mathematical techniques used stem from probability theory statistics convex analysis and stochastic process theory. AMS Subject Classification 62P05 60G51 Keywords and Phrases Quantitative risk management financial mathematics credit risk risk measures Libor-rate models Levy processes 1 Introduction Financial Risk Management Broadly speaking risk management can be defined as a discipline for Living with the possibility that future events may cause adverse effects Kloman 1999 . In the context of risk management in financial institutions such as banks or insurance companies these adverse effects usually correspond to large losses on a portfolio of assets. Specific examples include losses on a portfolio of market-traded securities such as stocks and bonds due to falling market prices a so-called market risk event losses on a pool of bonds or loans caused by the default of some issuers or borrowers credit risk losses on a portfolio of insurance contracts due to the occurrence of large claims insurance- or underwriting risk . An additional risk category is operational risk which includes losses resulting from inadequate or failed internal processes fraud or litigation. In financial markets there is in general no so-called free lunch or in other words no profit without risk. This is the reason why financial institutions actively take on risks. The role of financial risk