Correlation Risk Modeling and Management, + Website: An by Gunter Meissner

By Gunter Meissner

A thorough advisor to correlation chance and its growing to be significance in international monetary markets

Ideal for an individual learning for CFA, PRMIA, CAIA, or different certifications, Correlation chance Modeling and Management is the 1st rigorous consultant to the subject of correlation hazard. a comparatively missed kind of danger till it triggered significant unforeseen losses through the monetary quandary of 2007 via 2009, correlation hazard has develop into an incredible concentration of the danger administration departments in significant monetary associations, rather on account that Basel III in particular addressed correlation threat with new laws. this gives a rigorous clarification of the subject, revealing new and up-to-date methods to modelling and chance coping with correlation risk.

  • Offers entire insurance of a subject of accelerating significance within the monetary world
  • Includes the Basel III correlation framework
  • Features interactive versions in Excel/VBA, an accompanying site with extra fabrics, and difficulties and questions on the finish of every chapter

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Additional resources for Correlation Risk Modeling and Management, + Website: An Applied Guide including the Basel III Correlation Framework - With Interactive Models in Excel / VBA

Example text

3, we observe that default correlations between industries are mostly positive with the exception of the energy sector. This sector is typically viewed as a recession-resistant, stable sector with little or no correlation to other sectors. We also observe that the default correlation within sectors is higher than between sectors. , a recession or structural weakness such as the general decline of a sector) have a greater impact on defaults than do idiosyncratic factors. Hence if General Motors defaults, it is more likely that Ford will default, rather than Ford benefiting from the default of its rival.

The first correlation-related crisis, which was a forerunner of the major one to come in 2007 to 2009, occurred in May 2005. General Motors was downgraded to BB and Ford was downgraded to BB+, so both companies were now in junk status. A downgrade to junk status typically leads to a sharp bond price decline, since many mutual funds and pension funds are not allowed to hold junk bonds. Importantly, the correlation of the bonds in CDOs that referenced investment grade bonds decreased, since bonds of different credit qualities are typically lower correlated.

Correlated defaults in a multi-asset portfolio quantified with the Gaussian copula, correlations in derivatives transactions termed credit value adjustment (CVA), and correlations in what is WEBC01 11/25/2013 13:31:31 Page 24 24 CORRELATION RISK MODELING AND MANAGEMENT called wrong-way risk (WWR) are currently being discussed. We devote the entire Chapter 12 to addressing the benefits and limitations of these correlation approaches in Basel III. 4 HOW DOES CORRELATION RISK FIT INTO THE BROADER PICTURE OF RISKS IN FINANCE?

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