Market Risk references? (Notes from my review of GARP's 2017 Part 2 Practice Exam)

[FrmL2_Aspirant]

This post was moved from https://forum.bionicturtle.com/thre...iew-of-garps-2017-part-2-practice-exam.10510/

Question 4 is thematic to the FRM: what are key differences between parametric and non-parametric VaR approaches. In practice, parametric often refers to linear normal VaR models, while non-parametric often refers to historical simulation. (Here a question to tease your understanding of these terms: Is Monte Carlo simulation parametric or non parametric?). But importantly, each is a very broad class with dozens of variations. The FRM continues to lean heavily on Dowd’s summary advantages and disadvantages (copied below; I emphasize those I believe are worth paying careful attention to). In this Question 4, the correct answer depends on SKEWNESS favoring historical simulation. Experienced candidates will note that positive/negative skew can be modeled by non-normal parametric distributions, obviously; so I’m not sure this is a super-strong question. However, it’s obviously the best choice among those given. Choice (A)—”Scarcity of high magnitude loss event”—is EXACTLY why we go to parametric extreme value theory (EVT).

Carol Alexander (MRA Vol IV) introducing Historical Simulation (emphasis mine):


Dowd's EOC summary that informs GARP's Question 4 (emphasis mine)

Hi David, my question is not related to this topic, but since you have quoted two different authors above, I am considering you can help me . I want to go through different market risk models that are practically used in the industry, please suggest a good book/site that can be useful in this regard.. thanks!

 

[David Harper CFA FRM]

Hi @FrmL2_Aspirant I hope the exam went well for you? Regarding Market Risk, it's not an original thought, and they are aging a bit, but I continue to rely heavily on Carol Alexander's 4-volume Market Risk Analysis series (please see https://forum.bionicturtle.com/resources/categories/frm-p2-t5-market-risk.3/ (she has a forum, where perhaps there are additional suggestions, see http://www.carolalexander.org But I am not sure if it's active, forums are a ton of work ). I wonder if @ShaktiRathore or @emilioalzamora1 or @brian.field have suggestions for you? Thanks!

 

[emilioalzamora1]

Hi @David Harper CFA FRM,

long time no hear. What an honour to be referenced here.

Carol Alexander's is not up date but there have been some valuable contributions over recent years (especially from Carol herself! and some errata in the books have been revealed as well).

 

[David Harper CFA FRM]

@emilioalzamora1 good to hear from you, too! There have been a lot of errata issued on her MRA books; their only weakness IMO is the very large number of mistakes (I reported many myself in the first version). Can you point to any relevant new material (not errata)? Do you really think it's "not up to date" in terms of an introduction to various volatility and VaR methods? ... i feel like it continues to be relevant in reviewing modern methods from the perspective of an introduction. Like GARCH variations, for example, I'm not sure they've really moved so much. Thanks for any thoughts!

 

[brian.field]

From an actuarial perspective, (to which I tend to assign the most weight,) I would recommend Loss Models by Stuart Klugman for VaR coverage. It is the assigned material for actuarial exam C (construction and evaluation of actuarial models).

 

[emilioalzamora1]

Carol Alexander's book is and will always be up-to-date and I think it takes you months or ages to master all the material she covers in detail. If you don't want to be a researcher focusing on a particular high level topic, her book will always be YOUR main reading (day and night) and gives you the edge standing out from the crowd.

Beyond that, there are some complimentary readings (a selection is presented below) which might be useful:

• Financial Risk Management - A Practitioner's Guide to Managing Market and Credit Risk by Steven Allen
  
• Market Risk Management for Hedge Funds by Francois Duc
  
• Market Risk Modelling, Second Edition: Applied Statistical Methods for Practitioners by Nigel da Costa Lewis
• Models at Work - A Practitioner's Guide to Risk Management by Jaawad Farid

 

[FrmL2_Aspirant]

Hi @FrmL2_Aspirant I hope the exam went well for you? Regarding Market Risk, it's not an original thought, and they are aging a bit, but I continue to rely heavily on Carol Alexander's 4-volume Market Risk Analysis series (please see https://forum.bionicturtle.com/resources/categories/frm-p2-t5-market-risk.3/ (she has a forum, where perhaps there are additional suggestions, see http://www.carolalexander.org But I am not sure if it's active, forums are a ton of work ). I wonder if @ShaktiRathore or @emilioalzamora1 or @brian.field have suggestions for you? Thanks!

Hi David, thanks for asking .. yes the exam was good, now desperately waiting for 5th Jul, for the results, fingers crossed ! thanks for your guidance, and thanks a lot to forum veterans @brian.field , @emilioalzamora1 .. your help is much appreciated