In Coherent Stress Testing: A Bayesian Approach, industry expert Riccardo Rebonato presents a groundbreaking new approach to this important but often undervalued part of the risk management toolkit. Based on the author’s extensive work, research and presentations in the area, the book fills a gap in quantitative risk management by introducing a new and very intuitively appealing approach to stress testing based on expert judgement and Bayesian networks. It constitutes a radical departure from the traditional statistical methodologies based on Economic Capital or Extreme-Value-Theory approaches. The book is split into four parts. Part I looks at stress testing and at its role in modern risk management. It discusses the distinctions between risk and uncertainty, the different types of probability that are used in risk management today and for which tasks they are best used. Stress testing is positioned as a bridge between the statistical areas where VaR can be effective and the domain of total Keynesian uncertainty. Part II lays down the quantitative foundations for the concepts described in the rest of the book. Part III takes readers through the application of the tools discussed in part II, and introduces two different systematic approaches to obtaining a coherent stress testing output that can satisfy the needs of industry users and regulators. In part IV the author addresses more practical questions such as embedding the suggestions of the book into a viable governance structure.
Book Details:
- Author: Riccardo Rebonato
- ISBN: 9780470666012
- Year Published: 2010
- Pages: 240
- BISAC: BUS027000, BUSINESS & ECONOMICS/Finance
About the Book and Topic:
In Coherent Stress Testing: A Bayesian Approach, industry expert Riccardo Rebonato presents a groundbreaking new approach to this important but often undervalued part of the risk management toolkit. Based on the author’s extensive work, research and presentations in the area, the book fills a gap in quantitative risk management by introducing a new and very intuitively appealing approach to stress testing based on expert judgement and Bayesian networks. It constitutes a radical departure from the traditional statistical methodologies based on Economic Capital or Extreme-Value-Theory approaches. The book is split into four parts. Part I looks at stress testing and at its role in modern risk management. It discusses the distinctions between risk and uncertainty, the different types of probability that are used in risk management today and for which tasks they are best used. Stress testing is positioned as a bridge between the statistical areas where VaR can be effective and the domain of total Keynesian uncertainty. Part II lays down the quantitative foundations for the concepts described in the rest of the book. Part III takes readers through the application of the tools discussed in part II, and introduces two different systematic approaches to obtaining a coherent stress testing output that can satisfy the needs of industry users and regulators. In part IV the author addresses more practical questions such as embedding the suggestions of the book into a viable governance structure.
Stress testing is a simulation technique by financial institutions to assess their reactions to different financial situations. They are typically computer-generated simulation models that test hypothetical scenarios, useful for determining how a portfolio will fare during a period of financial crisis. Monte Carlo simulation is one of the most widely used methods of stress testing although a large number of other stochastic processes can be applied.
AUTHOR REPUTATION: Rebonato is an internationally renowned financial mind, and speaks regularly at conferences such as ICBI sRI$K, GARP and WBS and a regular contributor to the Wilmott magazine. He is the author of four other books, including Volatility and Correlation: The Perfect Hedger and the Fox which has sold over 6000 copies. MARKET DEMAND: The author speaks on the topic regularly and is in great demand. He has recently advised practitioners, institutions and governments on effective stress testing approaches. HOT TOPIC – risk management is at the top of the agenda of financial institutions as they seek to better safeguard their assets against market turmoil.
About the Author
Dr Riccardo Rebonato (London, UK) is Head of Front Office Risk Management and Head of the Clients Analytics team at RBS. He is visiting lecturer at Oxford University (Mathematical Finance) and adjunct professor at Imperial College (Tanaka Business School). He sits on the Board of Directors of ISDA and on the Board of Trustees for GARP. He is an editor for the International Journal of Theoretical and Applied Finance, Applied Mathematical Finance, Journal of Risk, and the Journal of Risk Management in Financial Institutions. He holds doctorates in Nuclear Engineering and in Science of Materials/Solid State Physics. He was a research fellow in Physics at Corpus Christi College, Oxford, UK.