Handbook of Market Risk (Wiley Handbooks in Financial Engineering and Econometrics)

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Authored by an acknowledged expert in the quantification of market risk, this one-stop guide conveniently and systematically displays all of the financial engineering topics, theories, applications, and current statistical methodologies that are intrinsic to the subject matter.

Reviewer: MC VOLTZ
Rating: 5.0 out of 5 stars
Title:
Review: C. Szylar’s ‘Handbook of Market Risk is a well-written, detail-oriented must-have book. Dedicated to those having significant quantitative analysis skills in finance and mathematics, the ‘Handbook of Market Risk’ embraces key concepts of Market Risk and related financial mechanisms. While experiencing a remarkable clarity in the notions discussed, the reader will find comprehensive examples, numerical applications and real-world concerns related to a wide range of financial instruments and investment strategies. Mathematical foundations approach will definitely allow the reader to intuitively grasp the concepts exposed. Blessed by the author’s talent, this handbook will certainly give the reader a wonderful opportunity to better understand the fundamentals of Market Risk.

Reviewer: Igelfeld
Rating: 5.0 out of 5 stars
Title:
Review: It seems that many financial books are afraid of any real mathematics, this is the exception. And although a majority of the models are at the single equation (no derivation or discussion of how intuitively the equation does what it is supposed to do), it does provide a very nice comprehensive set of equations for understanding financial mechanisms. The book is centered on risk, but the author spends nearly half the book providing mathematical foundation that are required to understand the concepts later in the book. For example, correlation is a concept often used and addressed at the qualitative level, particularly when dealing with diversification, but in this book, the author provides not only the mathematical basis, but also important variants. The book is very comprehensive, but certainly not exhaustive since that kind of book would be written in volumes. I really liked the authors writing style, although at times it was a bit mechanical.The target audience for this book is really as a text or a reference book for the already established financial analyst. I would even go further by saying that most finance people don’t have nearly the math background to understand half of this book. The author does a good job of trying help the reader out, but it’s likely that most financial people don’t really care about Monte Carlo simulations that use a Chelefsky Factorization (etc etc). They are typically much more results oriented. So this book is a bit more for those that want to understand the finance and the math. In particular, stress and financial models has become the topic of the day after the whole subprime fiasco in 2008. This is the math that those in charge SHOULD have understood, but simply didn’t. With the emphasis moving towards better understanding risk and investment (since we as tax payers are the ones really footing the bill once stuff happens), it’s really in the best interest of the taxpayer to hold the financial industry to a standard that includes true understanding of risk.My bet is that this book is going to be a part of a graduate course in finance for those interested in hard core analysis and financial modeling. Not everyone’s cup of tea, but if you’re at all interested in the mathematical foundation in conjunction with the ideas behind risk and methods to analyze risk (and stress), you should consider getting this book.

Reviewer: Aaron C. Brown
Rating: 2.0 out of 5 stars
Title:
Review: This is a very narrow book. The author begins by stating the book is not about risk management despite what he anticipates is “expected by most readers.” There is nothing in the book about taking actions: adjusting positions, changing hedges, entering or exiting businesses, setting policies, designing reports, firing or promoting people. The book only covers computing market risk metrics, it does not consider what those metrics mean or how someone might use them.This topic is narrowed further by the definition, “Market risk is the risk that a stock will drop because some event, such as a hike in interest rates, may cause the stock market as a whole to fall. . . . All stocks have the same market risk. The risk cannot be eliminated by diversification. Market risk is also known as systematic risk.” This is a definition from Modern Portfolio Theory (although that theory considers all assets, not just stocks, and any price movement, not just declines). The usual definition in risk management is that market risk is any change in value due to movement in market prices, that is, not just the systematic component or market risk, but the idiosyncratic component as well.Readers interested in risk management would do better with Portfolio Risk Analysis at a high mathematical and academic level, or Mathematics and Statistics for Financial Risk Management at a moderate mathematical and more practical level.The first six chapters, plus chapters 8, 9 and 11, are standard portfolio management material. The only topic related to market risk in the risk management sense is titled “forecasting volatility” in chapter 3. No actual forecasting is involved, only measuring historical volatility is covered. The material is all taken from textbooks and academic papers and the original notation is preserved. That means there are different variables used for the same thing in different paragraphs, and the same variables are used for different things.To take one example, and there are similar defects in all the complex equations, the Parkinson estimator is given in terms of variables N, k, h_k and l_k. The formula is missing the frequency term, and the summation limits are wrong. N is defined as the estimator itself, when it is actually the number of periods. k is not defined at all. Two additional variables, o and c, are defined but not used. The author claims, “it is obvious” that the estimate is equal to 1.67 times the historical volatility, but provides no further explanation. If that were true, why would anyone use the Parkinson estimate? They’d just multiply historical volatility by 1.67. In fact, assuming constant continuous Gaussian Brownian motion with no drift, the Parkinson estimate will approach the volatility, there is no 1.67 factor. And in the form given in the book, the Parkinson is an estimate of variance, not volatility.The author gives what look like references, for example, “Rogers and Satchell (1991)” but there is no Rogers and Satchell paper in the bibliography. I assume these are copied from a secondary source.Chapter 7 covers Value at Risk (VaR). The author defines VaR, “Diverse literatures insist on the distinction between metric and measure: the former is a function, while the latter corresponds to particular mathematical values. Although multiple metrics exist, we generally consider VaR as a threshold for confidence interval and timeframe. For example, we speak of a daily VaR at 99%. As such, VaR represents statistical confidence intervals, therein being a financial application of the works of Pearson and Neyman.”If you could figure out what VaR is from that, you might like this book. Translated, he means the term “VaR” refers both to a measure (define risk as the probability distribution of mark-to-market profit or loss over a fixed horizon assuming normal markets and no trading) and a metric (summarize that probability distribution by a percentile in the left tail). The chapter then describes three different methods for estimating VaR (Variance/Covariance, Historical Simulation and Monte Carlo) but only in simplified textbook form. There is not enough information to help someone actually use one of these methods, and no mention that none of them work (they can be useful numbers to compute, but they do not meet the operational definition of VaR).Chapter 10 is the next chapter that concerns market risk. It discusses various ways of estimating liquidity risk, none of which involve actually liquidating a position. Chapter 12 on stress testing and back testing and Chapter 13 on Basel regulations are the only chapters I can recommend in this book. The treatment is brief but accurate and reasonably clear.I’m not sure who the intended reader of this book is. Since most of the book is about portfolio management, and there is no discussion of risk management for a bank or other intermediary, it might seem to be someone employed in asset management. But the material on regulation and the terminology is all for large banks, there is no discussion of insider trading, market manipulation, anti-fraud or fiduciary rules. The absence of material on leverage, shorting, illiquid assets, high-frequency trading, orders; or for that matter idiosyncratic risk; would rule out all but the most vanilla asset managers. Along with the errors and incoherencies in the book, and its radically narrow focus, I think most people should consider one of the alternatives above, or another book.

Reviewer: Luis Figueroa
Rating: 3.0 out of 5 stars
Title:
Review: The Handbook of Market Risk by Christian Szylar is a useful book that will help in better understanding the various techniques used in analyzing financial risk. The book insightfully identifies a changing risk environment that has occurred since the financial crisis of 2007, where there is high positive correlation between asset classes that in the past had weak correlations (or in some cases negative). This new phenomenon implies increasing challenges in developing adequate diversification and hedging strategies.The book as currently structured would have limited utility as a textbook for self-learning, given the limited number of examples and lack of mathematical tools (for e.g. Excel spreadsheet, Matlab, etc). The book covers a wide range of topics such as: Efficient Markets; Return and Volatility; Diversification; Capital Asset Pricing a Model (CAPM); Market Risk, including Value at Risk (VaR); Financial Derivatives; Fixed Income and Interest Rates; Liquidity Risk; and Stress Testing; The breadth of the book and the many references provided will help make it a valuable reference.Overall many of the topics are covered in a cursory manner with a large number of formulas. In some cases, the author provides useful insights that help the reader grasp the concept being described. However, at other times, the formulas are basically written down, with little discussion.The book provides a limited number of numerical examples and no links to a website where either spreadsheets or simulations could be provided for more detailed analysis. In contrast, books covering similar topics by Garp (Financial Manager’s Risk Handbook), Hull (Options, Futures, and Other Derivatives), Luenberger (Investment Science) provide a more extensive set of numerical examples, including spreadsheets.Overall, The Handbook of Market Risk is a useful reference book, with some limitations.

Reviewer: Jijnasu Forever
Rating: 4.0 out of 5 stars
Title:
Review: In a comprehensive handbook (with a pithy and mostly technical style), Szylar provides a researcher/grad student an excellent resource to understand the context of market risk and its evolution over time. One should note that the technical/academic viewpoint is serving to educate the entry-level professional (or refresh an experienced mind) rather than to generate thought-provoking hypotheses such as seen in other treatments of risk (Nassim Taleb’s books for example). Nevertheless, the systematic approach in describing market efficiency, efficiency frontier, historical progression of value-at-risk models, CAPM and APT approaches makes this a good resource to begin any exploration. The chapters on derivatives doesn’t add any new insights to the literature and may be too concise for the non-professional. Perhaps, as the “handbook” in the title implies, the target audience is predominantly those in the field of portfolio management or will be entering it soon – not individual investors. Individual investors may find the book to add some theoretical insights on how markets work and how risks could be viewed – but they are not likely to gain any actionable portfolio management strategies (this could’ve remedied partly if the author had a short section at the end of each chapter explaining the import to the individual investor – even if it was constructed as a framework that can be used by professional manager to explain to their clients). The discussion on interest-rate and liquidity risks is fairly unique to the book; while the discussion on regulations may be of limited value.Overall, a good starting point/reference book for professionals in the field. As an individual investor with a technical background, I found the discussions to provide a better insight on how to view portfolio and risks, but not necessarily any new “ideas” to implement. The pithy writing style is welcome, but one wishes that the citations were less stingy – most chapters end with very few “further reading” suggestions and the list typically do not include emerging thoughts in the field. A well-written, “traditional” and technical resource.

4

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